Jharkhand HC Directs Revenue to Pay 6% Interest on Seized Cash Despite No Assessment: Section 132B Analysis

COURT: Jharkhand High Court

CASE NAME: Kamal Kumar Khetawat vs. Union of India & Ors.

DATE OF JUDGMENT: 23rd June 2026

KEY SECTIONS: Section 132B(4), Section 132, Income Tax Act, 1961; Article 226, Constitution of India

Table of Contents

1. Introduction

The payment of interest on seized assets has been a recurring source of litigation between taxpayers and the Income Tax Department. The statutory framework under Section 132B of the Income Tax Act, 1961 provides a mechanism for refund of seized money and payment of interest — but what happens when the Revenue fails to complete assessment proceedings within the prescribed period? The Jharkhand High Court, in a recent judgment dated 23rd June 2026, addressed precisely this issue in the case of Kamal Kumar Khetawat vs. Union of India & Ors. (W.P. (T) No. 2575 of 2026). The Court held that interest under Section 132B(4) is payable even where no assessment is completed, and further invoked its extraordinary writ jurisdiction under Article 226 to award compensatory interest for the Revenue’s failure to act within the statutory timeframe.

This analysis dissects the judgment, its legal underpinnings, and the practical implications for tax professionals handling search and seizure matters.

2. Factual Background

The petitioner, Kamal Kumar Khetawat, was subjected to search and seizure operations under Section 132 of the Income Tax Act on 30th April 2019 and 1st May 2019. During these operations, cash amounting to Rs. 9,00,000 was seized from the petitioner and deposited into the personal deposit account of the Principal Commissioner of Income Tax, Ranchi (the 2nd respondent).

As per the statutory mandate of Section 132B(4)(b), the Revenue is required to either complete assessment proceedings within 120 days from the date on which the last authorisation for search was executed, or release the seized money. In this case, no assessment proceedings were initiated within the stipulated 120-day period. The petitioner thereafter made representations seeking refund of the seized amount along with interest at the prescribed statutory rate. When the Revenue did not comply, the petitioner filed the present writ petition before the Jharkhand High Court.

During the pendency of the petition, and after several years of delay, the Revenue refunded the principal amount of Rs. 9,00,000 on 5th June 2026. However, no interest was paid on this amount. The petitioner therefore confined the prayer to the payment of interest on the seized cash.

3. Petitioner’s Arguments

Mr. Sumeet Gadodia, learned counsel for the petitioner, advanced the following key submissions:

  • Statutory Entitlement: Under Section 132B(4), the Central Government is obliged to pay simple interest at the rate of one-half per cent for every month or part of a month (i.e., 6% per annum) on the amount refunded. The interest runs from the date immediately following the expiry of 120 days from the last authorisation of search to the date of completion of assessment.
  • No Assessment – No Bar: Since no assessment was ever completed in this case, the period for which interest is payable cannot be limited to the date of assessment. If the Revenue’s interpretation were accepted, it would lead to an absurdity: the Revenue could avoid paying interest simply by failing to frame an assessment. The petitioner argued that compensatory interest must be awarded.
  • Precedents: Reliance was placed on the Supreme Court’s decision in Sandvik Asia Ltd. vs. CIT (2006) 2 SCC 508 and the Allahabad High Court’s judgment in Umang Agrawal vs. CIT (Central Circle) (2015 SCC OnLine All 10003), both of which recognised the power of constitutional courts to award compensatory interest in such circumstances.

4. Department’s Stand

Mr. Kumar Vaibhav, learned Senior Standing Counsel for the Income Tax Department, raised two main points:

  • Reference to Vigilance: The matter had been referred to the Director General of Income Tax (Vigilance), New Delhi, to fix responsibility for the failure to carry out assessment proceedings within the prescribed period. The Department submitted that this reference should be decided first before addressing the interest claim.
  • Rate of Interest: Without prejudice to the above, the Department contended that the claim of 18% interest per annum was not justified. Section 132B(4)(a) provides for simple interest at one-half per cent per month (6% per annum), and that too only from the date following the expiry of 120 days from the search to the date of completion of assessment. Since no assessment was completed, the Department argued that no interest was payable at all.

5.1. Statutory Scheme of Section 132B

The Court first examined the text of Section 132B(4), which reads:

“(4) (a) 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 amount by which the aggregate amount of money seized under section 132 or requisitioned under section 132A, as reduced by the amount of money, if any, released … exceeds the aggregate of the amount required to meet the liabilities …
(b) Such interest shall run from the date immediately following the expiry of the period of one hundred and twenty days from the date on which the last of the authorisations for search under section 132 or requisition under section 132A was executed to the date of completion of the assessment or reassessment or recomputation.”

The plain language of clause (b) links the termination point of interest to “the date of completion of the assessment.” However, this does not mean that if no assessment is made, the Revenue can avoid interest altogether. Such an interpretation would defeat the purpose of the provision, which is to compensate the taxpayer for the Revenue’s retention of the seized money beyond the statutory 120-day period.

5.2. Interest Where No Assessment is Made

The Court observed that it is a settled principle of law that a statute must be interpreted in a manner that does not lead to absurdity or allow a party to benefit from its own default. In the present case, the Revenue failed to initiate any assessment proceedings within the 120-day window — or at any time thereafter. To hold that interest ceases to run because no assessment was completed would place a premium on the Revenue’s inaction.

