1. This departmental appeal is directed against the order dated 7-9-1987 of the CIT (Appeal) (I), Madras relating to the assessment year 1984-85.
2. The assessee is an individual and the assessment year 1984-85, the year of account ending on 31-3-1984 being the relevant previous year.
In the assessment order passed by him on 27-3-1987 the Assessing Officer levied interest of Rs. 24,898 under Section 139(8) of the Act and Rs. 1,13,610 under Section 217(1)(a) of the Act. In the process, he left out of reckoning a sum of Rs. 1,64,113 being the advance-tax belatedly paid by the assessee.
3. The said two levies were the sole subject matter of appeal preferred by the assessee to the first appellate authority. The basic point that was urged before the first appellate authority on behalf of the assessee was that the assessee was questioning the liability to pay interest under the said two Sections; and that consequently he was entitled to file the appeal on that issue only. In this regard reliance was placed on the Supreme Court's decision in Central Provinces Manganese Ore Co. Ltd. v. CIT [1986] 160 ITR 961 27 Taxman 275.
Interest under Section 139(8) was not exigible, because the delay in the filing of the return was occasioned by the delay in the finalisation of the accounts of T.T.K. and Co., a firm in which the assessee was a partner. It should, therefore, follow that the assessee was prevented by sufficient cause from filing his return of income within time. Further, though the assessee had filed application in Form No. 6 seeking extension of time, he did not receive any intimation from the Assessing Officer on the fate of the application.
4. As respects interest under Section 217(1)(a), the assessee's case was that no tax was payable as per the latest completed assessment and that, therefore, the assessee was not obligated to comply with the provisions of Section 209A(1)(a) of the Act. Therefore, the provisions of Section 217(1)(a) of the Act could not have been lawfully invoked against him. In any event, the assessee was disputing his liability to pay that part of the interest levied under the said sections which was occasioned by the Assessing Officer's decision to treat the sum of Rs. 1,64,113 not as advance-tax but as an ad hoc payment. In this regard, reliance was placed, inter alia, on the Madras case of CIT v. T.T.Investments and Trades (P.) Ltd. [1984] 148 ITR 347 17 Taxman312 to drive home the point that even advance-tax paid belatedly must be treated as advance-tax and not as ad hoc payment.
5. The CIT (Appeal), relying on the Supreme Court case of Central Provinces Manganese Ore Co. Ltd. (supra), held that the assessee was competent in law to agitate the exigibility issue relating to levy of interest under the said sections, even if it happens to be the solitary issue raised in the appeal. Even so, he held that, in the facts and circumstances of the case, "the appellant cannot argue that interest was not chargeable under provisions of Section 217 and Section 139(8) of the Income-tax Act.
6. Turning his attention next to the question whether the Assessing Officer was justified in treating the sum of Rs. 1,64,113 as ad hoc payment and leaving it out of reckoning for purposes of levying interest under the said sections, the CIT (Appeals) directed the Assessing Officer to treat the said sum of Rs. 1,64,113 as advance-tax paid by the assessee and to recompute on that basis the interest chargeable under Section 139(8) and 217 of the Act. In this regard he relied on the Madras case of T.T. Investments & Trades (P.) Ltd. (supra).
9. The first point made by the Departmental Representative was that the CIT(Appeals) was not justified in entertaining an appeal on the solitary ground centering on the charging of interest under Section 139(8) and 217(1)(a) of the Act. In this regard, reliance was placed on the following two Madras cases : Rajyam Pictures v. Addl. CIT [1978] 114 ITR 847 and Triplicane Urban Co-operative Society Ltd. v. CIT [1980] 126 ITR 125 3 Taxman 64. The second point urged on behalf of the Department was that, in any event, the CIT (Appeals) was not justified in directing the Assessing Officer to treat the sum of Rs. 1,64,113 as advance-tax for purposes of calculating the interest leviable under the said sections.
10. Shri K.R. Ramamani, the counsel for the assessee strongly supported the impugned order of the CIT(Appeals).
11. We have looked into the facts of the case. We have considered the rival submissions. As we see it, the second issue holds the key to the first.
