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TMI Blog2012 (1) TMI 10X X X X Extracts X X X X X X X X Extracts X X X X ..... It was carrying on finance and investment business at the relevant time and in respect of this business, it was assessed to income tax in Delhi. In respect of the assessment year 1995-96, the petitioner was assessed to income tax by order dated 7.10.1997 on net taxable income of Rs. 1,26,34,604/-. The tax calculated on the taxable income amounted to Rs.21,44,521/-. The calculation was made in Form No.ITNS-150. A demand notice for the aforesaid amount was issued under Section 156 of the Act along with the assessment order. The assessment order and the demand notice were served on the petitioner on 10.12.1997. 4. The assessee filed an appeal against the assessment order before the CIT(Appeals) and requested for stay of the disputed demand pending appeal by an application submitted to the CIT(Appeals) on 9.1.1998. While the appeal was pending, the petitioner paid an amount of Rs.5,50,000/- on 15.1.1998 and another amount of Rs.5,00,000/- on 27.3.1998. These amounts were paid in part discharge of the demand raised in the notice issued under Section 156. On payment of the aforesaid amounts, the balance demand of Rs. 10,94,521/- was stayed. 5. On 20.5.1998, the CIT(Appeals) passed an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ition before the CIT, the petitioner also raised an alternative prayer to the effect that interest can be charged only for the period starting after the lapse of 35 days from the date of the service of the demand notices up to 14.1.1998 when tax of Rs. 5,50,000/- was paid and further that the demand created on 30.7.2004, pursuant to the order of the Tribunal, was immediately paid and thus the maximum amount of interest that could be charged from the petitioner was only Rs. 1,04,589/-. A calculation sheet was attached to the application filed before the CIT explaining how the petitioner was liable to pay interest of only Rs. 1,04,589/-. In support of this alternative prayer the petitioner cited the judgment of the Jharkhand High Court in New United Construction Co. v. Commissioner of Income Tax and Others (2004) 270 ITR 224. 8. It appears that the petitioner's application before the CIT for waiver/reduction of interest was not being taken up for disposal despite repeated reminders. Therefore, the petitioner filed WP(C) No.2740/2010 before this court seeking a direction to the CIT to dispose of the waiver/reduction application. The Court passed an order on 10.5.2010 directing the CI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Finance Act, 1963 with retrospective effect from 1-4-1962 provides that where as a result of an order of rectification/amendment or an appellate or revisional order or an order of the High Court or Supreme Court the amount on which interest is payable as per sub-section (1) is reduced, the interest payable shall also stand reduced accordingly and if the assessee has paid any excess interest it shall be refunded. 11. A question arose under the Indian Income Tax Act, 1922 ("the old Act", for short) under the provision corresponding to section 156 of the 1961 Act as to whether it was necessary for the Income Tax Officer ("ITO") to issue fresh notices of demand as and when the amount of tax payable by the assessee undergoes a change due to appellate or revisional orders. The question arose in the context of tax recovery provisions of the old Act under which the ITO was obliged to issue a certificate to the Tax Recovery Officer ("TRO") specifying the amount that fell for recovery from the assessee. The matter ultimately reached the Supreme Court in ITO v. Segu Bechiah Setty [1964] 52 ITR 538. By a majority the Supreme Court held that it was necessary for the ITO to issue fresh notic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rder of the AO passed to give effect to the order of the Tribunal restoring the assessment order by withdrawing the relief granted by the CIT(A). This covers a period of 6 years and 3 months. The argument is that during this period the assessee was not liable to pay tax on the amount of relief granted by the CIT(A) because such tax was not due to be paid, and consequently he was not liable to pay interest thereon. Interest being compensation for being deprived of the use of the money, where the revenue was not entitled to the money at all during the said period it cannot charge interest as compensation. In support of the contention Mr. Sharma cited a judgment of the Jharkhand High Court in New United Construction Co. (supra). The validating Act, according to him, is of no assistance to the revenue as the dispute in the present case is only about the period for which interest was chargeable. 14. The dates and events in the present case as given to us in the course of the hearing are as follows: "S.No. Date of Service Particulars 1. 30.11.1995 Return filed- Total income - Rs.64,18,600/- Tax liability - Rs.24,39,252/- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9 to 31-5-2001, 24 months @ 1.5% pm on " " " Rs.7,72,027 1-6-2001 to 8-9-2003, 28 months @ 1.25% pm on " " " Rs.7,50,587 1-10-2003 to July 2004, 10 months @ 1% pm on " " Rs.2,14,452 Total interest u/s.220(2): Rs.25.52.976 16. The contention of Mr. Anoop Sharma is that interest was not chargeable on the full amount of Rs.21,44,521 for the period from 15-5-1998 till 23-8-2004 and it can be lawfully charged, for the said period, only on the amount of Rs.21,44,521 minus (Rs. 10,50,000 + interest of Rs.58,500 granted on the refund of Rs. 10,50,000) = Rs. 11,53,021. 