Conflicts arise when a statute dictates a different manner of recognising income and departs from the strict interpretation of accrual.

Assessees and the Income-Tax Department are often at loggerheads in the matter of refunds. More often than not, refunds due to an assessee are adjusted during the process of regular assessment. In the context of mandatory levy of interest under Sections 234A, 234B and 234C, most assessees prefer to overpay advance tax and, as a result, refund is due at the time of filing of return of income. This refund is received with interest, which currently is 9 per cent per annum. An interesting accounting and tax issue is whether this interest is to be reckoned at the Section 143(1)(a) stage itself or at the regular assessment stage?

Special Bench decision

Recently, the Mumbai Bench of the Tribunal considered the issue in detail in the Avada Trading CoP Ltd vs Assistant Commissioner of Income Tax (2006 284ITR AT 73) case. The question before the Tribunal was whether the interest on refund received by the company is to be assessed in the year the return of income is processed under Section 143(1)(a) or should be deferred to the point of the regular assessment which fructifies, say, a couple of years after the grant of the refund.

The issue is significant since more often than not additions are made at the time of the regular assessment and the refund originally granted along with interest is recalled. The Special Bench held that interest on the refund is to be assessed at the point of grant of refund itself irrespective of the outcome at the time of the regular assessment.

Accounting principles

Recognition of income, particularly interest, has its own share of accounting challenges. The principle of accrual, which is a fundamental accounting assumption, demands recognition of income based on the right to receive the same and not when it is actually realised. Conflicts do arise when a statute dictates a different manner of recognising income and departs from the strict interpretation of accrual.

Some flexibility is allowed in the Accounting Standard dealing with Revenue Recognition (AS 9), where it is stated that "Where the ability to assess the ultimate collection with reasonable certainty is lacking at the time of raising any claim, e.g. for escalation of price, export incentives, interest, etc., revenue recognition is postponed to the extent of uncertainty involved. In such cases, it may be appropriate to recognise revenue only when it is reasonably certain that the ultimate collection will be made."

Statistics show that interest on refund is kept temporarily and disappears the moment regular assessment is completed. One may argue that where cases are not taken for scrutiny, interest received is virtually permanent. In value terms, this may not be significant.

This decision of the Special Bench has effectively reduced the yield on the interest on refund by taxing it upfront. Already, there is no level-playing field since interest received is taxable and interest paid is not tax deductible.

Advancing the point of taxing interest on refund is burning the candle on both ends. Readers may also note that from 2003 if a refund granted to an assessee is called back at the time of the regular assessment the same has to be returned with 9 per cent interest along with the interest already received.

The scope of using advance tax as a mechanism for treasury management is no longer attractive with several roadblocks and unfavourable rulings. But is it possible to pay the correct amount of advance tax without facing the situation of refund and the associated problems thereon?

(The author is a Chennai-based chartered accountant.)

R. Anand

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