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Birla Cotton Spg. and Wvg. Mills Ltd. Vs. Income-tax Officer and ors. - Court Judgment

SooperKanoon Citation

Subject

Direct Taxation

Court

Kolkata High Court

Decided On

Case Number

Matter No. 326 of 1987

Judge

Reported in

[1995]211ITR610(Cal)

Acts

Income Tax Act, 1961 - Sections 154, 220, 220(1) and 220(2); ;Constitution of India - Article 226

Appellant

Birla Cotton Spg. and Wvg. Mills Ltd.

Respondent

income-tax Officer and ors.

Appellant Advocate

R.N. Bajoria, Sr. Adv. and ;A.K. Dey, Adv.

Respondent Advocate

Sunil Mitra, Adv.

Excerpt:


- .....petition, the petitioner challenges the legality and validity of a notice dated march 6, 1987, issued by the income-tax officer, respondent no. 1, under section 154 of the income-tax act, 1961 ('the act'), for the assessment year 1973-74. by the said notice, the income-tax officer seeks to rectify an alleged mistake in the calculation of interest under section 220(2) of the act. the notice itself does not make it clear as to how and what was the mistake sought to be rectified. it is stated by the petitioner that in the course of discussion, the petitioner's representative was informed that the income-tax officer proposed to charge interest under section 220(2) of the act from the date of the revised assessment order dated september 24, 1979, till may 8, 1986, when the income-tax officer made assessment giving effect to the appeal order dated october 3, 1985, of the income-tax appellate tribunal for the said assessment year 1973-74.2. the facts of the case are that for the assessment year 1973-74, the petitioner filed its return under the act on october 31, 1973, which was revised on november 30, 1973, claiming, inter alia, deduction for gratuity liability calculated on the.....

Judgment:


Ajit K. Sengupta, J.

1. In this writ petition, the petitioner challenges the legality and validity of a notice dated March 6, 1987, issued by the Income-tax Officer, respondent No. 1, under Section 154 of the Income-tax Act, 1961 ('the Act'), for the assessment year 1973-74. By the said notice, the Income-tax Officer seeks to rectify an alleged mistake in the calculation of interest under Section 220(2) of the Act. The notice itself does not make it clear as to how and what was the mistake sought to be rectified. It is stated by the petitioner that in the course of discussion, the petitioner's representative was informed that the Income-tax Officer proposed to charge interest under Section 220(2) of the Act from the date of the revised assessment order dated September 24, 1979, till May 8, 1986, when the Income-tax Officer made assessment giving effect to the appeal order dated October 3, 1985, of the Income-tax Appellate Tribunal for the said assessment year 1973-74.

2. The facts of the case are that for the assessment year 1973-74, the petitioner filed its return under the Act on October 31, 1973, which was revised on November 30, 1973, claiming, inter alia, deduction for gratuity liability calculated on the basis of actuarial valuation. The total income shown in the revised return was Rs. 8,29,370 and the tax paid thereon by way of tax deducted at source and self-assessment was Rs. 4,77,858. Assessment thereon under the Act was made on June 5, 1976, wherein the Income-tax Officer disallowed the claim of deduction of gratuity for not complying with the conditions of Section 40A(7) of the Act. The total income assessed was Rs. 60,56,160. The tax thereon was computed at Rs. 34,96,327 and after adjusting the tax paid as above the balance taxpayable was determined at Rs. 30,18,469. Against the said assessment, the petitioner preferred an appeal. The Appellate Assistant Commissioner of Income-tax, by his order dated February 28, 1977, set aside the assessment with the direction to make fresh assessment after examining the question relating to deduction of gratuity afresh. The assessment was set aside to scrutinise other claims of the assessee as well. By reason of the said appeal order setting aside the assessment there was no subsisting outstanding tax demand payable by the petitioner.

