Section 234D- Interest on Excess Refund of Income Tax

 Section 234D in the Income Tax Act, 1961 was incorporated in the Act to cover certain cases where the refund was given to the assessor according to intimation U/s 143(1) and it was later discovered after scrutiny evaluation that the assessor was not liable for refund or that the amount of refund was more than the amount refunded after processing the Income Tax Return u/s 1433(1) (1).

For e.g. Mr. A filed for the Assessment Year 2017-18 Return of Income & total Tax Liabilities was Rs 8 Lacs. Prepaid Taxes of Rs. 9 Lacs in the form of TDS & Advance Tax. The ROI was filed with us 139(1) & the intimation was produced on 30/12/2017 & the Rs. 1 Lacs refund was processed & credited to the Assessee along with interest us 244A. Later, we were opened by the assessee's case 143(3) & notice 143(2) was given. The demand notices u/s 156 were released and the Assessee was liable to pay Net Demand of Rs 1.6 Lacs at the end of the evaluation order on 25/06/2019.

The Assessee earned Rs 1 Lacs on 30/12/2017 in this entire scenario and the same funds were used by him to produce other incomes. It implies that those funds are correlated with some kind of opportunity costs. Section 234D was also added to cover the expense of the opportunity, i.e. Interest in favor of revenue.

Section 234D, preceded by Section 143(1D) of the 1961 Income Tax Act,

Interest on the refund in excess.

234D. (1) Pursuant to the other provisions of this Act, where, under subsection (1) of section 143, any refund is given to the Assessee, and-

(a) no refund is due upon periodic assessment; or (a) no refund is due upon periodic assessment; or

(b) the amount refunded pursuant to section 143 of sub-section (1) exceeds the amount refundable upon periodic review,

The Assessee shall be liable, for each month or part of the month covered by the period from the date of grant of the refund to the date of such periodic assessment, to pay simple interest at a rate of one-half per cent of the total or excess sum so refunded.

(2) If, as a result of an order pursuant to section 154 or section 155 or section 250 or section 254 or section 260 or section 262 or section 263 or section 264 or an order of the Settlement Commission pursuant to section 245D of sub-section (4), the balance of the refund given pursuant to section 143 of sub-section (1) is deemed to be correctly permitted, in whole or in part, as the case may be, then the amount of the refund granted pursuant to section 143 of sub-section (1) is deemed to be correct, either in whole or in part, as the case may be.