ORDER
S.B. Sinha, CJ
1. Reference to this Bench has been made by a Division Bench of this Court having regard to the importance of the question as regards the interpretation of Section 220(2) of the Income Tax Act (hereinafter referred to as 'the said Act' for brevity). Although all the writ petitions involve a similar question of law, factual matrix of the matter shall be considered from Writ Petition No.6112 of 1996.
2. The writ petition relates to the assessment year 1984-85 and the original demand of assessment was made on 27-3-1987. The entire amount of tax was paid. But the order of assessment was questioned in an appeal. The said appeal of the assessee was allowed by the Commissioner of Income Tax (Appeals) by an order dated 31-3-1989. The assessee made a demand of refund of the amount with interest, pursuant whereto the amount was refunded along with interest in terms of Section 244 of the said Act on or about 28-7-1989. The department preferred an appeal there against before the Appellate Tribunal, which was allowed on 6-9-1995. A consequential demand was made on 6-9-1995 wherein interest was charged under Section 220(2) of the said Act from the date of original demand.
3. Mr. V. Ramachandran, learned Counsel appearing on behalf of the writ petitioner-assessee, inter alia, submitted that having regard to the provision in Section 156 read with the Scheme as contained in Chapter XVII of the said Act, it is manifest that the interest can be charged only when there exists a demand. According to the learned Counsel, as the assessee had already paid the entire amount pursuant to the notice of demand issued under Section 156 of the said Act, the entire demand having been wiped off, the question of charging of interest from the date of original demand would not arise only because the appeal of the department before the Appellate Tribunal succeeded and in the meantime pursuant to the order of Commissioner of Income Tax (Appeals), the amount was refunded together with interest in terms of Section 244 of the said Act. According to the learned Counsel, the demand made upon the petitioner is a fresh one. It was pointed out that having regard to the procedure for the deposit of the amount, a challan has to be issued and a prescribed procedure has to be followed.The learned Counsel would contend that it is not necessary, having regard to Section 244(1) of the said Act that an order of refund would be made automatically. In this connection, our attention has been drawn to the provisions contained in Sections 237, 240 and 241 of the said Act.
4. The learned Counsel would furtherurge that even the Taxation Laws(Continuation and Validation of RecoveryProceedings) Act, 1964 (hereinafter referredto as 'the Validation Act' for brevity) wouldnot change the situation. It was urged thatinterest is leviable only if there exists anexpress provision.
5. Mr. S.R. Ashok, learned Counsel appearing on behalf of the respondents, on the other hand, would submit that Section 3(f) of the Validation Act raises a legal fiction. It was contended that in the case of this nature, the doctrine of merger would come into play. Mr. Ashok would urge, that having regard to the fact that by reason of the order of Commissioner of Income Tax (Appeals) the appeal, was allowed, the demand would remain in eclipse during the pendency of the appeal by the department before the Income Tax Appellate Tribunal. In support of the said contention reliance has been placed on Pitambardas Dulichand v. Union of India, (M.P.) : [1999]239ITR69(MP) , ITO v. Ghanshyamdas Jatia, (Cal), : [1976]105ITR693(Cal) , Bharat Commerce and Industries Ltd. v. Union of India, (Delhi) : [1991]188ITR277(Delhi) , Roopali Dyeing and Printing Works v. Asst C1T, (Guj.) : [1995]212ITR573(Guj) , Vikrant Tyres Ltd v. First ITO, (Kar.) : [1993]202ITR454(KAR) , Union of India v. Jardine Henderson Ltd., (SC) : [1979]118ITR112(SC) and Jadhav v. Fourth ITO, (Kar.) : [1986]161ITR275(KAR) . According to the learned Counsel, there does not exist any ambiguity after the amendment.
6. Section 156 of the said Act provides that when any tax, interest, penalty, fine or any other sum is payable in consequence of an order passed under the said Act, the Assessing Officer shall serve upon the assessee a notice of demand in the prescribed from specifying the sum so payable. Reference by the learned Counsel to the provisions of Sections 219 and 234-A of the said Act, in our opinion, are not relevant for the purpose of disposal of the present case. Section 220 prescribes the period within which the payment has to be made. Sub-section (2) of Section 220 reads thus:
'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 sub-section (1) and ending with the day on which the amount is paid'.
