PITAMBARDAS DULICHAND VS UNION OF INDIA
2001 P T D 467
[239 I T R 69]
[Madhya Pradesh High Court (India)]
Before A. K. Mathur, C. J. and S. K. Kulshrestha, J
PITAMBARDAS DULICHAND and others
versus
UNION OF INDIA and others
Writ Petition No.4796 of 1996, decided on 13/11/1997.
Income‑tax‑‑‑
‑‑‑‑Recovery of tax‑‑‑Appeal‑‑‑Interest‑‑‑Demand notice based on original order of assessment‑‑‑Subsequent order of Appellate Authority‑‑‑Original order merges with order of Appellate Authority‑‑‑Interest under S.220(2) is payable from date of original order‑‑‑Circular clarifying this point is valid‑‑‑Indian Income Tax Act, 1961, S.220‑‑‑C.B.D.T. Circular No.334, dated 3‑4‑1982‑‑‑Constitution of India, Art.226.
Section 220(2), of the Income Tax Act, 1961, lays down that any amount, otherwise than by way of advance tax, specified as payable in a notice of demand under section 156 of the Act shall be paid within thirty days of the service of the notice at the place and to the person mentioned in the notice. The idea behind section 220 is that if any demand is raised, then it has to be paid within 30 days from the date of the demand notice and if, it is not paid, then the Revenue will be entitled to interest on that demand. The interest is compensatory in nature.
Once the Assessing Officer's order is reversed or affirmed by the Commissioner (Appeals) then it is merged in the order of the Commissioner (Appeals). Likewise, if it is further confirmed or reversed by the Tribunal, then that order will also merge in the order of the Tribunal. Therefore, the theory of merger will apply and the order of the lower authority will stand merged with the order of the higher authorities. Therefore, if the principle of merger is applied, then it will be clear that in case the Assessing Officer passed an order and a demand notice is issued on the basis of assessment order, if the assessment order in appeal is set aside by the Commissioner (Appeals) automatically the demand raised by the Assessing Officer in pursuance of the assessment order will stand merged in the appellate order and that demand will cease to exist. In case the order of the Commissioner (Appeals) on appeal by he Revenue or the assessee is set aside, then the order of the Assessing Officer is restored and automatically the demand raised by the Revenue on the basis of the assessment will revive and the assessee will be liable to pay interest on that demand. This is so because of the principle of merger. But this would only apply with regard to the original assessment made by the Assessing Officer and the same being confirmed. The assessment order is sometimes affirmed by the appellate authority and sometimes it is reversed and sometimes, the Tribunal can take a different view in the matter and it can remand the case and direct fresh enquiry on certain items which were not assessed to tax in the original order. However, if other items remain intact then interest will be payable to the exchequer in pursuance of the original demand. There could be the other eventuality that the amount of tax could be reduced, and then of course, interest will be payable on the reduced amount and in case a certain fresh item is to be taxed, a fresh notice for that part of the demand will have to be issued and if the assessee does not pay the amount within the time prescribed, then the interest will start accruing from that fresh date of demand. Therefore, in order to' work out the rate of interest, care will have to be taken to segregate the original demand and the fresh order of assessment resulting in fresh dues. For the new demand raised, interest will accrue from the date of the fresh order issued under section 156 whereas from the original order, which is maintained as it is or on the reduced amount, the interest will be due on that demand. Circular No.334, dated April 3, 1982, clarifying this point is valid.
A. V. Thomas & Co. Ltd. v. ITO (1982) 138 ITR 275 (Ker.); Abdul Kareem Hajee (K.P.) v. ITO (1983) 141 ITR 120 (Ker.); Bharat Commerce and Industries Ltd. v. CIT (1994) 210 ITR 13 (Delhi); Bharat Commerce and Industries Ltd. v. Union of India 1991) 188 ITR 277 (Delhi); Birla Cotton Spinning and Weaving Mills Ltd. v. ITO (1995) 211 ITR 619 (Cal.); Nachimuthu v. STO (1994) 95 STC 539 (Ker.) and Shri Ambica Mills Ltd. v. ITO (1993) 203 ITR 84 (Guj.) ref.
