Income-tax---

----Recovery of tax---Interest---Constitutional validity of provisions--Levy of interest under S.220(2) on non-payment of sum specified in notice of demand---Interest is compensatory---Section 220(2) does not violate Arts. 14 & 19 of Constitution---Section 220(2) is valid---Indian Income Tax Act, 1961, 5.220---Constitution of India, Arts. 14, 19 & 226.

Section 220(1) of the Income Tax Act, 1961, provides' that the amount specified in the notice of demand has to be paid within 30 days of the service of the notice. Subsection (1) refers to the amount and has not categorised "interest", "tax" and "penalty" separately. The distinction between "interest", "tax" and "penalty", comes to an end once the demand notice is issued. The distinction remains only till they are determined separately. Section 220 refers to any amount payable in accordance with the notice of demand under section 156. Section 221(1) provides for levy of penalty when the assessee is in default or is deemed to be in default in making the payment of tax. The distinction between sections 220 and 221 is thus obvious that penalty could be levied only if there is default in making the payment of tax. This penalty is in addition to the interest payable under section 220(2). The interest under section 220(2) is to be levied for non payment of the sum specified in the notice of demand which may be, interest or even penalty as determined by the assessing authority under the Act and for which the notice of demand is issued under section 156. The nature of the interest is compensatory and, therefore, the liability which has been created by the statute in respect of "tax, interest and penalty" has to be discharged within the time specified in the notice of demand and any non-payment or late payment thereof has to be compensated by paying the interest as provided under section 220(2). If Parliament has competence to levy interest for non-payment or late payment of tax, then, after the liability is determined, if certain amount of interest is payable, the power to recover and make a provision for levy of interest for non-payment of such amount is ancillary incidental to the main power for levy of tax. Section 220(2) is not violative of Articles 14 and 19(1)(g) of the Constitution. Section 220(2) is valid.

Achamma Kuriakose (Smt.) v. State of Kerala (1988) 171 ITR 494 (Ker.); Gujarat State Fertilizers Co. Ltd. v. ITO (1983) 142 ITR 787 (Guj.); Khazan Chand v. State of Jammu and Kashmir (1984) 56 STC 214 (SC); Sali Maricar (A.M.) -v. ITO (1973) 90 ITR 116 (Mad.) and Soma Sundarams (Pvt.) Ltd. v. CIT (1979) 116 ITR 620 (Kar.) ref.

Vasan Associates for Petitioner indra Kumar for Respondents.

JUDGMENT

The validity of section 220(2) of the Income Tax Act, 1961, has been challenged as violative of Articles 14 and 19(1)(g) of the Constitution. The provisions of section 220(2) are as under:

"If the amount specified in any notice of demand under section 156 is not paid within the period specified under subsection (1), the assessee shall be liable to pay simple interest at one 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."

It is submitted that the interest has already been levied while creating the demand under sections 139(8) and 217 of the Act. In respect of the amount specified in the demand notice which is inclusive of the tax, interest and penalty liability of further interest to the extent that it is on the interest element is confiscatory in nature. Reliance is placed on the judgment given by the Madras High Court in the case reported in A.M. Sali Maricar v. ITO (1973) 90 ITR 116, where the provisions of section 140A(1)/(3) were held violative of Articles 14 and 19(1)(g) of the Constitution. It is submitted that the tax on interest stands on a different footing as held by this Court in Soma Sundarams (Pvt.) Ltd v. CIT (1979) 116 ITR 620.

Arguments of both learned counsel for the parties heard.

The decision relied on by learned counsel for the petitioner is not relevant for the controversy raised. The demand notice is issued in respect of the liability determined for tax, interest and penalty. Section 156 requires the notice of demand to be issued. The amount has to be paid within the time specified in the notice of demand. Section 220 is a provision which mentions when the tax is payable and when the assessee is deemed in default besides making the provision for payment of interest. Section 220(1) provides that the amount specified in the notice of demand has to be paid within 30 days of the service of the notice. Subsection (1) refers to the amount and has not categorised "interest", "tax" and "penalty" separately. The distinction between "interest", "tax" and "penalty" comes to an end once the demand notice is issued. The distinction remains only till they are determined separately. After the determination it is the amount specified in the notice of demand which has to be paid by the assessee. Even under section 220(2.) of the amount specified in the notice of demand issued under section 156 is no! paid then the assessee is liable to pay simple interest at the rate specified therein. This interest is payable on the total liability and the amount found payable by way of qualification of liability of an assessee in respect of "tax", "interest" and "penalty".

A contention was raised in Gujarat State Fertiliser Co. Ltd. v. ITO (1983) 142 ITR 787 (Guj.), that the provisions of section 220(2) are manifestly unreasonable and arbitrary exhibiting unfairness and naked despotism and are, therefore, violative of Article 14 of the Constitution. It was pointed out by the Gujarat High Court that the order passed levying the interest is not unreasonable but is in fact blended with equity.

Section 220 refers to any amount payable in accordance with the notice of demand under section 156. Section 221(1) provides for levy of penalty when the assessee is in default or is deemed to be in default in making the payment of tax. The distinction between sections 220 and 221 is thus obvious that penalty could be levied only if there is a default in making the payment of tax. This penalty is in addition to the interest payable under section 220(2). The interest under section 220(2) is to be levied for non payment of the sum specified in the notice of demand which may be tax, interest or even penalty as determined by the assessing authority under the Act and for which the notice of demand is issued under section 156. The nature of the interest is compensatory and, therefore, the liability been created by the statute in respect of "tax, interest and penalty" have to be discharged within the time specified in the notice of demand and any non payment or late payment thereof has to be compensated by paying the interest as provided under section 220(2) of the Act.

The apex Court in the case of Khazan Chand v. State of Jammu and Kashmir (1984) 56 STC 214, observed that providing for payment of interest in the case of delayed payment of tax is a method usually adopted in fiscal legislation to ensure that the amount of tax which is due is paid by the prescribed time and provisions in that behalf form part of the recovery machinery provided in a taxing statute. It is for the State to provide by what "means payment of tax is to be enforced and a person who does not pay the amount of tax lawfully and admittedly due by him can hardly complain of the measures adopted by the State to compel him to pay such amount.

The provisions of section 40(1) of the Agricultural Income-tax Act, 1950, fixing the time for payment of tax assessed and making the amount payable by issue of demand notice were upheld in Sint. Achamma Kuriakose v. State of Kerala (1988) 171 TTR 494 (Ker.)

. If Parliament has competence to levy the interest for non-payment or late payment of tax, then, after the liability is determined if certain amount of interest is payable, the power to recover and make a provision for levy of interest for non-payment of such amount is ancillary and incidental to the main power for levy of tax.

The contention that the provisions are violative of Articles 14 and 19(1)(g) has no substance.

The writ petition is accordingly dismissed.

M.B.A./659/FC Petition dismissed.