12. The Department's case is that the advance-tax of Rs. 1,64,113 paid belatedly cannot be treated as advance-tax proper, and that, therefore, the CIT(Appeals) was not justified in directing the Assessing Officer to treat the said sum as advance-tax for purposes of calculating the interest leviable under Sections 139(8) and 217(1)(a). In our opinion going as it does against the scheme of the Income-tax Act, 1961 relating to collection and recovery of tax, the said contention lacks force.
13. The provisions relating to collection and recovery of tax are contained in Chapter XVII of the Act, and they have been collected under the following headings:- C. - Advance payment of tax : Sections 207 to 219. D.-Collection and recovery: Sections 220 to 232.
The first significant point to be noted is that Parliament has used two different words, namely, "collection" and "recovery". The word "collection" has been used in the context of payment by the assessee or any other person (who is liable to pay tax under the provisions of the Act) of tax within the time normally allowed by and under the various sections of the Act. The word "recovery" has been used in contra-distinction to the word "collection" and in the context of default on the part of the assessee or any other person to pay tax suo motu within the time allowed under the Act. Thus, whereas "collection" signifies voluntary payment of tax, "recovery" connotes collection of tax by the Department through coercive steps.
14. Under the heading 'B. Deduction at source' are collected various provisions which make certain persons liable to deduct tax at source and remit the tax deducted to the credit of the Central Government within the time stipulated. Here, Section 201, which deals with the consequences of failure to deduct and pay tax, is relevant. The consequences are that the person who failed to deduct or pay tax is, to start with, "deemed to be an assessee in default in respect of the tax". Once the person is deemed to be an assessee in default in respect of the tax, Sections 222 to 225 (which deal with certificate proceedings) and/or Section 226 (which deals with other methods of recovery) get activated.
15. The provisions relating to payment of tax in advance have been collected under the heading 'C. Advance payment of tax'. Here, Section 218 is designed to deal with cases of default in matters relating to advance payment of tax. If an assessee fails to pay any instalment(s) by the date(s) specified, Section 218 steps in and deems him "to be an assessee in default in respect of such instalment or instalments". Here also, once Section 218 is activated, Sections 222 to 225 and/or 226 are also activated as a consequence.
16. Since the issue before us is centered on advance-tax, let us take an example to see how the relevant provisions operate. Let us assume that an assessee follows the year ending on, say 31-3-1984, as the year of account, and that he is liable to pay advance-tax now, under the provisions of Section 211, he is obligated to pay advance-tax by 15-9-1983, 15-12-1983 and 15-3-1984. Let us assume also that he defaults in paying the instalments. In such a situation, under Section 218, he shall be deemed to be an assessee in default in respect of the instalments in question. And nothing prevents the Assessing Officer from initiating recovery proceedings under Section 222, or resorting to other modes of recovery Under Section 226, or taking action simultaneously under both the sections.
222. Now, Section 231 stipulates that no recovery proceedings shall be commenced after the expiration of one year from the last day of the financial year in which the demand (under Section 156) is made, or, in a case of a person who is deemed to be an assessee in default under any provision of the Act, after the expiration of one year from the last day of the financial year in which the assessee is deemed to be in default. In other words, recovery proceedings could be validly initiated before the onset of the bar of limitation stipulated under the said section. In the example under consideration, let us assume that the Assessing Officer initiates recovery proceedings under Section 222 say, on 1-6-1984. Let us also assume that tax is recovered through certificate proceedings by, say, 1-9-1986.