B. L. Nema for Petitioners.
Abhay Sapre for Respondents.
JUDGMENT
A.K. MATHUR, C.J.‑‑‑The petitioners by this writ petition have prayed that no interest can be levied under section 220(2) of the Income Tax Act, 1961. It is also prayed that the computation of interest from the date of the original assessment may be held illegal and without jurisdiction. It is also prayed that the orders passed under section 154 of the Income‑tax Act, i.e., Annexures P‑25 and P‑26 may be quashed.
Petitioner No.1 is carrying on the business of gold and silver ornaments and money‑lending at Jurhanpur, District Khandwa. He was assessed to income‑tax by respondent No.4. Petitioners Nos. 2,3,4, and 5 are partners in the said firm. There were search and seizure operations in the business premises of petitioner No.1 and residential premises of petitioners Nos. 2 to 5 from August 3, 1987 to August 8, 1987. Consequent to that, assessments were made for the assessment years 1985‑86, 1986‑87, 1987‑88, 1988‑89 and 1989‑90. The assessment in the case of the firm was originally made for the assessment year 1985‑86 on March 28, 1988, determining the total tax, inclusive of interest under sections 139(8) and 217 of the Income Tax Act, 1961 (hereinafter referred to as the "Act" in short), at Rs.8,55,830. It is alleged that the said demand was reduced to Rs.1,61,374. It is also alleged that prior to creation of demand by order, dated January 30, 1996, petitioner No.1 had paid tax amounting to Rs.1,63,489. Interest was calculated at Rs.83,213 counting the period from the original order, dated March 28, 1988, to January 30, 1996. It is alleged that since the demand was created only on January 30, 1996, interest under section 220(2) of the Act could be charged from the date provided the demand is not paid. A detailed chart has been placed on record showing the order for the assessment year 1985‑86, date, of the notice of demand, date of its service, total income assessed and the amount payable according to the orders together with interest and the net amount payable. Similar details are also given in respect of petitioner No. l‑film for the assessment years 1986‑87, 1987‑88, 1988‑89 and 1989‑90 in Annexures P‑2 to P‑5, respectively. Respondent No.4 charged interest under section 220(2) of the Act.
An application was filed by petitioner No.1 on March 6, 1996, before respondent No.5 under section 154 of the Act objecting to the levy of interest under section 220(2) of the Act on the ground that the original order was passed on March 28, 1988, under which a demand of Rs.8,55,830 was raised. The assessment of petitioner No.1 for the assessment year 1985‑86 was objected to and finally, an order was passed on August 25, 1994, resulting in the refund of assessment, therefore, interest payable came to be nil. It is alleged that ‑the interest is only payable if the amount has not been paid in accordance with section 220(2) of the Act. Since there was no demand by order, dated August 25, 1994, no interest could be charged. Similar applications were also filed for the assessment years 1986‑87, 1987?88, 1988‑89 and 1989‑90, by petitioners Nos.2 to 5 for rectifying the interest wrongly charged for the assessment years 1985‑86, 1986‑87 and 1987‑88, but that application was rejected by order, dated May 14, 1996, on the basis of the instructions issued by the Central Board of Direct Taxes, vide Circular No.334 (see (1982) 135 ITR (St.) 10), dated April 3, 1982. It is alleged that, according to this circular, the demand raised relates back to the first order of assessment, dated March 28, 1988, for the assessment year 1985‑86 and, similarly, other applications were also rejected. In these circumstances, the present writ petition has been fled by the petitioners that the circular issued by the Central Board of Direct Taxes is not correct and the interpretation put by their on section 220(2) of the Act is also not proper.