17. In Vikrant Tyres Ltd. v. First ITO [2001] 247 ITR 821(SC) the Supreme Court was considering the correctness of charging interest u/s.220(2) in the following facts. There, the assessee had paid the entire demand of tax pursuant to the assessment. He however preferred an appeal to the first appellate authority who decided the appeal in his favour. The AO refunded the tax to the assessee. The revenue carried the matter further appeal and ultimately the matter reached the High Court on a reference. The High Court ruled in favour of the revenue and the assessment was restored. The assessee paid the taxes as dema ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irst appellate authority which was allowed by the Tribunal by order dated 6-9-1995. A consequential demand of the tax was made by the AO along with interest u/s.220(2) from the date of the original demand, i.e., 27-3-1987. On these facts it was held by the Full Bench (S.B. Sinha, C.J., as he then was, speaking for the court) that the ruling of the Supreme Court in Vikrant Tyres (supra) was attracted to the case and the levy of interest was illegal. It was observed as under: "Interest is payable if a sum is due. Where the assessee is in default in making payment of the assessed amount demanded from him he is liable to pay interest. Although interest is payable to the revenue by an assessee in terms of section 220 of the Income Tax Act by way of compensation, the same would not mean that, although there does not exist any demand, interest would become payable ". 19. The quoted observations are relied upon by Mr. Anoop Sharma, learned counsel for the assessee, to contend that since in the instant case the assessee was not due to pay any tax on the addition deleted by the CIT(A) till his order was reversed by the Tribunal after a period of more than 6 years, no interest can be charge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t to refer to the judgments of some of the other High Courts. 22. In A.V. Thomas and Co. Ltd. v. ITO (1982) 138 ITR 275, it was held by a learned single judge of the Kerala High Court that if the assessee had paid the full tax at the right time (when demand was raised pursuant to the assessment order) and a portion of the tax was refunded to him as per the order of the first appellate authority, he had no liability to pay interest to the department u/s.220(2) until the notice of demand was served upon him consequent to the reversal of the order of the first appellate authority by the Tribunal. This judgment was affirmed by the division bench of the Kerala High Court in ITO v. A. V. Thomas and Co. Ltd. (1986) 160 ITR 818. 23. In K.P. Abdul Kareem Hajee v. ITO (1983) 141 ITR 120, it was again held by a learned single judge of the Kerala High Court that an order of a judicial or quasi-judicial authority was not final for the purpose of res judicata during the time allowed for filing the appeal or during the pendency of the appeal. The order, it was held, although not final, is provisionally executable subject to restoration. Where the order of assessment was taken up in appeal and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 271(1)(c) of the Act in M.N. Jadhav v. Fourth ITO (1986) 161 ITR 275. In that case the Inspecting Asst. Commissioner imposed the penalty on the assessee, which was cancelled by the Tribunal on appeal. A reference was made to the High Court at the instance of the department and the High Court held that the penalty was rightly imposed. The Tribunal passed a consequential order to give effect to the opinion of the High Court. Pursuant to the order of the Tribunal, the AO passed consequential orders calling upon the assessee to pay up the penalty with interest accrued thereon u/s.220(2). The assessee challenged the order before the High Court by filing writ petition on the ground that fresh demand notices were not issued by the AO for recovery of the penalty and interest. The High Court dismissed the petition holding (a) that the legal effect of the later order of the Tribunal (to give effect to the opinion expressed by the High Court on a reference) was that the earlier notice of demand stood revived and became valid, legal and enforceable against the assessee and there was no need to issue fresh demand notices and (b) that in view of the validating Act the original notice of demand i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under section 143(3) of the Act. The said demand finally stood reduced to the extent order passed under section 254 by the Tribunal, though in between the Commissioner of Income Tax (Appeals) had granted greater relief in its order under section 250 of the Act. Considering the provisions of section 220(2), proviso thereto and section 156, and keeping in view the fact that tax on income is a debt due on the closing date of the previous year, though quantified later on in accordance with the provisions of the Act, the interest which was payable on the amount demanded, vide notice under section 156 as per the assessment order has to be reduced only to the extent it stood reduced finally by the order of the Tribunal under section 254 of the Act. Regard being had to the scope of the facts of the present case, we hold that in view of the scope of the