Introduction
The High Court of Jharkhand, in Kamal Kumar Khetawat vs. Union of India, delivered a significant ruling on the entitlement of interest on seized cash refunded after the expiry of the statutory period under Section 132 of the Income Tax Act, 1961. The case underscores the Revenue’s obligation to compensate an assessee when seizure is made but no assessment is completed within the prescribed 120 days. The Court, exercising its extraordinary jurisdiction under Article 226 of the Constitution, directed payment of interest at 6% per annum (one-half per cent per month) from the date following the expiry of 120 days from the last search until the actual refund. This commentary delves into the legal reasoning, the interplay between statutory provisions and constitutional remedies, and the implications for taxpayers.
Facts
The petitioner, Kamal Kumar Khetawat, was subjected to search and seizure operations under Section 132 of the Income Tax Act on 30.04.2019/01.05.2019. During these operations, cash amounting to Rs. 9,00,000 was seized and deposited with the Principal Commissioner of Income Tax, Ranchi. As per Section 132B(4), the Revenue is required to complete assessment or reassessment within 120 days from the date of the last search. Admittedly, no assessment proceedings were initiated within this period. Consequently, the petitioner demanded refund of the seized amount along with interest. Upon non-compliance, he filed a writ petition before the High Court.
During the pendency of the petition, the seized cash of Rs. 9,00,000 was released on 5th June 2026. However, no interest was paid on this refunded amount. The petitioner thus restricted the prayer to interest at 18% per annum. The Revenue argued that interest under Section 132B(4)(a) is payable only at the rate of one-half per cent per month (6% per annum) and only up to the date of completion of assessment. Since no assessment was made, the Revenue resisted any interest liability. The Court also noted that a reference had been made to the Director General of Income Tax (Vigilance) to fix responsibility for the failure to conduct assessment proceedings.
Reasoning
Interpretation of Section 132B(4)
The core of the judgment revolves around the construction of Section 132B(4) of the I.T. Act. Clause (a) mandates that the Central Government shall pay simple interest at the rate of one-half per cent for every month or part of a month on the excess of the seized amount over the aggregate liabilities. Clause (b) provides that such interest shall run from the date immediately following the expiry of 120 days from the date of the last search “to the date of completion of the assessment or reassessment or recomputation.” The Revenue contended that because no assessment was completed, the period for interest had not commenced, and therefore no interest was payable.
The Court rejected this narrow interpretation. It observed that the purpose of Section 132B(4) is compensatory in nature. If the Revenue retains seized money beyond 120 days without initiating assessment, the assessee is deprived of the use of that money. The statutory interest is intended to compensate for such deprivation. The Court held that in cases where no assessment is undertaken, the period of interest cannot be open-ended. Instead, the interest must run from the expiry of 120 days until the date the seized amount is actually refunded. This reading harmonizes the provision with the object of preventing unjust enrichment by the Revenue.
Compensatory Interest under Article 226
The petitioner argued for interest at 18% per annum, relying on the Supreme Court decision in Sandvik Asia Ltd. vs. Commissioner of Income Tax (2006) 2 SCC 508 and the Allahabad High Court’s ruling in Umang Agrawal vs. Commissioner of Income Tax (Central Circle) (2015 SCC OnLine All 10003). The High Court acknowledged that while the statutory rate under Section 132B(4)(a) is only 6% per annum, the constitutional court is not powerless to award compensatory interest under Article 226. The Court noted that if the Revenue’s failure to act within the statutory period causes undue delay in refund, the assessee suffers a real financial loss. The extraordinary remedy under Article 226 can step in to ensure that the Revenue does not benefit from its own default. However, in this case, the Court limited the grant to the statutory rate of 6% per annum (one-half per cent per month), finding that the petitioner’s claim for 18% was not justified under the specific provision.
Vigilance Inquiry Not a Ground for Delay
The Revenue pleaded that the matter was under reference to the Director General of Income Tax (Vigilance), New Delhi, for fixing responsibility for the failure to conduct assessment proceedings. The Court categorically held that such an internal inquiry cannot be a reason to withhold interest from the assessee. The reference is meant to fix accountability on departmental officials, not to delay payments due to the petitioner. The Court clarified that this order would not prejudice the vigilance proceedings, but the Revenue must pay interest within the stipulated time. If further delay occurs, the Court directed that interest would escalate to 12% per annum, and the errant officials would be held personally liable for recovery of that additional amount after complying with principles of natural justice.
Direction and Consequences
The Court directed the respondents to pay interest at 6% per annum on the seized amount of Rs. 9,00,000 from the expiry of 120 days from 01.05.2019 (i.e., from 29.08.2019) up to the date of refund (5th June 2026). Payment must be made within six weeks of the order, failing which the interest rate rises to 12% per annum. This hybrid approach balances the statutory rate with a punitive escalation to enforce compliance. The Court also empowered the Revenue to recover the additional 12% interest from the officials found responsible for the delay.
Conclusion
The High Court of Jharkhand has reinforced the principle that the Revenue cannot retain seized money indefinitely without completing assessment nor avoid paying interest by pleading internal inquiries. Section 132B(4) must be interpreted to ensure that interest runs from the expiry of 120 days up to the actual refund when no assessment is made. The judgment provides a clear road map: even if the statutory rate is low, the constitutional court can award compensatory interest under Article 226. The decision also sets a deterrent against bureaucratic inaction by imposing higher interest for further delays. For taxpayers who face seizure and ensuing refund delays, this ruling offers a strong remedy to claim interest without waiting for assessment.
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