18. The assessment for the assessment year 1984-85 is to be completed by 31-3-1987. Let us assume that in the example under consideration the assessment is made on 1-1-1987. Since the advance-tax payable by the assessee had been recovered through certificate proceedings even by 1-9-1986, in the assessment for the assessment year 1984-85 made on 1-1-1987, the Assessing Officer will necessarily have to give credit for the tax recovered. Now the question is: How will the recovered tax be treated - as advance-tax or as an ad hoc recovery As we see it, the tax recovered can be treated only as advance-tax. This clearly follows from the scheme of the Act relating to collection and recovery of tax. As pointed out earlier, Section 218 gets activated the moment assessee fails to pay the instalments in time. Since under that section the assessee is deemed to be an assessee in default "in respect of such instalment or instalments", the recovery proceedings initiated under Section 222 are naturally directed towards the recovery of "such instalment or instalments". And when the Tax Recovery Officer recovers tax from the assessee, the tax so recovered is attributable to "such instalment or instalments". It should, therefore, follow that while giving credit for the tax recovered in the regular assessment, the credit will necessarily have to be given on the footing that the sum recovered is advance-tax. Unless we resort to some legal legerdemain or some strange forensic alchemy, the sum thus recovered cannot be regarded as something other than advance-tax.
19. One other matter may here be adverted to parenthetically. In the aforesaid example we have assumed that assessment was completed on 1-1-1987, that is to say within the period of two years normally available to the Assessing Officer to complete the assessment. We also have Section 153(1)(c) which extends the said period in cases where returns are filed belatedly under Section 139(4) or 139(5). In such cases the TRO gets some extra time to complete the certificate proceedings and to recover the tax; and as long as the tax is recovered before completion of the assessment, credit will have to be given for the tax recovered through certificate proceedings. And where the certificate proceedings relate to instalment or instalments of advance-tax, the sum recovered will have to be treated only as advance-tax and not as ad hoc payment.
(a) The sum recovered by the Department through recovery proceedings partakes the characteristics of the tax in respect of which the recovery proceedings were initiated in the first instance. Thus, if recovery proceedings were initiated under Section 201 read with Section 222, then the sum recovered will have to be treated as tax deducted at source. If recovery proceedings were initiated under Section 218 read with Section 222, then the sum recovered will have to be treated as advance-tax.
(b) In the very nature of things, where tax is recovered by taking resort to Section 222, or Section 226, or both, the recovery will normally be made long after the due dates for payment stipulated by and under Section 200 (read with Rule 30 of the Income-tax Rules, 1962) or Section 211. Even so, in the regular assessment (assuming of course that the tax is recovered before the completion of the assessment) credit will have to be given for tax recovered.
(c) The combined effect of (a) and (b) above is that where the department recovers tax, the identity of the tax recovered (i.e., tax deducted at source or, as the case may be, instalment of advance-tax) is not obliterated, either by reason of the fact that the tax is collected through recovery proceedings or by the reason of the delay in collection which such proceedings generally entail.
21. That the said conclusions drawn or derived on first principles are in consonance with the legislative intent will be clear from Section 219, which reads as follows:- 219. Any sum, other than a penalty or interest, paid by or recovered from an assesses as advance tax in pursuance of this Chapter shall be treated as a payment of tax in respect of the income of the period which would be the previous year for an assessment for the assessment year next following the financial year in which it was payable, and credit therefor shall be given to the assessee in the regular assessment: Provided that where, before the completion of the regular assessment, a provisional assessment is made under Section 141A, the credit shall be given also in such provisional assessment.
The italicised portion will at once make it clear that the advance tax recovered from the assessee is also advance-tax, and that the legislature has not set much store by the delay which is generally occasioned by the recovery proceedings.
22. Now, the question is: will the advance-tax paid by the assessee suo motu but belatedly cease to be advance-tax by reason only of the fact that the delay is attributable to the assessee? We should think not; for more than one reason. First, Section 219 treats the tax recovered from the assessee as advance-tax in pursuance of the provisions of chapter XVII as advance tax proper. As pointed out supra, recovery proceedings, by their very nature, are prone to delay; and the legislature did not mind treating such delayed recovery of advance-tax as advance-tax proper. Considering the fact that the recourse taken by the Department to recovery proceedings is itself the direct result of the default on the part of the assessee, the legislature could have, if it had so minded, stipulated that the advance tax recovered under Chapter XVII would not be treated as advance-tax for purposes of calculating the interest payable by the Government under Section 214, on the one hand, and, on the other, the interest payable by the assessee under Sections 215, 216 and 217. It has not done so. The reason is not far to seek. A petty-fogging approach is anathema to the legislature.