3. The Income-tax Officer pursuant to the said appeal order, made a fresh assessment on September 24, 1979, again disallowing the claim for deduction of gratuity. In the said assessment total income was computed at Rs. 61,38,357 by making addition for gratuity of Rs. 12,13,929 (provided in the accounts and which was allowed by the Income-tax Appellate Tribunal) and Rs. 41,45,444 (not provided in the accounts). There were other additions and disallowances as well. Tax was computed at Rs. 35,43,895 and after adjusting the prepaid tax of Rs. 4,77,858, the balance payable was determined at Rs. 30,65,937.

4. The petitioner's appeal against the fresh assessment was partly allowed by appeal order dated October 26, 1979, of the Commissioner of Income-tax (Appeals). In the said order, the Commissioner of Income-tax (Appeals) accepted the claim for deduction of gratuity and the claim for deduction of Rs. 34,398 and Rs. 56,106 and for relief under Section 80G of the Act, but rejected the petitioner's claim for deduction of Rs. 69,245.

5. As a result of the said order of the Commissioner of Income-tax (Appeals), the total income of the petitioner and the tax payable by it required to be computed afresh. Therefore, the assessment order dated September 24, 1979, and tax demand computed thereby no longer subsisted and the assessment order dated September 24, 1979, merged in the appeal order.

6. The Income-tax Officer gave effect to the said appeal order dated October 26, 1979, by his order dated December 31, 1979, and deductions for provision for gratuity of Rs. 41,45,444 and other deductions as per the said appeal order were allowed. This resulted in the computation of total income at Rs. 18,76,834.

7. In the meantime, the petitioner had preferred an appeal to the Income-tax Appellate Tribunal on the point of relief under Section 80G of the Act. The Income-tax Appellate Tribunal, by its order dated November 15, 1980, partly allowed the appeal of the petitioner. The Income-taxOfficer gave effect to the said order of the Tribunal, by his order dated December 18, 1981, and recomputed the total income at Rs. 18,02,409 and tax thereon was computed at Rs. 10,39,784. After adjusting prepaid tax of Rs. 4,77,858 and further post-assessment payment of Rs. 6,30,587, a refund of Rs. 46,238 was found to be due to the petitioner which was granted on December 18, 1985.

8. The Department had also preferred an appeal to the Income-tax Appellate Tribunal against the appeal order dated October 26, 1979, against the allowance of gratuity and other reliefs. The Department's appeal was decided by the Income-tax Appellate Tribunal on October 3, 1985, by which the disallowance of gratuity by the Income-tax Officer was upheld but the allowances of Rs. 34,398 and Rs. 56,106 were held to be justified. Pursuant to the Tribunal's order, the provision for gratuity to be disallowed was fixed at Rs. 41,45,444. By reason of the Tribunal's order dated October 3, 1985, the total income and tax thereon for the assessment year 1973-74 was recomputed at Rs. 59,48,067 and the tax thereon at Rs. 34,33,902. After adjusting the prepaid tax of Rs. 4,77,858 and interim post-assessment payment of Rs. 5,84,349, the balance tax payable was found to be Rs. 23,71,695. Interest under Section 220(2) of the Act amounting to Rs. 11,370 was also charged in addition to interest under Section 139(8) of the Act. In earlier orders interest under Section 220(2) was not charged. Details of interest charged under Section 220(2) of the Act were not given.

9. It is relevant to point out here that the total income and tax thereon computed by the order dated May 3, 1986, was not the same as computed by the order dated September 24, 1979, but was much less than that. The assessment order dated September 24, 1979, was not upheld in totality but partially. Hence the total income and tax computed by the assessment order dated September 24, 1979, was not legal and payable.

10. By the impugned rectification proceedings, the Income-tax Officer sought to charge interest on the balance tax of Rs. 23,71,695 computed by the order dated May 3, 1986, from the date of assessment order dated September 24, 1979, to May 3, 1986. This act of the Income-tax Officer has been questioned in the present writ.