In order to appreciate the controversy involved in the present petition, it would be proper to refer to section 220(2) of the Act, which reads as under:
"220. When tax payable and when assessee deemed in default.‑‑‑
If the amount specified in any notice of demand under section 156 is not paid within the period limited 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:
Provided that, where as a result of an order under section 154, or section 155, or section 250, or section 254, or section 260, or section 262, or section 264 or an order .of the Settlement Commissioner under subsection (4) of section 245D, the amount on which interest was payable under this section had been reduced, the interest shall be reduced accordingly and the excess interest paid, if any, shall be refunded:
Provided further that in respect of any period commencing on or before the 31st day of March, 1989, and ending after, that date, such interest shall in respect of so much of such period as falls after that date, be calculated at the rate of one and one‑half per cent. for every month or part of a month."
The Central Board of Direct Taxes has also issued a Circular No.334 (see (1982) 135 ITR (St.) 10), dated April 3, 1982 (Annexure P‑31), which reads as under:
"Circular No.334, dated 3rd April, 1982.
To
All Commissioners of Income‑tax.
Sir,
Subject: Levy of interest under section 220(2) when the original assessment is set aside‑‑‑Instructions regarding.
Doubts have been raised as to the quantum of interest chargeable under section 220(2) of the Income‑tax Act, when the original assessment order passed by the income‑tax Officer is‑‑‑
(i) cancelled by him under section 146 of the Income‑tax Act:
(ii) set aside/cancelled by an 'appellate/revisional authority anti such appellate/revisional order has become final; or
(iii) set aside by one appellate authority but, on further appeal, the order setting aside the assessment is varied by the second appellate authority and the demand gets finally determined.
2. These issues were comprehensively examined in consultation with the Ministry of Law and the Board has been advised:
(i) where an assessment order is cancelled under section 146 or cancelled/set aside by an appellate/revisional authority and the cancellation/setting aside becomes final (i.e., it is not varied as a result of further appeals/revisions), no interest under section 220(2) can be charged pursuant to the original demand notice. The necessary corollary of this position will be that even when the assessment is refrained, interest can be charged only after the expiry of 35 days from the date of service of demand notice pursuant to such fresh assessment order:
(ii) where the assessment made originally by the Income‑tax Officer is either varied or even set aside by one appellate authority but, on further appeal, the original order of the Income‑tax Officer is restored either in part or wholly, the interest payable under section. 220(2) will be computed With reference to the due date reckoned from the original demand notice and with reference to the tax finally determined. The fact that during an intervening period, there was no tax payable by the assessee under any operative order would make no difference to this position.
3. The foregoing legal position will apply mutatis mutandis to the proceedings under other direct taxes also. These instructions may be brought to the notice of all the officers working in your charge.
Yours faithfully,
(Sd.)
??????????? H. Venkataraman,
Director, Central Board of Direct Taxes.
??????????????????????? [F. No.400/3/91‑ITCO]."
Section 220(1) of the Act lays down that any amount, otherwise than by way of advance talc, specified as payable in a notice of demand under section 156 shall be paid within thirty days of the service of the notice at the place and to the person mentioned in the notice. A proviso attached to subsection (1) of section 220 of the Act lays down that where the Assessing. Officer has any reason to believe that it will be detrimental to the Revenue if the full period of thirty days aforesaid is allowed,, he may, with the previous approval of the Deputy Commissioner, direct that the sum specified in the notice of demand shall be paid within such period being a period less than the period of thirty days aforesaid, as may be specified by him in the notice of demand. Subsection (2) says that if the amount specified in any notice of demand under section 156 is not paid within the period limited under subsection (1), the assessee shall be liable to pay simple interest at 1/2 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 rate of interest, of course, was amended by the Direct Tax Laws (Amendment) Act, 1987, with effect from April 1, 1989. Prior to this, the rate of interest was 15 per cent. per annum from the day commencing after the end of the period mentioned in subsection (1). The proviso further lays down that where as a result of an order passed under section 154, i.e., after rectification; or under section 155, i.e., amendment of the assessment order, or under section 250, i.e., procedure in appeal, or under section 254, i.e., order of the Appellate Tribunal, or under section 260 i.e., decision of the High Court or Supreme Court, or under section 262, i.e., hearing before Supreme Court and/or under section 264 as a result of revisional orders, or under the order of Settlement of the Commission under section 245D(4) and the amount of interest shall be payable on that amount if reduced and the excess amount shall be refunded. The idea behind section 220 of the Act is that if any tax demand is raised then it has to be paid within 30 days from the date of the demand of notice and if it is not paid then the Revenue will be entitled to interest on that demand. The interest is compensatory in nature; therefore, if the demand is raised and amount is not paid that would amount to that amount which was lawfully due to the State, has been retained and the interest would start accruing to the State on that amount. Therefore, in order to compensate the State for not paying the amount after the demand notice, the exchequer should be adequately compensated with interest. But the question before us is when the interest will start accruing on that amount.
