Sub: Whether an assessee is entitled to compensation by way of interest when the Income Tax Department unjustifiably retains seized Kisan Vikas Patras (KVPs) and Indira Vikas Patras (IVPs) after the tax liability has been discharged, thereby depriving the assessee of the opportunity to earn interest.
Brief Facts:The petitioners were subjected to a search under Section 132 of the Income-tax Act on 21 January 1997. During the search, cash, jewellery, fixed deposits and Kisan Vikas Patras (KVPs) and Indira Vikas Patras (IVPs) having substantial face value were seized. Assessment proceedings culminated in a large tax demand. The petitioners approached the Settlement Commission under Section 245C. During pendency of the settlement proceedings, several KVPs and IVPs matured or were about to mature. The petitioners repeatedly requested the Department to release the KVPs/IVPs; alternatively permit renewal; or convert them into interest-bearing fixed deposits. Despite several representations over nearly two years, the Department neither accepted nor rejected these requests. Ultimately they were refused after delay upon order of settlement commission. The writ petitions sought compensation for the interest lost because of such delayed release.
Court’s Observations:The Delhi High Court partly allowed the writ petitions and held that the Department was liable to compensate the petitioners for the period during which the certificates were wrongfully retained after payment of the settlement amount. However, compensation could not be granted for the period prior to payment because the Settlement Commission had specifically directed release only after payment of the settlement dues. The Court distinguished Commissioner of Income Tax v. Gujarat Fluoro Chemicals by holding that the present claim was not one under Section 244A but arose from wrongful administrative action. Relying upon Sandvik Asia Ltd. v. CIT, the Court reiterated that where the Revenue wrongfully withholds an assessee’s money or property, compensation becomes payable.
Ratio Decidendi:Where the Income Tax Department continues to retain seized assets after the legal basis for such retention has ceased, and such retention deprives the assessee of earning income therefrom, the assessee is entitled to compensatory interest for the resulting loss. Such compensation is founded on principles of restitution and wrongful deprivation of property rather than statutory interest under the Income-tax Act.
Income Tax Case Law Pradeep Misra v. Union of India & Ors
Citation-2026 TAXONATION 1640 (DELHI)