11. Reference is made to Section 220(2) of the Act as it stood at the relevant time which provided as follows :

'If the amount specified in any notice of demand under Section 156 is not paid within the period limited under Sub-section (1), the assessee shall be liable to pay simple interest at 12 per cent. per annum from the day commencing after the end of the period mentioned in Sub-section (1):

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, the amount on which interest was payable under this section has been reduced, the interest shall be reduced accordingly and the excess interest paid, if any, shall be refunded.'

12. Sub-section (1) of Section 220 of the Act provides that the amount, otherwise than by way of advance tax, specified as payable in a notice of demand under Section 156 shall he paid within thirty-five days of the service of the notice of demand at the place and to the person mentioned in the notice.

13. Both under Sections 220(1) and 220(2) of the Act, what is important and relevant is the 'amount specified in the notice of demand'. An assessee is liable to pay interest under Section 220(2) of the Act, if the amount specified in the notice of demand is not paid within the period specified in Section 220(1).

14. The Department in support of the impugned notice have relied upon a circular of the Central Board of Direct Taxes dated April 3, 1982 (see Circular No. 334 [1982] 135 ITR 10), which provides, inter alia, that where the assessment made originally by the Income-tax Officer was either varied or even set aside by an appellate authority, but on further appeal, the original order of the Income-tax Officer was 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.

15. Therefore, the contention of the Department is that the assessment order dated September 24, 1979, was restored in respect of gratuity disallowance by the appeal order of the Income-tax Appellate Tribunal. Therefore, the tax demand computed on May 3, 1986, was payable and remained unpaid all through since September 24, 1979, until it was paid and, therefore, the assessee is liable to pay interest under Section 220(2) of the Act on the said unpaid amount from the expiry of the period of 35 days from the date of the service of the notice of demand pursuant to the assessment order dated September 24, 1979.

16. Learned counsel for the Department also relied on the decisions of the Kerala High Court in the cases of K.P. Abdul Kareem Hajee v. ITO : [1983]141ITR120(Ker) and Mohammed Essa Moosa Salt v. GTO : [1987]167ITR338(Ker) . In K.P. Abdul Kareem Hajee v. ITO : [1983]141ITR120(Ker) , the Kerala High Court held, inter alia, as follows (at page 122) :

'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 exhibit P-2-A 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 Appellate Assistant Commissioner concerning the petitioner was finally set aside by the Tribunal, thereby affirming exhibit P-2-A order of the Income-tax Officer, the cloud hanging over exhibit P-2-A was removed and its finality was affirmed. Consequently, for the relevant period, exhibit P-2-A is deemed to have operated in full vigour to make the petitioner liable in law by reason of the Tribunal's affirmative order.'

17. This decision of the Kerala High Court, it is contended, is of no assistance to the Revenue and is distinguishable and, if at all, supports the case of the petitioner. The Kerala High Court in principle held that in the absence of the stay orders, the assessed demand under appeal is executable and is deemed to be operative, during the pendency of the appeal. Therefore, the assessee is liable to pay interest under Section 220(2) of the Act. Further, in the said Kerala case, the whole of the order of the Income-tax Officer was disputed and was the subject-matter of appeal and was set aside by the Appellate Assistant Commissioner and restored by the Tribunal. But, in the case of the petitioner here, within the period of 35 days from the date of the service of the notice of demand, the relevant assessment order dated September 24, 1979, became unenforceable by reason of the appeal order dated October 26, 1979. Therefore, the demand as raised by the said notice was no longer subsisting, payable or executable. Further, by reason of subsequent payment of Rs. 6,30,587 under the order dated December 31, 1979, the demand notice was fully satisfied and was no longer outstanding. Even by reason of the subsequent order of the Tribunal, the assessment dated September 24, 1979, and the tax demand raised thereby, as it was, was not wholly restored. By reason of the subsequent appeal orders including the order of the Tribunal, the total income and the tax was recomputed. Hence, in the words of the Kerala High Court decision, the assessment order dated September 24, 1979, could not be said to be 'deemed to have operated in full vigour to make the petitioner liable ....'. In fact, subsequently, by reason of the appellate order fresh computations of the total income and tax payable have been made. All the said subsequent orders of re computations are assessment orders lawfully made. They cannot simply be ignored and deemed to havenever existed or been made. The recomputed demand arose from the fresh orders and not by assessment or notice of demand dated September 24, 1979. What the Kerala High Court, on the facts of that case laid down was that the demand as originally made was all along executable and was wholly affirmed by the Tribunal's order. This is not the case in the instant case.

