Section 426 — Interest on excess refund. Successor to s.234D of the 1961 Act.
Section 426 is in Chapter XIX — Collection and Recovery of Tax, which runs from section 390 to section 430.
Sub-section (1) charges interest where a refund granted under section 270(1) turns out excessive. Subject to the other provisions of the Act, where such a refund has been granted and either no refund is due on regular assessment or the amount refunded exceeds what is refundable on regular assessment, the assessee is liable to simple interest at 0.5% on the whole or the excess amount so refunded, for every month or part of a month from the date of grant of the refund to the date of the regular assessment.
Sub-section (2) reduces that interest accordingly where, as a result of an order under section 287, 288, 359, 363, 365(10), 368, 377 or 378, the refund is held to have been correctly allowed in whole or in part. Sub-section (3) provides that where, for a tax year, an assessment is made for the first time under section 279, that assessment is regarded as a regular assessment for the purposes of this section.
A refund granted on processing is provisional, and money released early on a figure later found excessive has been in the assessee's hands in the meantime. The interest charges for that period rather than penalising the claim. Sub-section (2) is the corrective: if an appellate or rectification order restores the refund, the interest falls away to that extent, so the charge tracks the final position.
| What | Figure | The condition on it | Where |
|---|---|---|---|
| Rate of interest on an excess refund | 0.5% simple interest | For every month or part of a month, on the whole amount refunded where no refund is due on regular assessment, or on the excess where the refund exceeds what is refundable | Sub-section (1) |
| Period over which interest runs | From the date of grant of refund to the date of the regular assessment | Every month or part of a month in that period counts | Sub-section (1) |
The interest is a charge for the use of money, so it runs from the date the refund was actually granted and accrues for a part month as for a full one — a refund granted late in one month and assessed early in another can attract two months' interest. The charge is as provisional as the refund was: sub-section (2) reduces it whenever a rectification, appellate or revision order listed there holds the refund correctly allowed, in whole or in part. Sub-section (3) closes a gap by treating a first-time section 279 assessment as the regular assessment that ends the period.
An assessee is granted a Rs 12 lakh refund under section 270(1) in April. On regular assessment the following January only Rs 2 lakh is found refundable. Interest runs on the Rs 10 lakh excess at 0.5% for every month or part of a month from the date the refund was granted to the date of that assessment — ten months, Rs 50,000. If an order under section 287 later holds Rs 4 lakh of the refund correctly allowed, sub-section (2) reduces the interest accordingly.
On the demand notice accompanying a regular assessment that withdraws or reduces a refund already granted under section 270(1). The interest appears as a separate line computed from the date the refund was granted, and is recomputed if a later order restores part of the refund.
the assessee shall be liable to pay simple interest at the rate of 0.5% on the whole or the excess amount so refunded, for every month or part of a month comprised in the period from the date of grant of refund to the date of such regular assessment
the assessment so made shall be regarded as a regular assessment for the purposes of this section
See the full 1961 to 2025 concordance.