23. Secondly, if the advance-tax recovered by the Department (naturally long after the due dates) is treated under the Act as advance-tax, there is no reason why the same treatment should not be extended to the advance-tax paid by the assessee suo motu but belatedly. What is sauce for the goose is sauce for the gander.
24. Thirdly, the very scheme of the Act relating to collection and recovery of tax envisages the setting in motion of recovery machinery in all cases of default. Clearly, the legislative intent is not to follow the policy of quieta non movere - let the sleeping dogs lie. The legislative intent is to pursue the defaulter and to recover the sums due from him by resorting to one or more modes of recovery incorporated into the Act. Therefore, conceptually speaking, there is no place in the scheme of the Act relating to collection and recovery of tax for the proposition that mere default either obliterates the liability to pay tax, or, in cases of the type under consideration, somehow converts advance-tax payment into an ad hoc payment.
25. In our opinion, therefore, to argue that advance tax paid belatedly is an ad hoc payment is to fly in the face of the scheme of the Act.
26. One tiling remains to be highlighted and that is that, approaching the issue from different angles, various High Courts have in the cases cited below reached the same conclusion: Sontha S. Shenoy v. Union of India [1982] 135 ITR 39 11 Taxman 170 (Ker.) CIT v. Jagannath Narayan Kutumbik Trust [1983] 144 ITR 526 [1984] 16Taxman 192 (MP) 27. We, therefore, hold that the first appellate authority was justified in treating the advance-tax paid belatedly as advance-tax proper for purposes of calculating the interest payable under Sections 139(8) and 217(1)(a).
28. This brings us on to the question whether as contended by the Department the appeal filed by the assessee before the CIT(Appeals) could be regarded as invalid for the only reason that the solitary subject matter of appeal related to levy of interest under Section 139(8) and 217 of the Act.
29. Now this controversy has had a long history, having arisen even under the Indian Income-tax Act, 1922 (hereinafter called "the old Act"). Under the old Act the provisions relating to deduction of tax at source were contained in Section 18 and those relating to advance payment of tax in Section 18A. The scheme of both the old and the new Acts are essentially the same. It is, therefore, necessary to notice some of the reported cases under both the Acts.
30. In the case of CIT v. Jagdish Prasad Ramnath [1955] 27 ITR 192 the Bombay High Court was concerned with a case of a new assessee, who did not make any estimate under Section 18A(3) and was consequently asked to pay interest under Section 18A(8) of the old Act. The AAC held that no appeal lay to him against levy of interest under that section. The ITAT held that an appeal lay to the AAC, and accordingly directed the AAC to dispose of the appeal in accordance with law. The matter reached the High Court through a reference made at the instance of the Department.
It was contended on behalf of the assessee that the order of the ITAT did not invite any interference, because the case before the High Court was one that fell under the general words used in Section 30(1), namely a case of the assessee's denying his liability to be assessed under the Act, and that consequently an appeal would lie to the AAC, even if the solitary point urged related to levy of interest under Section 18A{8).
On a consideration of the scheme of the old Act relating to advance payment of tax, the High Court rejected the said contention and laid down the following propositions: (1) There is clear indication In the (old) Act itself that the Legislature did not intend to provide for a right of appeal against the imposition of penal interest. The Legislature has clearly kept in mind the distinction between a penalty imposed under certain provisions of the Act and the interest which the assessee is liable to pay under Section 18A, and while providing for a right of appeal against orders of penalty the Legislature has not provided for any appeal against the payment of penal interest. This was because the case of penal interest was more a matter of simple computation than anything else.
(2) There is no room for the apprehension that the assessee would be deprived of his right, to contest any decision of the ITO that the assessee was liable to pay advance-tax in respect of some items of income, which, in fact, do not fall under Section 18A but under Section 18. For, it would be open to the assessee to challenge that decision in the appeal against regular assessment and to get the appellate authority to hold that the income falls under Section 18 and, therefore, Section 18A has no application. This right would permit the assessee to escape wholly or partially from the consequences of penal interest.