proviso to section 220(2) of the Act, the notice of demand must relate back to the original notice of demand. At no stage while the appeals were pending before the different forums, had the same lost its force. The moment there is finality of proceedings, the original notice of demand comes to the surface and for any default on the part of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ely to provide that depreciation and investment allowance cannot be claimed on interest on loans capitalised and added to the cost of the assets. The Tribunal disposed of the appeals of the revenue in accordance with the amendment, and thus restored the disallowances. The AO passed consequential orders and demanded both the tax and the interest u/s.220(2). The assessee paid the tax but filed applications to the CIT u/s. 264 of the Act contending that the additional tax became payable only as a result of the retrospective amendment made to the Act, that such tax was paid by the assessee within time after receipt of the demand notices issued by the AO consequent to the passing of orders giving effect to the Tribunal's orders and therefore no interest u/s.220(2) was payable. The CIT rejected the applications following a circular No.334 dated 3-4-1982 issued by the CBDT [reported in (1982) 135 ITR St. 10] rejected the applications filed by the assessee. In this circular, the CBDT expressed the view that where the assessment made originally was varied or set aside by one appellate authority, but on further appeal the original order of assessment was restored either wholly or partly, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s) Act, 1964. In other words, the 1964 Act comes to the rescue of the Revenue to hold that the original notice of demand issued by the Income Tax Officer continued to be valid and operative against the petitioner. As rightly observed by the Division Bench in Bharat Commerce and Industries Ltd. v. Union of India (1991) 188 ITR 277 (Delhi), the demand of interest cannot be termed as a penal provision, as the rationate behind the said provision is not to penalise a party but to make a provision for compensation to the Department on the failure of the assessee to make payment on the first notice of demand. I have already concluded that as per the order of the Appellate Tribunal, the original demands stood revived, if that is so, in the absence of payment of entire amount demanded, the respondents are justified in claiming interest under Section 220(2) of the Act. To make it clear even if a part of the amount of tax is outstanding, interest is chargeable from the expiry of 35 days. Even though learned senior counsel for the petitioner very much relied on some of the decisions of the various High Courts as mentioned above, after carefully scrutinising the factual position therein, I am o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt to the assessment order stands on a different footing from a case where such demand was not satisfied in full and different considerations shall apply to such a case; (c) the original demand made by the AO on the basis of the assessment order is merely kept in abeyance or suspension during the entire proceedings by way of appeal or revision taken against the assessment and gets revived from inception once the assessment gets finally confirmed in those proceedings; (d) when the assessment order is finally affirmed, the doctrine of merger also applies and interest being compensatory in nature, the revenue is entitled to charge the same from the date of the original order which merged with the final appellate order; (e) as a corollary to the above, it follows that where an assessment is restored and the original demand gets revived from inception, the assessee is liable to pay interest u/s.220(2) of the Act from that date on the unpaid amount and any variation in the amount of the demand favourable to the assessee which was directed by any of the appellate authorities in the interregnum has no effect on the liability of the assessee to pay the interest. 38. It will now be appropri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... manner run counter to the earlier judgment of this court in Bharat Commerce and Industries Ltd. v. UOI (supra). Obviously, the rectification order which created an additional demand of tax has to be followed up by a notice of demand u/s. 156. The failure of the assessee to pay that demand within the time stipulated in the notice will attract the levy of interest u/s.220(2). There can be no two views on the question. 42. The result of the discussion is this. The petitioner before us is liable to pay interest u/s.220(2) of the Act on the amount of tax due from him on the basis of the assessment order passed u/s.143(3) on 7-10-1997. The interest is payable for the entire period on the amount of tax as computed in the assessment order, from November 1997 till the date on which it was actually paid. In computing the interest, no notice shall be taken of the fact that by virtue of the order of the CIT(A) there was a reduction of the tax liability from the date of the said order till the date on which the Tribunal restored the assessment order. However, no interest shall be charged from the assessee on the interest of Rs.2,58,993, Rs. 58,500 and Rs.26,000 allowed to the assessee under s ..... X X X X Extracts X X X X X X X X Extracts X X X X
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