7. Section 221 of the said Act provides for penalty payable when assessee is in default in payment of tax. Section 223 lays down the power of Tax Recovery Officer to take action under Section 222. Section 224 of the said Act provides that it shall not be open to the assessee to dispute the correctness of the certificate drawn up by the Tax Recovery Officer on any ground whatsoever, but the Tax Recovery Officer may cancel the certificate if, for any reason, he thinks necessary so to do. He has also a power to correct any clerical or arithmetical mistake therein. Section 225 empowers the Tax Recovery Officer to grant time to the assessee for payment of tax and for the said purpose he may stay the proceedings for recovery of tax until the expiry of the time so granted. Subsection (2) of Section 225 deals with a situation where a demand has been reduced in a proceeding, but the order is subject-matter of further proceeding under the Act. Sub-section (3) of Section 225 provides that if by reason of an order passed in appeal or other proceedings, the amount of outstanding demand is reduced the certifying officer may amend the certificate or cancel it. Section 226 provides for other modes of recovery.
8. Section 244 of the said Act deals with interest on refund where no claim is needed.
9. The question came up before the Apex Court in Income Tax Officer, Kolar v. Seghu Buchaiah Setty, (SC), : [1964]52ITR538(SC) and while interpreting the provisions of Sections 29 and 45 of the Income Tax Act, 1922, it was held that in a case where the demand levied by the Income Tax Officer was varied by appellate or revising authority, the original order of the Income Tax Officer merges into the order of such authority and consequently in all cases of an order varying the assessment, the original order goes and all steps already taken for recovery of the demand become null and void and that in such cases it is the duty of the Income Tax Officer to issue a fresh notice of demand in the prescribed form and serve it upon the assessee.
10. The Parliament has enacted the Validation Act, 1964 and the Statement of Objects and Reasons reads thus:
'Recently in the case of Income Tax Officer, Kolar and another v. Seghu Buchiah Setty, : [1964]52ITR538(SC) the Supreme Court had occasion to consider the scope of Sections 29 and 45 of the Indian Income Tax Act, 1992, and it has been held in that case that when a demand levied by the Income Tax Officer as a result of an assessment is varied by an appellate or revising authority, the original order of the Income Tax Officer merges into the order of such authority and consequently in all cases of an order varying the assessment, the original order goes and all steps already taken for the recovery of the demand become null and void and that in such cases it is the duty of the Income Tax Officer to issue a fresh notice of demand in the prescribed form and serve it upon the assessee. Though the judgment is with reference to the Indian Income Tax Act, 1992, which has been repealed but kept alive only for some limited purposes, the same interpretation may hold good with respect to the corresponding provisions in the Income Tax Act, 1961, and in the other Acts relating to the imposition of direct taxes.
2. The above decision of the Supreme Court will create difficulties in the collection of income tax and other direct taxes. The number of assessments involved in the arrear demands of the direct taxes is nearly 6 lakhs and recovery certificates have been issued to Collectors or Tax Recovery Officers in approximately 2,25,000 cases and the revenue involved comes to Rs.157 crores. In view of the above decision of the Supreme Court, in most of these cases, fresh notices of demand may have to be served upon the assessees and the assessees will have to be allowed a further period for paying the tax. It will be only after the expiry of the said period that fresh proceedings for recovery can be started. The result would be that recalcitrant assessees would get sufficient time to withdraw their funds or alienate their properties with a view to defeating the claims of revenue.
3. In order to overcome these difficulties, it is proposed to provide that in such cases, it shall not be necessary to take proceedings afresh or to serve fresh notices of demand except that in the case of an enhancement of assessment, another notice of demand shall be served upon the assessee with respect to the amount by which the assessment has been enhanced. Opportunity has also been taken to provide for certain matters which are ancillary to the above proposal.'