(3) Again it would be open to the assessee to urge before the appellate authority that the income upon which the quantum of interest was charged should be reduced and if such quantum was reduced then again the penal interest would also be reduced.
(4) The assessee cannot directly challenge the penal interest imposed upon him, because in doing so he would really be challenging the quantum which he cannot do, because that quantum is arrived at merely by arithmetic computation, A couple of points may here be highlighted. First, the assessee before the Bombay High Court was a new assessee who did not file an estimate under Section 18A(3) of the Act and pay tax accordingly.
Secondly, he had merely challenged the quantum of interest levied under Section 18A(8). Thirdly, according to the High Court he could challenge the levy on the ground that Section 18A had no application and thereby "escape wholly or partially from the consequences of penal interest.
31. In Keshardeo Shrinivas Morarkav. CIT [1963] 48 ITR 404 the Bombay High Court was concerned, inter alia, with interest under Section 18A(6) of the old Act. There also the AAC rejected the assessee's appeal relating to levy of interest under Section 18A(6) holding that no appeal lay to him on that point. Relying on the Bombay case of Jagdishprasad Ramnath (supra), the Tribunal declined to interfere in the matter. Before the High Court it was sought to be contended on behalf of the assessee that with the handing down by the Supreme Court of its decision in the cases of C.A. Abraham v. ITO [1961] 41 ITR 425 and CIT v. Bhikqji Dadabhai & Co. [1961] 42 ITR 123 the earlier decision in the case of Jagdishprasad Ramnath (supra) was impliedly over-ruled. The High Court rejected this contention and held that no appeal lay to the AAC against levy of interest correctly computed in accordance with the provisions of Section 18A(6) of the old Act.
It may here he highlighted that in Keshardeo Shrinivas Morarka's case(supra) the appeal filed by the assessee was not solely directed against levy of interest. It was an appeal against regular assessment and in that appeal the assessee has challenged, inter alia, the levy of penal interest. Even so, the Division Bench held that no appeal lay to the AAC against levy of penal interest correctly computed in accordance with the provisions of Section 1.8A of the old Act.In Mathuradas B. Mohla v. CIT [1965] 56 ITR 269 (Bom.) the arguments based on the aforesaid two decisions of the Supreme Court found favour with the Division Bench. Accordingly, the Division Bench held that the amount of interest determined under Section 18A(8) being tax within the meaning of the old Act, the assessee would have a right to file an appeal against levy of such interest. This is because he would be "denying his liability to be assessed under the Act within the meaning of Section 30 of the Act.
Two points may here be made. Keshardeo Shrinivas Morarka's case (supra) was not brought to the notice of the Bench. Secondly, the Division Bench took note of the fact that at the time when the case of Jagdishprasad Ramnath (supra) was decided the aforesaid two decisions of the Supreme Court were not available.
33. Next in chronology comes the case of CIT v. Daimler Benz A.G.[1977] 108 ITR 961. This case was decided by a three-Judge Full Bench of the Bombay High Court, which noticed not only the three earlier decisions of the Bombay High Court, but also the two decisions of the Supreme Court. On an analysis of the provisions of Section 18A of the old Act, the Full Bench held: Section 30 of the Act contains provisions with regard to appeals to the Appellate Assistant Commissioner against certain orders of the Income-tax Officer. No appeal has been specifically provided therein against an order made either under Section 18A(6) or under Section 18A(8), but Sub-section (1) of Section 30, inter alia, provides that any assessee denying his liability to be assessed under the Act may appeal to the Appellate Assistant Commissioner against an order of the Income-tax Officer and the question was whether the assessee in the instant case fell within the phrase 'denying his liability to be assessed under this Act.