Shri B. L. Nema, learned counsel for the assessee, submits that the amount should be due from the date of demand, i.e., in case the demand is set aside or stayed when on issuing a fresh demand alone, the Revenue is entitled to interest. Learned counsel further submits that in case, the demand is set aside and if it is restored back by an appellate order, then it shall relate from the date of fresh order and it shall not relate back to the original demand raised by the Revenue. We are of the opinion that the contention of learned counsel appears to be not well‑founded.
Once the Assessing Officer's order is reversed or affirmed by the Commissioner of Income‑tax (Appeals) then it is merged in the order of the Commissioner of Income‑tax (Appeals). Likewise, if it is further confirmed or reversed by the Tribunal then that order will also merge in the order of the Tribunal. Therefore, the theory of merger will apply and the order of the lower authority will stand merged with the order of the higher authorities. Therefore, if the principle of merger is applied then it will be clear that in case the Assessing Officer passed an order and demand notice is issued on the basis of assessment order, then the assessment order in appeal is set aside by the Commissioner of Income‑tax (Appeals) and then automatically the demand raised by the Assessing Officer in pursuance of the assessment order will stand merged in the appellate order and that demand will cease to exist. In case the order of the Commissioner of Income‑tax (Appeals) on appeal by the Revenue or the assessee is set aside then the order of the Assessing Officer is restored back, and automatically the demand raised by the Revenue on the basis of the assessment will revive and the assessee will be liable to pay interest on that demand. This is so because of the principle of merger.
But here, we would like to add that this would only apply with regard to the original assessment made by the Assessing Officer and the same being confirmed. It is possible that the assessment orders sometimes is affirmed by the appellate authority and sometimes it is reversed and sometimes the Tribunal can take a different view in the matter and it can remand the case and direct to make fresh enquiry on certain items which were not assessed to tax by the Assessing Officer in the original order and the same is sought to be reassessed and the tax demand is raised on this new item, then the interest will be payable for this new item from its demand. However, if other items remain intact then the interest will be payable to the exchequer in pursuance of the original demand. There could be the other eventuality that amount of tax could be reduced then of course, interest will be payable on the reduced amount and in case a certain fresh item is to be taxed fresh notice for that part of demand will have to be issued and if the assessee does not pay the amount within the time prescribed then the interest will start accruing from that fresh date of demand. Therefore, in order to work out the rate of interest, care will have to be taken to segregate between the original demand and the fresh order of assessment resulting in dues. For the new demand raised, interest will accrue from the date of the fresh order issued. under section 156 whereas from the original order, which is maintained as it is or on the reduced amount then the interest will be due on that whole demand. In this connection, our attention was also invited to various decisions from both sides, of the High Courts as also that of‑the Supreme Court: In AN. Thomas & Co. Ltd. v. CIT (1982) 138 ITR 275 (Ker.), that was a single Bench decision. In that case, the Tribunal restored the order of the Income‑tax Officer and fresh notice of demand was issued after the order of the Tribunal to pay back tax refunded with interest. It was also observed that liability to pay interest to the Department arises only from the date of fresh notice of demand and not from the original date. In a reversed casein K.P. Abdul Kareem Hajee v. ITO (1983) 141 ITR 120 (Ker.), certain amount seized by the Enforcement Directorate from H was claimed by the assessee/petitioner as his. As a result of the claim of the petitioner, the Income‑tax Officer made a protective assessment on the petitioner and an assessment on H. Both the assessments were set aside by the Appellate Assistant Commissioner. On further appeal, the Tribunal affirmed the order of the Appellate Assistant Commissioner relating to H, however, affirmed the order of the Income‑tax Officer relating to the