11. The said Validation Act, received the assent of the President on 12th May, 1964 and was published in the Gazette of India on the same date. The assessee, the Taxing Authority and the Tax Recovery Officer have been defined in Sections 2(a), 2(d) and 2(e) of the Validation Act, respectively, in the following terms:
'2. Definitions :--In this Act, unless the context otherwise requires,--
'assessee', in relation to-
(i) the Excess Profits Tax Act, 1940 (15 of 1940), or the Business Profits Tax Act, 1947 (21 of 1947), means a person by whom the tax or any other sum is payable under that Act;
(ii) the Estate Duty Act, 1953 (34 of 1953) means a person accountable or an accountable person as defined in that Act;
(iii) any other scheduled Act, means an assessee as defined in that Act;
(b) xx xx xx
(c) xx xx xx
(d) 'Taxing Authority' in relation to any scheduled Act, means an Officer (by whatever name called) empowered to serve upon an assessee a notice of demand in respect of any Government dues under that Act;
(e) 'Tax Recovery Officer', in relation to any scheduled Act, means a Tax Recovery Officer as defined in that Act and where there is no such definition, means an Officer (by whatever name called) to whom a certificate for the recovery of arrears of Government dues may be issued under that Act'.
12. Section 3 of the Validation Act, reads thus:
'3. Continuation and validation of certain proceedings :--(1) Where any notice of demand in respect of any Government dues is served upon an assessee by a Taxing Authority under any scheduled Act, and any appeal or other proceedings is filed or taken in respect of such Government dues, then,--
(a) where such Government dues are enhanced in such appeal or proceeding, the Taxing Authority shall serve upon the assessee another notice of demand only in respect of the amount by which such Government dues are enhanced and any proceedings in relation to such Government dues as are covered by the notice or notices of demand served upon him before the disposal of such appeal or proceeding may, without the service of any fresh notice of demand, be continued from the stage at which such proceedings stood immediately before such disposal;
(b) Where such Government dues are reduced in such appeal or proceedings,--
(i) it shall not be necessary for the Taxing Authority to serve upon the assessee a fresh notice of demand;
(ii) the Taxing Authority shall give intimation of the fact of such reduction to the assessee, and where a certificate has been issued to the Tax Recovery Officer for the recovery of such amount, also to that officer;
(iii) any proceedings initiated on the basis of the notice or notices of demand served upon the assessee before the disposal of such appeal or proceeding may be continued in relation to the amount so reduced from the stage at which such proceedings stood immediately before such disposal;
(b) no proceedings in relation to such Government dues (including the imposition of penalty or charging of interest) shall be levied by reason only that no fresh notice of demand was served upon the assessee after the disposal of such appeal or proceeding or that such Government dues have been enhanced or reduced in such appeal or proceeding :
Provided that if as a result of any final order such Government dues (other than annuity deposit) have been reduced and the penalty imposed on the assessee for default in payment thereof exceeds the amount so reduced, the excess shall not be recovered and if it has already been recovered, it shall be refunded to the assessee on an application made by him to the Taxing Authority within such time and in such manner as may be prescribed by rules made under this Act;
Provided further that if the amount of penalty imposed on the assessee for failure to make any annuity deposit exceeds one half of the amount of the annuity deposit required to be made as a result of such order, the excess shall not be recovered, and if it has already been recovered, shall be refunded to the assessee on an application made by him to the Taxing Authority within such time and in such manner as may be prescribed by rules made under this Act;
Provided further that where any Government dues are reduced in such appeal or proceeding and the assessee is entitled to any refund thereof, such refund shall be made in accordance with the provisions of that Act.
(2) For the removal of doubts, it is hereby declared that no fresh notice of demand shall be necessary in any case where the amount of Government dues is not varied as a result of any order passed in any appeal or other proceeding under any scheduled Act.
(3) The provisions of this section shall have effect notwithstanding any judgment, decree or order of any Court, Tribunal or other authority'.
13. We may, however, note that in this regard the Central Board of Direct Taxes has also issued a circular, being No.334, dated 3-4-1982.
14. A taxing statute, in a case where two interpretations are possible, must be construed in favour of the assessee and against the revenue.