When the Income-tax Officer resorts to Section 18A(1), he implicitly decides that the assessee is one who is under legal liability to pay advance-tax. In other words, he first decides that the assessee is in receipt of an income in respect of which there is no provision for deduction of income-tax at the time of payment. Similarly, he also decides that the assessee is a person who could not be said to be completely outside the ambit of the Act (that is to say, he is not a non-resident). Similarly, he also decides that the assessee is not in receipt of an income which is not chargeable at all (that is to say, his income is not agricultural). If, in respect of such decisions which are implicit in his action in resorting to Section 18A(1) of the Act, the assessee feels that Income-tax Officer has gone wrong, he would be an assessee desiring to 'deny his liability to be assessed under this Act' and, therefore, it would be unfair to deny him the right of appeal to the Appellate Assistant Commissioner. It does appear that if after resorting to Section 18A(1), the Income-tax Officer were to proceed against the assessee by way of charging penal interest on him either under Section 18A(6) or under Section 18A(8) for some default on his part and the assessee were minded to challenge merely the quantum of penal interest charged to him, he would have no right of appeal to the Appellate Assistant Commissioner inasmuch as the assessee in that event would not fall within the phrase 'assessee denying his liability to be assessed under this Act' occurring in Section 30(1) of the Act. On a proper construction of the relevant phrase occurring in Section 30(1) of the Act, it had to be held that in the former type of cases an appeal would lie to the Appellate Assistant Commissioner, whereas no appeal would lie merely against the quantum of penal interest charged by the Income-tax Officer to the assessee.
An assessee can prefer an appeal to the Appellate Assistant Commissioner against his regular assessment and urge all contentions which, if accepted, must result in the Income-tax Officer holding that there was no liability to pay advance tax, and, therefore, there was no liability to penal interest, or, even in an appeal preferred against an order charging penal interest, it would be open to him to raise a contention that the income in respect of which tax is imposed and in respect of which interest is calculated for the purpose of Section 18A(8) was not income which fell under the head covered under Section 18A or he could contend that the income calculated by the Income-tax Officer as income of the assessee for the relevant year was not the proper income and that there was no income at all or the income was less than the income calculated.
In the instant case, the assessee had preferred an appeal to the Appellate Assistant Commissioner in which the principal ground of attack against the charge of penal interest levied against it was that the assessee-company being a non-resident company was not liable to be taxed to advance-tax at all, inasmuch as its income was under one or the other head falling under Section 18 of the Act and was outside the purview of Section 18A of the Act. It was a clear case of an assessee 'denying its liability to be assessed under this Act' and as such the appeal to the Appellate Assistant Commissioner was competent under Section 30(1) of the Act. The view of the Tribunal was, therefore, correct.
34. The same issue came up for consideration before the Madras High Court also in more than one case. In the case of South India Flow Mills (P.) Ltd. v. CBDT [1968] 70 ITR 863 the question whether an appeal lay to the AAC against levy of interest under Section 18A(6) of the old Act came up in an indirect fashion. There interest under Section 18A(6) and 18A{8) had been charged under the old Act. Thereupon the assessee filed a revision petition before the Commissioner of Income-tax in that regard. But the Commissioner dismissed the petition on some technical ground. The assessee then filed a writ petition before the Madras High Court. Allowing the petition, the Court observed that when Section 30, which provides for appeals against specific orders, makes no mention of Section 18A(6), a revision petition to the Commissioner under Section 33A(2) is competent from an order levying penal interest under Section 18A(6).
35. In the case of Rajyam Pictures (supra) the same issue arose but in the context of levy of interest under Section 139. The Court held that no appeal will lie under Section 246(c) of the new Act against imposition of penal interest alone as it is not an order of assessment.
However, in an appeal filed against the assessment the levy of penal interest could also be challenged. What is noteworthy in the short report of the case is that the Madras High Court dissented from the Karnataka case of National Products v. CIT [1977] 108 ITR 935.
36. In the case of CIT v. City Palayacot Co. [1980] 122 ITR 430 4 Taxman 217 the Madras High Court was concerned with the question whether the Commissioner could validly take recourse to Section 263 of the Act in a case where the Assessing Officer had omitted to charge interest under Section 217. In connection with that issue the Madras High Court noticed, inter alia, the cases of South India Flour Mills (P.) Ltd. (supra) and Rajyam Pictures (supra) and observed :- In South India Flour Mills (P.) Ltd. v. CBDT [1968] 70 ITR 863, it was ruled that the levy of penal interest could not be challenged in any appeal. In the later decision in Rajyam Pictures' case [1978] 114 ITR 847 also, the same view was taken, but with the modification that in an appeal against the assessment there could be a challenge to the legality of the levy of interest. There is no inconsistency between the two decisions. This aspect as to whether the legality of the levy of penal interest could be challenged in an appeal against the assessment on other aspects had not to be considered in the earlier decision.
