[Opinion] Seeking Full Interest on Tax Refunds after Updating Returns: Justified or Not?

Authored by V. K. Subramani – CA

Table of contents

1. Section 140B(2)
2. Crux of the controversy
3. Illustration
4. Inferences

Insertion of section 139(8A) by the Finance Act, 2022 backed by Section 140B for computing the tax payable on updated return provides immense relief to the taxpayers at large. Presently, the practice of filing updated return has not gained much of momentum. However, the taxpayers and counsels would definitely take recourse to the legal provision since it is not harsh if advance tax was paid in the regular course by the assessee. One apparent anomaly could be attributed to clause (b) of section 140B(2) and the focus of this write up is on that legal provision with the help of an illustration.

1. Section 140B(2)

This provision would apply where a return of income was furnished earlier under section 139(1) or section 139(4) or section 139(5) and the assessee opts to file updated return subsequently under section 139(8A). The tax computation shall be on the total income admitted in the updated return after taking into account the following:

(i) The amount of relief or tax referred to in section 140A(1), the credit for which was taken in the earlier return;

(ii) TDS/TCS, in accordance with the provisions of Chapter XVII-B, on any income which is subject to such TDS/TCS and which has been taken into account for computing total income and which was not included in the earlier return;

(iii) Any relief of tax or deduction of tax claimed under section 90 or section 91 on account of tax paid in a country outside India on such income which has not been included in the earlier return;

(iv) Any relief of tax claimed under section 90A on account of tax paid in any specified territory outside India referred to in that section on such income which has not been included in the earlier return;

(v) Any tax credit claimed, to be set off in accordance with the provisions of section 115JAA or section 115JD which has not been claimed in the earlier return; and

(b) as increased by the amount of refund, if any, issued in respect of such earlier return.

The assessee must compute the income-tax liability on the total income admitted in the updated return and deduct/claim credit in respect of (i) to (v) above and add back the amount of interest on refund, if any, issued in response to the earlier ITR.

On the resultant the assessee is liable to pay interest payable under any provision of the Act for any default or delay in payment of advance tax along with additional income-tax @ 25% or 50% thereon (to be computed as per section 140B(3)).

2. Crux of the controversy

The expression contained in clause (b) of sub-section (2) of section 140B viz. “as increased by the amount of refund, if any, issued in respect of such earlier return” acts as a thorn in the flesh for the taxpayers.

3. Illustration

The following illustration is a case relating to an individual for the assessment year 2020-21 where the assessee has omitted to admit interest income of Rs.1,00,000. The assessee had filed original ITR and claimed refund of Rs.9,47,000. The assessee had received refund of Rs.10,03,820 which included interest of Rs.56,820 under section 244A. When the assessee subsequently opts to admit the omitted income of Rs.1,00,000 the tax demand is not only the amount of tax on the additional income admitted in the updated return but also the refund interest granted earlier is sought to be repaid with additional income tax being loaded to such amount.

4. Inferences

On reading section 140B(2)(b) and the illustration given above, one would be tempted to draw the following inferences:

(i) Filing updated return after having filed a return previously for the same assessment year requires abundant caution if the assessee has received refund with interest in respect of the ITR filed earlier.

(ii) The legal provision contained section 140B(2)(b) seems to function beyond its legitimate scope. When the assessee wants to admit omitted income by means of updated return, seeking entire interest on refund granted earlier to form part of the income-tax liability seems to be illogical. Further to add salt to the injury the additional income-tax payable thereon does not augur well for those opting to file updated return when the earlier return was a refund return received with interest thereon.

(iii) It would be fair and reasonable that the total income enhanced by the updated return vis a vis the tax thereon and excess interest paid on refund granted earlier alone are considered for the purpose of computing additional income-tax under section 140B(3). That would mean that the assessee who got refund on the portion of income not disclosed earlier is deprived of the corresponding interest thereon. Making such taxpayer to pay additional income tax on such portion of interest (refunded earlier) plus additional income tax thereon may be incorporated in the ensuing Budget, 2023.