15. In Sri Ambica Mills Ltd. v. Income Tax Officer, (Guj.) : [1993]203ITR84(Guj) , a Division Bench of Gujarat High Court, having regard to the provisions of Section 220 of the said Act, held:
'From the aforesaid provisions, it is apparent that interest can be recovered only if the assessee fails to comply with the notice of demand issued under Section 156 of the Income Tax Act. It is also apparent, as stated above, that the petitioner had complied with the notice of demand issued under Section 156 of the Income Tax Act and, therefore, there is no question of applying the provisions of sub-section (2) of Section 220 of the Income Tax Act.
As the provisions are absolutely unambiguous and clear, in our view, it is not necessary to refer to the decision of the Kerala High Court in the case of ITO v. A.V. Thomas and Co. : [1986]160ITR818(Ker) and the decision of the Delhi High Court in the case of Bharat Commerce and Industries Ltd. v. Union of India : [1991]188ITR277(Delhi) '.
16. In A. V. Thomas & Co., Ltd. v. CIT, (Ker.) : [1982]138ITR275(Ker) , the Kerala High Court held that where the assessee had paid the amount at the right time and received the refund as per the order of the AAC, he had no liability to pay any amount to the department, unless notice of demand was served on him consequent upon the reversal of the order of AAC by the Tribunal.
17. The said decision was affirmed in appeal in ITO v. A. V. Thomas & Co., (Ker.), : [1986]160ITR818(Ker) .
18. In CIT v. Chittoor Electric Supply Corpn., (SC) : [1995]212ITR404(SC) , the Apex Court, in a different fact situation, overruled the decision of the Kerala High Court reported in New Woodlands Hotel v. CIT, (Ker.) : [1991]188ITR137(Ker) , holding:
'Section 240 says that where, as a result of any appellate or other order passed under the Act, any amount becomes due to the assessee, the Assessing Officer shall have to refund it even without the assessee making a claim therefor. Section 244(1), which carries forward the idea contained in Section 240, says that where a refund is due to the assessee pursuant to an order referred to in Section 240 and the Assessing Officer does not grant the refund within a period of three months from the end of the month in which said order is passed, the Central Government shall pay to the assesses interest on the amount of refund from the date immediately following the expiry of the period of three months till the date on which refund is granted at the prescribed rate. Section 237, which is a general provision relating to refunds, says that if a person satisfies the Assessing Officer that the tax paid by him for any assessment year exceeds the amount properly chargeable under the Act, he shall be entitled to a refund of the excess. What is significant is that Section 240 speaks of an amount becoming due as a result of any order passed in appeal or other proceeding under the Act. Section 244(1) is also to the same effect. It says, 'where a refund is due to the assessee pursuant to an order referred to in Section 240'. The question to be answered is whether any amount became due to the assessee in this case when the Appellate Assistant Commissioner passed his order. Obviously not. According to Section 237, a refund becomes due when the amount paid by the assessee is in excess of 'the amount with which he is properly chargeable under this Act for that Year'. Unless a fresh assessment is made, it would not be possible to say what amount is properly chargeable and until that is determined, the question of refund may not arise. In this case, the Appellate Assistant Commissioner merely directed a fresh assessment on a different basis. In cases where the assessment is set aside and a fresh assessment is directed to be made, the tax determined on such assessment may be either more or less than the tax determined in the original (set aside) assessment. Therefore, no one can say on the date of such appellate order any amount has become due to the assessee or for that matter, to the Revenue'.
19. The Apex Court, thus, held that the refund becomes due only after fresh assessment is made pursuant to appeal and not from the date of appellate order. In the fact situation of that case, it was observed that according to Section 220(2), interest is payable by the assessee on the amount due only after the service of notice of demand pursuant to such fresh assessment. However, the Apex Court has clarified that the ratio laid down therein is confined to a case where an appellate or other authority under the Act sets aside or cancels the assessment and directs a fresh assessment to be made i.e., a situation contemplated by the subsequently inserted proviso [clause (a)].
20. In Bharat Commerce & Indus. Ltd, v. CIT, (Delhi) : [1994]210ITR13(Delhi) , it was held that interest cannot be levied in an order of rectification passed under Section 154 of the Act.