37. We may now notice the Karnataka case of National Products (supra).
There the question was whether an appeal would lie against levy of interest under Sections 139 and 215 of the Act. On a consideration of the reported cases on the subject, the Court observed: 'The fact that clause (m) of Section 246 provides only for an appeal against an order levying interest under Sections 216 is no ground to hold that an order levying penal interest under Section 139 or Section 215 is not appealable where the case falls under clause (c) of Section 246. If the assessee denies his liability to be 'assessed' under the Act, he has a right of appeal and that right of appeal cannot be denied." In that regard the High Court adumberated various situations in which an appeal would lie to the AAC and also held that the denial of liability contemplated under Section 246(c) would Include partial denial also.
38. We also have the Gujarat case of Bhikhoobhai N. Shah v. CIT [1978] 114 ITR 197 on the same issue. The Court held: No appeal lies against an order levying penal interest either under Section 139 or Section 215 or under Section 217 if in the appeal the assessee merely challenges the quantum of penal interest or failure on the part of the Income-tax Officer to waive penal interest or to reduce penal interest.
If, however, the assessee denies his liability to pay penal interest at all (a) on the ground that he was not liable to pay advance tax at all in the case of levy of penal interest under Section 215 or Section 217, or (b) contends that the conditions for the exercise of the power to levy penal interest under Section 139 did not exist in his case, it would be open to him to challenge the order levying penal interest because in such an eventuality he would be challenging his liability to be assessed and would be denying his liability to be assessed at all to penal interest.
It may here be highlighted that the Gujarat High Court did not subscribe to the Karnataka view that in an appeal against the order of assessment it would be open to the assessee to question even his partial liability to be assessed to interest.
39. Finally we have the latest decision of the Supreme Court in the case of Central Provinces Manganese Ore Co. Ltd. (supra), where the following legal propositions were laid down by the Supreme Court: (1) Interest levied under Section 139(8) and 215 are not penal but compensatory in nature.
(2) The levy of interest under the said sections is part of the process of assessment.
(3) It is open to the assessee to dispute the levy of interest in appeal provided he limits himself to the ground that he is not liable to the levy at all.
In this connection, even while approving the Karnataka decision in the case of National Products (supra) and the Gujarat decision in the case of Bhikhoobhai N. Shah (supra), the Supreme Court noticed the dissent expressed by the Gujarat High Court on the question whether the assessee could challenge in appeal his partial liability to be assessed to interest and observed: "In this area of dissent, we need not enter.
But we have no hesitation in endorsing the legal position which has commonly found favour with the two High Courts.
40. We may now examine the issue before us in the light of the foregoing legal principles. To recapitulate the facts of the case: the Assessing Officer levied interest under Sections 139(8) and 217. While working out the interest chargeable under the said sections, the Assessing Officer ignored the sum of Rs. 1,64,113, being the advance-tax belatedly paid by the assessee, treating it as an ad hoc payment. According to the Assessing Officer, such ad hoc payment cannot be taken into account for purposes of computing the interest chargeable under the said sections. The assessee filed an appeal before the first appellate authority challenging the levy. The main contention of the assessee was that he was not liable to pay interest under the said sections. An alternative plea was also raised and that was that, in any event, the Assessing Officer was not justified in ignoring the sum of Rs. 1,64,113, being the advance-tax paid belatedly by the assessee, for purposes of computing the interest chargeable under the said sections.
The first appellate authority held, first, that the ITO was not justified in ignoring the said sum and, secondly, that the assessee was competent to deny, partially, his liability to pay interest under the said section. In this regard he took particular notice of the fact that the Supreme Court did not enter into the field of the dissent expressed by the Gujarat High Court on the Karnataka view that the assessee could challenge in appeal his partial liability to be assessed to interest.
