Income-tax---

----Recovery of tax---Delay in payment of tax----Interest---Assessment and issue of notice of demand---Appeal and order of remand by Tribunal to recompute income---Notice of demand remained valid and effective to extent tax was finally determined ---Assessee liable to pay interest under S.220(2)-- Indian Income Tax Act, 1961, S.220.

The proviso to subsection (2) of section 220 of the Income Tax Act, 1961, states that if as a result to a subsequent order the amount on which the interest was payable under this section had been reduced, the interest shall be reduced accordingly. Where an assessment order is set aside and a fresh assessment is directed to be made, the assessment must be deemed to be still pending. The notice of demand remains valid and effective to the extent that the tax is finally determined to be due and payable by the assessee. The enforceability of the notice of demand is qualified by and subject to the fresh determination of the liability. What is required by an order of remand is not to refund the money collected as per the original order, but to recompute the amount of tax that is payable by the assesssee. The original assessment is annulled not with a view to refund but with a view to correct the determination of liability. Where the assessee had not paid the tax as per the original demand notice, the amount on which the interest was payable would. have to be reduced according to the subsequent order consequent on the appeal. That is the import of the proviso to subsection (2) of section 220 of the Act.

The original assessment of the petitioner for the years 1982-83 and 1984-85 to 1987-88 was completed on March 27, 1991, and demand was raised accordingly. On appeal to the Commissioner of Income-tax (Appeals) by the petitioner, the assessment order was set aside with certain directions. On second appeal, the Tribunal found that there was no need for setting aside the assessment. It allowed the appeal partly and directed the Assessing Officer to recompute commission income and bring to tax the interest from banks. The Tribunal's orders were given effect to, and the total income and tax were finally determined. Thereafter, the Deputy Commissioner levied interesteinder section 220(2) of the Act for the delay in payment of tax for the above years. As against these demands the petitioner filed a revision petition before the Commissioner of Income-tax who upheld the demand of interest. On a writ petition against this order:

Held, dismissing the petition, that the petitioner was liable to pay interest as per section 220(2) of the Act read with the proviso thereto.

C IT v. Chittoor Electric Supply Corporation (1995) 212 ITR 404 (SC) ref.

ITO v. A. V. Thomas.& Co. (1986) 160 ITR 818 (Ker.); New Woodlands v. CIT (1982) 138 ITR 795 (Ker.); New Woodlands Hotel v. CIT (1991) 188 ITR 137 (Ker.) and Purshottam Dayal Varshney v. CIT (1974) 94 ITR 187 (All.) ref.

T. M. Sreedharan and N. Unnikrishnan for Petitioner.

P. K. R. Menon for Respondents.

JUDGMENT

The petitioner is an assessee to income-tax. He challenges the proceedings of the Commissioner of Income-tax confirming the levy of interest under section 220(2) of the Income-tax Act. The original assessment of the petitioner for the years 1982-83 and 1984-85 to 1987-88 was completed on March 27, 1991 and demand was raised accordingly. On appeal, to the Commissioner of Income-tax (,Appeals) by the petitioner, the assessment order was set aside with certain directions. On second appeal, the Tribunal found that there was no need for setting aside the assessment, allowed - the appeal partly and directed the Assessing Officer to recompute commission income and bring to tax the interest from banks. The Tribunal's orders were given effect to and the total income and tax were finally determined. Thereafter, the Deputy Commissioner levied interest under section 220(2) of the Act for the delay in payment of tax for the above years. The details of levy are as follows:

As against these demands the petitioners filed a revision before the Commissioner of Income-tax who by the impugned proceedings upheld the demand of the interest and dismissed the revision petition. The original petition is against this order

According to learned counsel for the petitioner, a demand of interest under section 220(2) of the Income-tax Act for interest is payable only when there is default in payment of tax in accordance with the terms of notice of demand. According to him, when the assessment order is set aside by the appellate authority, there is no demand subsisting and, therefore, there is no question of any default in payment of the demand so long as a new demand is raised after passing the fresh assessment order. The Commissioner found that in case the assessee -had paid the tax in pursuance of the original demand of tax, there may not be tax due till the demand is revived, In this case the petitioner had not made any remittance at all. Thereafter, the original demand continues and there is a reduction of demand when the case was finally decided by the Tribunal. The Commissioner of Income-tax referred to and followed the decision of New Woodlands v. CIT (1982) 138 ITR 795. Section 220(2) of the Income-tax Act which is relevant for the purpose of this case states as follows:

"If the amount specified in any notice of demand under section 156is not paid within theperiod limited under subsection (1), the assessee shall be liable to pay simple interest atone and one-half per cent for every month or part of a month comprised in the period commencing from the day immediately following the end of the period mentioned in subsection (1) and ending with the day on which the amount is paid.

The proviso to subsection (2) of section 220 of the Income-tax Act states that as a result of a subsequent order the amount on which the interest was payable under this section had been reduced, the interest shall be reduced accordingly. Therefore, the contention that there was no demand from October 21, 1991, until the fresh assessment was completed by the Deputy Commissioner after the order of the Tribunal cannot be accepted. A similar question was raised before this Court in New Woodlands v. CIT (1982) 138 ITR 795. In that case the question was whether the assessee is entitled to interest on the income-tax paid by .it as per the notice of demand, when the orders of assessment were set aside by the appellate authority. The argument on behalf of the petitioner in that case was that with the orders of the appellate authority the original orders of assessment disappeared and lost their identity. They had been merged with the final orders of the appellate authority. The appellate orders having superseded the original orders of assessment, notice of demand fell to the ground. Consequently, any amount paid on the basis of such demand was immediately refundable. Where such refund is not made within the time stipulated, the interest accrues in favour of the assessee. Repelling the said argument, this Court held that the notice of demand remains valid and effective to the extent that the tax is finally determined to be due and payable by the assessee. According to the learned Judge, the enforceability of the notice of demand is qualified by and subject to the. fresh determination of the liability. What is required by an order of remand is not to refund the money collected as per the original order, but to recompute the amount of tax that is payable by the assessee. The original assessment is annulled not with a view to refund but with a view to correct the determination of liability. The learned Judge differed from the view expressed to the contrary by the Allahabad High Court in Purshottam Dayal Vatshney v. CIT (1974) 94 ITR 187. This view was upheld by the Supreme Court in CIT v. Chittoor Electric Supply Corporation (1995) 212 ITR 404. The Supreme Court took the view that where an, assessment order is set aside and a fresh assessment is directed 'to be made, the assessment must be deemed to be still pending, which has to be completed. In such a case the question of refund does not arise. A contrary view taken by the Allahabad High Court holding that if an assessment order is set ,aside, the notice of demand becomes ineffective and the tax already paid under such a notice of demand becomes refundable was not approved by the Supreme Court in that decision. The Supreme Court also disapproved the Division Bench judgment in New Woodlands Hotel v. CIT (1991) 188 ITR 137 (Ker.), and approved the decision of the Single Judge in New Woodlands v. CIT (1982) 138 ITR 795 (Ker). In the case relied on by learned counsel for the petitioner, viz., ITO v. A. V. Thomas & Co. (1986) 160 ITR 818 (Ker.), the assessee paid the tax as per the original assessment order: Therefore, the Division Bench found that the requirement under section 220(2) ,of the Income-tax Act for attracting the liability to pay interest, are not present in that case. Therefore, even if the original notice is revived, it was held that the Department may not be justified in demanding the interest from the date of the original notice. But where the assessee had not paid the tax as per the original demand notice, the amount on which the interest was payable would have reduced according to the subsequent order consequent on the appeal. That is the import of the proviso to subsection (2) of section 220 of the Income-tax Act in the light of the Supreme Court decision in CIT v. Chittoor Electric Supply Corporation (1995) 212 ITR 404, 'approving the decision of the Kerala High Court in New Woodlands v. CIT (1982) 138 ITR 795. Therefore, the petitioner is liable to pay interest as . per section 220(2) read with the proviso of the Income-tax Act. For all these reasons, the grounds raised by the petitioner against the order of the Commissioner cannot be sustained and accordingly the original petition is dismissed.

M.B.A./3192/FCPetition dismissed.