21. In K.P. Abdul Kareem Hajee v. ITO, (Ker.) : [1983]141ITR120(Ker) , the doctrine of eclipse was taken recourse to stating:
'The order of a judicial or quasi-judicial authority is not final for the purpose of resjudicata during the time allowed for filing an appeal or the pendency of an appeal. In the absence of any statutory provision to the contrary, or an interim stay granted by a competent authority, the order, although not final, is provisionally executable, subject to restoration. The finality of Ex.P2A was qualified by and subject to appeal, which was taken before the appellate authority. The order of the appellate authority itself was likewise provisional during the period allowed for filing an appeal or during the pendency of the appeal. When the order of the AAC concerning the petitioner was finally set aside by the Tribunal, thereby affirming Ex.P2A order of the ITO, the cloud hanging over Ex.P2A was removed and its finality was affirmed. Consequently, for the relevant period, Ex.P2A is deemed to have operated in full vigour to make the petitioner liable in law by reason of the Tribunal's affirmative order. If this is the position in law, which I think it is, Section 220(2) of the IT Act was attracted in respect of the amount due from the petitioner as per Ex.P2A dated December 1, 1973. It is that interest which is now demanded by the ITO, vide Ex.P6, and affirmed by the Commissioner by Ex.P7.'
22. In Bharat Commerce and Industries's case (supra), the Delhi High Court in a case where the tax was reduced by the Commissioner of Income Tax (Appeals) and increased by Income Tax Appellate Tribunal, directed that the levy of interest was valid as tax demanded under Section 156 of the said Act pursuant to original assessment has not been paid.
23. In Vikrant Tyres's case (supra), the Karnataka High Court had held that the interest is valid from the date of refund till the date of final payment. The said decision was rendered prior to the judgment of the Apex Court in Chittoor Electricity Supply Corporation's case (supra).
24. The Karnataka High Court in that case considered the CBDT, Circular No.334 dated 3-4-1982 and held that as refund had been obtained by the petitioner because the appellate authority reversed the order of the assessing authority, it cannot be said that the assessee had not paid the tax specified in a notice of demand under Section 156 of the said Act. Referring to the CBDT, Circular and the Validation Act, 1964, the Division Bench held:
'Payment of interest, essentially, is compensatory in nature. Logically, the compensation should cover the entire period during which the person to whom the money belongs lawfully was made to part with it to another. To reduce the period for which compensation is payable, when, in fact, the person was deprived of is money for a longer period, his to truncate the very concept of compensation'.
That liability to pay income tax is a debt due on the last date of the accounting period is a principle now established by the decision of the Supreme Court in Kesoram Industries and Cotton Mills Ltd. v. CWT : [1966]59ITR767(SC) . At page 784, the Supreme Court observed:
'A liability to pay income tax is a present liability though it becomes payable after it is quantified in accordance with ascertainable data. There is a perfected debt at any rate on the last day of the accounting year and not a contingent liability'.
Therefore, jurisprudentially, the Revenue is a creditor and the tax-payer is a debtor and there is nothing strange if the law contemplates that the debtor should compensate the creditor by paying interest on the amount due. The fact that the law has postponed the discharge of tax liability to the date of issuance of a demand notice and the period of 30 days from the date of the demand, would not alter the nature of the said liability.
25. As regard the decision of the Kerala High Court in A. V. Thomas's case (supra) it was observed:
'With utmost respect, we cannot agree with the observations of the Kerala High Court referred to earlier. The nature of the interest payable under the Act has not been considered in the said decision'.