Following the decision of the Karnataka High Court on this aspect of the matter, the CIT(Appeals) held that the appeal was in order and on this basis proceeded to give partial relief to the assessee.
41. We may, at the outset, point out that words are but an imperfect vehicle of communication of human thoughts, ideas and feelings. The problem is further compounded by our penchant for employing shorthand ways of expressing our ideas, with the result that, at times, the issues get clouded.
42. The use of the words "partial denial" exemplifies the above situation. While interpreting Section 346(c) of the Act, which, inter alia, talks of the assessee denying his liability to be assessed under the Act, one does not experience any difficulty in understanding a case of total denial. When it comes to partial denial, however, doubts arise. This is because, at the first blush, one wonders whether the denial could at all be partial. One somehow feels that either the assessee is liable to pay interest, or he is not; and that if he is liable to pay interest, he cannot at all question the quantum of the interest levied, which is a matter of mere arithmetical calculation. A moment's reflection will, however, reveal that, while questioning the legality of the levy, the assessee can, even while not raising the basic exigibility issue, that is to say, even while not totally denying his liability to pay interest, raise other points to show that the quantum of the interest actually charged, though correctly computed in consonance with the provisions of the concerned sections, is much higher than what could have been lawfully levied. The plea in such cases, is not a mere plea that, though arithmetically correctly calculated in accordance with the provisions of the concerned sections, the quantum of interest levied is excessive and merits reduction in the facts and circumstances of the case. In other words, it is not a mere plea for waiver, in full or in part, of the interest charged. The plea is that, though interest is exigible, the quantum actually charged is higher than what could have been lawfully charged. The term "partial denial" is a short-hand expression used to denote such cases.
43. It needs to be highlighted here that the said concept has been recognised by some of the Courts, For example, in the Bombay case of Jagdishprasad Ramnath (supra), Chagla C.J. himself recognised the concept of partial denial when at page 199 of the report he observed: "But, in our opinion, Mr. Kolah's grievance is not Justified because if the Income-tax Officer were to take the view that a certain income does not fall under a head which falls under Section 18, it would be open to the assessee to challenge that decision in the appeal against his regular assessment and to get the appellate authority to hold that the income falls under Section 18 and therefore Section 18A has no application. This right would permit the assessee to escape wholly or partially from the consequences of penal interest.
44. Other instances of partial denial have also been noticed by the Bombay High Court in the case of Daimler Benz A.G. (supra) and by the Karnataka High Court in the case of National Products (supra).
45. The case before us is one of "partial denial" in the sense elucidated in the preceding paragraphs. Here, the legality of the interest actually levied is called in question. The assessee's grievance is that the ITO had without justification ignored the sum of Rs. 1,64,113 paid by the assessee as and by way of advance-tax, though belatedly.
46. According to the ITO advance-tax belatedly paid is not advance-tax, but an ad hoc payment which cannot be taken into reckoning for purposes of computing the interest payable under Section 139(8) and 217. But as we have seen, neither the scheme of the Act, nor the reported cases on that issue support the aforesaid contention of the Assessing Officer.
It should, therefore, follow that the Assessing Officer could not have lawfully treated the said sum of Rs. 1,64,113 as an ad hoc payment and, on that basis, left it out of reckoning for purposes of charging interest under the said sections. The assessee thus has a valid grievance and is perfectly justified in agitating the issue before the first appellate authority, and the first appellate authority was perfectly justified in entertaining this claim of the assessee and in giving appropriate relief on this score.
47. Before taking leave of the matter, we may point out that the Madras case of Rajyam Pictures (supra) cannot avail the Department, because it stands overruled by implication by the Supreme Court decision in the case of Central Provinces Manganeste Ore Co. Ltd. (supra). The other Madras case of Triplicane Urban Co-operative Society Ltd. (supra) cannot also avail the Department, because it was concerned with grant of interest under Section 214.
48. In view of the foregoing, we hold that, given the nature of the controversy before us, the CIT(Appeals) was justified in entertaining the assessee's appeal and in giving partial relief to the assessee. We, therefore, decline to interfere in the matter.