petitioner. Since the petitioner alone became liable for the tax due in respect of the seized amount, the Department claimed interest under section 220(2) of the Income Tax Act, 1961, from the petitioner. The petitioner contended that since the Appellate Assistant Commissioner had set aside the assessment order in respect of the petitioner, no interest was payable by him on the tax demanded and his liability arose only upon the final order of the Tribunal. It was also held by the Kerala High Court that the finality of the assessment order of the Income-tax Officer, was qualified by and subject to appeal, which was taken before the Appellate Assistant Commissioner. The order of the Appellate Assistant Commissioner itself was likewise provisional during the period allowed for filing an appeal or during the pendency of the appeal. When the order of the Appellate Assistant Commissioner concerning the petitioner was finally set aside by the Tribunal, thereby affirming the order of the Income‑tax Officer, the finality of the order of the Income‑tax Officer was affirmed. Therefore, for the period commencing from the order of the Appellate Assistant Commissioner and ending with the order of the Tribunal, the assessment order of the Income‑tax Officer must be deemed to have operated and the petitioner was liable to pay interest under section 220(2). In. Shri Ambica Mills. Ltd. v. CIT (1993) 203 ITR 84 (Guj.), that was a case of the Gujarat High Court where the petitioner had complied with the notice of demand issued under section 156 of the Income‑tax Act and, therefore, there was no question of applying the provisions of subsection (2) of section 220 of the Act, the order levying interest under section 220(2) was liable to be quashed. In Birla Cotton.Spg. and Wvg. Mills Ltd. v: ITO (1995) 211 ITR 610 (Cal.), it was held that notice of demand based on the original assessment was passed in. September 1979, and the appeals against assessments, income and tax determined afresh were preferred in May, 1986, and the interest was not payable under section 220(2) from the order of the original assessment order, dated May, 1986. That case is not applicable in the present case as the demand was re‑determined. But in a case where the original assessment was upheld by the Tribunal then the interest will accrue from the date of the original order. In Bharat Commerce and Industries Ltd. v. CIT (1994) ‑210 ITR 13 (Delhi), it was held that when an order of rectification is made under section 154 and a notice‑of demand is issued thereafter for the amount determined by that order, interest under section 220(2) can be levied on the amount of demand only if there is no payment of amount covered by the rectification order in accordance with the notice of demand. The rectification order cannot include interest under section 220(2) of the Act. This case also does not provide us any assistance.
In K. Nachimuthu v. Sales Tax Officer (1994) 95 STC 539 (Ker.), that was ‑a case under the Sales Tax Act from the Kerala High Court and in that it was observed that the demand for tax was set aside in appeal but it was restored in subsequent proceedings and penal interest was not payable for interregum. But as we have already observed above by applying the principle of merger when the original order of the Assessing Officer is affirmed by the Tribunal though it might have been set aside by the Appellate Assistant Commissioner, then the interest shall relate back to the original order. In Bharat Commerce and Industries Ltd. v. Union of India (1991) 188 ITR 277 (Delhi), it was held that demand for payment of interest shall be from the date of original demand.
On survey of the aforesaid decisions referred to from various High Courts, there is a conflict of opinion. But the view which we have taken, is Supported by the decision of the Delhi High Court in Bharat Commerce and Industries Ltd. v. Union of India (1991) 188 ITR 277. We have applied the principle of merger and on that basis when the original demand is affirmed by the last Court then that amounts to affirming the original demand and the amount becomes due to the Revenue; therefore, the interest being compensatory in nature, the Revenue is entitled to charge interest from the date of the original order. In this view of the matter, we are of the opinion that the circular issued by the Central Board of Direct Taxes appears to be well‑founded. Hence, in the result, we do not find any merit in this petition and the same is dismissed. No order as to costs.
M.B.A./196/FC ?????????
Petition dismissed.