26. We may, however, notice that the decision of the Karnataka High Court in Vikrant Tyres's case (supra) has been reversed by the Apex Court recently in M/s. Vikrant Tyres Ltd. v. First I.T. Officer, Mysore, 2001 AIR SCW 624, wherein it was held:
'8. A bare reading of this section clearly indicates that if the assessee does not pay the amount demanded under a notice issued under Section 156 of the Act within the time stipulated under subsection (1), the said assessee is 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 date immediately following the end of the period mentioned in sub-section (1) and ending with the day on which the amount is paid, and therefore the condition precedent under this section is that there should be a demand notice and there should be a default to pay the amount so demanded within the time stipulated in the said notice. Applying this section to the facts of the case, it is seen that immediately after the assessment was made for the relevant years, demand notices were issued under Section 156(1) of the Act and admittedly the appellant satisfied the said demands and nothing was due pursuant to the said demand notices. However, after the judgment of the appellate authority which went in favour of the assessee, the Revenue refunded the amount due as per the said order of the authority. Thereafter, when the matter was taken up ultimately in Reference to the High Court and the assessee lost the case, fresh demand notices were issued and it is also an admitted fact that in satisfaction of the said demand notices the appellant had paid the amount as demanded within the time stipulated therein. The question, therefore, is: whether the Revenue is entitled to demand interest in regard to the amount which was refunded to the assessee by virtue of the judgment of the appellate authority and which was re-paid to the Revenue after decision in the Reference by the High Court on fresh demand notices being issued to the assessee? Admittedly, on a literal meaning of the provisions of Section 220(2) of the Act, such a demand for interest cannot be made. The High Court by a liberal interpretation of the said section and relying upon Section 3 of the Validation Act has held that the Revenue is entitled to invoke Section 220(2) of the Act for the purpose of demanding interest on such retention of money.
9. We are not in agreement with the High Court on the interpretation placed by it on Section 220(2) of the Act in regard to the right of the Revenue to demand interest in a situation where the assessee has promptly satisfied the demand made by the Revenue in regard to the tax originally assessed.
10. It is a settled principle of law that the Courts while construing Revenue Acts have to give a fair and reasonable construction to the language of a statute without leaning to one side or the other, meaning thereby that no tax or levy can be imposed on a subject by an Act of Parliament without the words of the statute clearly showing an intention to lay the burden on the subject. In this process, the Courts must adhere to the words of the statute and the so-called equitable construction of those words of the statute is not permissible. The task of the Court is to construe the provisions of the taxing enactments according to the ordinary and natural meaning of the language used and then to apply that meaning to the facts of the case and in that process if the tax-payer is brought within the net he is caught, otherwise he has to go free. This principle in law is settled by this Court in India Carbon Ltd. v. State of Assam : AIR1997SC3054 , wherein this Court held:
'Interest can be levied and charged on delayed payment of tax only if the statute that levies and charges the tax makes a Substantive provision in this behalf. A Constitution Bench of this Court speaking through one of us (Hon. Bharucha, J.) in the case of V. V.S. Sugars v. Government of A.P. : [1999]2SCR925 , reiterated the proposition laid down in the India Carbon Ltd's case (supra) in the following words: 'The Act in question is a taxing statute and, therefore, must be interpreted as it reads, with no additions and no subtractions, on the ground of legislative intendment or otherwise'. If we apply this principle in interpreting Section 220 of the Act, we find that the condition precedent for invoking the said section is only if there is a default in payment of amount demanded under a notice by the Revenue within the time stipulated therein and if such a demand is not satisfied then Section 220(2) can be invoked.
11. The High Court also feel in error in relying on Section 3 of the Validation Act to construe Section 220(2) in the manner in which it has done in the impugned judgment. Section 3 of the Validation Act, in our opinion, cannot be relied upon to construe the authority of the Revenue to demand interest under Section 220 of the Act. The said section, was enacted to cope up with a different fact-situation. The section only revives the old demand notice which had never been satisfied by the assessee and which notice got quashed during some stage of the challenge and finally the said quashed notice gets restored by an order of a higher forum. In such situation, Section 3 of the Validation Act restores the original demand notice which was never satisfied by the assessee and the said section does away with the need to issue a fresh notice. Beyond that, that section cannot be resorted to for reviving a demand notice which is already fully satisfied'.
27. The Supreme Court approved theviews of the Kerala High Court in A.VThomas's case (supra). In view of theaforementioned recent authoritativepronouncement of the Apex Court, thedecisions of different High Courts inPitambardas Dulichand's case (supra), AbdulKareem's case (supra), Bharat Commerceand Industries's case (supra), Shri AmbicaMills's case (supra), Roopali Dyeing &Prtg.; Works' case (supra), GhanshyamdasJatia's case (supra), cannot be said to begood law.
28. 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.
29. For the reasons aforementioned these writ petitions must be allowed but in the facts and pcircumstances of these cases there shall be no order as to costs.