INTEREST AWARDED BY HIGH COURT IS NOT LIABLE TO TAX.

[Mr. M. GOVINDARAJAN]

                        The tax authorities, in case of non payment of tax or short payment of tax, issue show cause notices to the assessees to show cause why the tax demanded could not be recovered from them?  After giving reasonable opportunity to the assessees the tax authorities either drops the show cause notice or confirm the tax demanded.   Along with the tax the assessee is liable to pay interest till the date of payment.   It is not necessary to indicate the levy of interest in the show cause notice.   Once tax demanded is confirmed levy of interest is automatic.  Many Courts held that interest is not that of a penalty and but it is the nature of compensation for the delayed payment of tax.  What is the legal position if the High Court awarded interest towards compensation in a case to the assessee and whether it is liable to tax?   This issue is to be discussed in this article with reference to a decided case law.

                        In ‘Sushil Kumar Das V. Income Tax Officer’ – (2011) 11ITR (Trib) 17 (Kolkatta) the assessee is a retired school teacher.   He received an amount of Rs.10,92,796/- inclusive of interest Rs.3,29,508/- by virtue of the Writ Petition.  TDS was made against this payment.   The Assessing Officer noticed that the income had escaped assessment for the assessment year 2005-06.  The assessee filed return showing income of Rs.6,19,392/- along with statement of taxable income of different years and the assessee also claimed for relief under Section 89(1) of the Act.   The Assessing Officer recomputed the taxable income at Rs.8,86,500/- restricting the relief under Section 89(1) of the Act at Rs.65,817/-.   The assessee was under impression that the interest received as per the Order of the High Court was taxable and paid tax Rs.2,53,730/-.   Thereafter he was advised that the interest received by him was a non statutory interest and in the form of compensation and hence it was not liable to income tax.  

                        The Assessee, therefore, filed appeal before the Commissioner of Income Tax (Appeals)  with the prayer to direct the Assessing Officer not to tax the interest which was not taxable but under wrong notion of law the same was offered to tax.   The Commissioner (Appeals) rejected the claim of the assessee stating that the assessee had offered the income in the return and the same could not be reduced at the appellate stage.   Aggrieved on the order of the Commissioner (Appeals) the assessee filed the present appeal before the Tribunal.

                        The assessee submitted the following before the Tribunal:

• The Commissioner (Appeals) simply rejected the claim of the assessee on the ground that the income has been declared by the assessee in his return of income and hence the same cannot be reduced at the appellate proceedings.   The power of the Commissioner (Appeals) are coterminous with the powers of the Assessing Officer;
• It is a well settled law that no tax can be imposed without the authority of law if a tax cannot be imposed, the same cannot be collected merely because the assessee has paid the same;
• It is unconstitutional to collect tax without authority of law.   Article 265 of the Constitution provides that no tax shall be levied or collected except by authority o law;
• Merely because the assessee under wrong understanding of law offers amount to tax, the same will not be in a reason to tax the said amount unless it is lawful to tax the same;
• The interest awarded by the High Court was non statutory and in the form of a damages/compensation and it is not liable to tax and the said amount is to be excluded from the taxable income of the assessee;

The Department submitted the following before the Tribunal:

• The amount of interest was already included by the assessee himself and he filed the return in response to the notice under Section 148 since this income is shown in the return by himself it cannot be reduced at the appellate state;
• The order of the Commissioner of Income Tax (Appeals) is to be confirmed.

The Tribunal after hearing both sides held as follows:

• It is a well settled that the principle for determining the taxable income of the assessee under the Income Tax Act should be within the purview of the law in force;
• If the taxable income determined by the Assessing Officer is not in accordance with such principle it is open to the assessee to contend the same before the higher authorities to follow the correct application of law to determine the actual taxable income of the assessee;
• The lower authorities are not expected to say that merely because the assessee has returned income which is higher than the income determined in accordance with legal principles such returned income can be treated as lawfully assessed;
• An assessee is liable to pay tax only up on the taxable income;
• It is always open to the assessee to take a plea that the taxable income though shown as income is not taxable under law before the higher authorities;
• The decision of the Commissioner (Appeals) is not correct;
• The interest received as a result of the order of the High Court is not a statutory interest and is in the form of damage/compensation and the same was not liable to tax;
• The circular issued by the Central Board of Direct Taxes vide circular No. 14(XL-35), dated 11.4.1955 directed the officers not to take advantage of the ignorance of the assessee.   The appellate authorities have powers to admit points of law and admit claim for exemption based on materials on record.

In view of the above the Tribunal held hat the interest received by the assessee as per the order of High Court was not taxable and the same is a capital receipt.