The Court noted that under Section 132B(4)(b), interest runs “up to the date of completion of the assessment.” Since the Revenue itself did not complete any assessment, it cannot argue that interest is not payable. The logical corollary is that interest should run from the expiry of 120 days after the search until the date the seized amount is actually refunded to the assessee. Otherwise, the Revenue would be permitted to indefinitely retain the money without any compensatory cost.

5.3. Compensatory Interest Under Article 226

Even assuming a strict reading of the statute, the Court held that it is not powerless to award compensatory interest. Relying on Sandvik Asia Ltd. (supra), the Court emphasised that Article 226 of the Constitution confers extraordinary jurisdiction on High Courts to do complete justice. Where the Revenue has wrongfully retained the assessee’s money and there is no assessment, the Court can direct payment of interest beyond the statutory framework.

The Allahabad High Court in Umang Agrawal (supra) had similarly held that compensatory interest must be paid when no assessment is made after seizure. The Jharkhand High Court endorsed this view, noting that the Revenue cannot be allowed to benefit from its own default while the assessee suffers a corresponding loss.

However, the Court clarified that the statutory rate under Section 132B(4)(a) — 6% per annum — is the appropriate compensatory rate for the period from the expiry of 120 days after search till the date of refund. The Court chose not to award the higher 18% claimed by the petitioner for the period prior to the refund, but instead directed that if the interest is not paid within six weeks, an enhanced rate of 12% per annum would apply.

5.4. Reference to Vigilance Not a Ground for Delay

The Department’s argument about the pending vigilance reference was firmly rejected. The Court held that a reference to the Director General of Income Tax (Vigilance) is an internal administrative matter aimed at fixing responsibility on erring officials. It cannot be used as a ground to withhold the assessee’s legitimate interest entitlement. The Court made it clear that the payment of interest to the petitioner must not be delayed on account of such proceedings, and that the vigilance reference can continue independently.

6. Final Decision and Directions

The Court allowed the writ petition and issued the following directions:

  1. Rate of Interest: The respondents shall pay interest at the rate of one-half per cent per month (6% per annum) on the seized amount of Rs. 9,00,000.
  2. Period: Interest shall run from the expiry of 120 days from 1st May 2019 (i.e., from 29th August 2019) till the date of refund, i.e., 5th June 2026.
  3. Time for Compliance: The interest amount shall be paid to the petitioner within six weeks from the date of the judgment (i.e., by 4th August 2026).
  4. Consequence of Default: If the interest is not paid within six weeks, the respondents shall be liable to pay interest at the rate of 12% per annum thereafter.
  5. Recovery from Erring Officials: If the default interest rate becomes applicable, the Department must hold the responsible officers accountable and consider recovering the additional amount from them after following principles of natural justice.
  6. Vigilance Reference: The order does not affect the pending vigilance proceedings, which may continue in accordance with law.

The Court also made the rule absolute and disposed of pending interlocutory applications, without any order as to costs.

7. Practical Takeaways for Professionals

  1. Mandatory Interest on Seized Cash: Even if the Revenue fails to complete assessment, interest under Section 132B(4) is payable from the expiry of 120 days after the search until the date of refund. Taxpayers should always claim this interest when filing refund applications.
  2. Do Not Wait for Assessment: The Department often argues that interest runs only till the date of assessment. This judgment clarifies that such an interpretation would be unjust; where no assessment is made, the interest period extends to the actual refund date.
  3. Use of Article 226: High Courts can award compensatory interest beyond the statutory framework to prevent the Revenue from benefiting from its own default. Tax professionals should consider writ jurisdiction in cases of inordinate delay.
  4. Insist on Timely Refund: The 120-day period under Section 132B(4) is not merely directory; it imposes a statutory obligation on the Revenue to either complete assessment or release the seized amount. Failure to do so triggers an immediate right to interest.
  5. Vigilance References Irrelevant: Internal disciplinary proceedings against errant officers cannot be a justification for delaying the payment of interest to the assessee. Practitioners should resist such arguments.
  6. Default Interest as a Deterrent: The Court’s direction of 12% interest for non-compliance within six weeks serves as a strong deterrent. Professionals should ensure that the Department is put on notice of this enhanced rate.

8. Why It Matters

This judgment is significant for several reasons:

  • Clarity on Interest for No-Assessment Cases: It fills a critical gap in the statutory scheme by expressly holding that interest does not cease to run merely because the Department fails to complete assessment. This protects assessees from indefinite retention of their money.
  • Reinforcement of Article 226 Powers: The decision reaffirms the constitutional court’s role in doing complete justice and awarding compensatory interest where the statute is ambiguous or yields an unjust result.
  • Accountability of Revenue Officers: By linking default interest to potential recovery from errant officers, the Court has sent a strong message that officials cannot act with impunity. This may improve compliance and timely disposal of seized assets.
  • Binding Precedent: The judgment, being from a High Court, carries persuasive value and will likely be cited in similar disputes across other jurisdictions. It aligns with existing Supreme Court jurisprudence on the point.
  • Practical Guidance for Litigation: Tax professionals now have a clear roadmap: claim interest under Section 132B(4) from day 121 post-search, and if assessment is not completed, approach the High Court for compensatory interest up to the date of refund.

In conclusion, the Jharkhand High Court’s decision in Kamal Kumar Khetawat strikes a fair balance between the Revenue’s power to seize assets and the taxpayer’s right to compensatory justice. It ensures that the Department cannot escape its interest obligations by simply failing to act, and provides a clear remedy for assessees who have been kept out of their money for years. Tax professionals should keep this judgment handy when dealing with search and seizure matters, particularly where the Department has been slow to complete assessment or refund seized cash.

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