18. The other decision of the Kerala High Court in the case of Mohammed Essa Moosa Salt : [1987]167ITR338(Ker) , also proceeds on the same basis as in the case of K.P. Abdul Kareem Hajee [1983] HI ITR 120 (Ker). In Mohammed Essa Moosa's case : [1987]167ITR338(Ker) , the order of the Gift-tax Officer was restored to full vigour by the decision of the High Court in reference. Therefore, the said decision also is of no assistance to the Department. The circular of the Board dated April 3, 1982 (see Circular No. 334 [1982] 135 ITR 10), referred to above, also proceeds on the basis that the assessment made originally by the Income-tax Officer is restored by the Tribunal and, therefore, the assessee is liable to pay interest under Section 220(2) of the Act from the date of the original demand notice.

19. The liability to pay interest under Section 220(2) of the Act is a statutory liability. It is not based on equity. The provisions of Section 220(2) which impose a fiscal burden have to be strictly construed. Whether, on the facts of a particular case, the assessee is liable to pay interest under Section 220(2) of the Act is a question of law which calls for interpretation of the provision of Section 220(2) of the Act.

20. It is to be remembered here that, in the instant case, the Department is proceeding under Section 154 of the Act. In order that Section 154 may be invoked, there must exist a 'mistake apparent from records' which can be rectified. The Supreme Court in the case of T.S. Balaram, ITO v. Volhart Brothers : [1971]82ITR50(SC)

'It was not open to the Income-tax Officer to go into the true scope of the relevant provisions of the Act in a proceeding under Section 154 of the Income-tax Act, 1961. A mistake apparent on the record must be an obvious and patent mistake and not something which can be established by a long-drawn process of reasoning on points on which there may conceivably be two opinions.'

21. The instant case falls squarely within the aforesaid observations of the Supreme Court. It cannot be said that there is an obvious and patent liability on the petitioner to pay interest under Section 220(2) of the Act.

22. The alleged mistake, if any, in not charging interest, is not a mistake apparent from the records. The alleged liability to pay interest under Section 220(2) of the Act could be established, if it be so possible, only by a long-drawn process of reasoning on points where there may conceivably be two opinions. It cannot be said that there can be no two opinions. In rectification proceedings, it is not open to the Income-tax Officer to go into the true scope of the provisions of the Act. That being so, the impugned notice is in excess of jurisdiction under Section 154 of the Act and, therefore, is liable to be declared invalid.

23. Although not strictly necessary, yet, since it has been argued by both sides, a view about the applicability of the provisions of Section 220(2) of the Act in the instant case may be expressed.

24. Section 220(2) of the Act has to be strictly construed. Liability to pay interest would arise under Section 220(2) of the Act only in case where,--

(i) the amount specified in the notice of demand is not paid ;

(ii) within the period specified under Sub-section (1) of Section 220.

25. Liability to pay interest under Section 220(2) will commence after the end of the period mentioned in Section 220(1). There is no liability to pay interest from the date of the service of the notice of demand for the marginal period of 35 days specified in Section 220(1). Section 220(2), necessarily assumes that the amount specified in the notice of demand remains outstanding and payable by the assessee even after the expiry of the period mentioned in Section 220(1). Where within the period specified in Section 220(1), the amount specified in the notice of demand is either already paid or no longer payable or subsisting, no liability to pay interest under Section 220(2) can arise. An assessee cannot be said to be a defaulter or liable in respect of a demand which is no longer subsisting, payable or enforceable. Section 220 is part of recovery provisions of the Act. If an amount specified in the notice of demand is not recoverable and enforceable, the assessee cannot be held responsible for non-payment of the said amount during the period it is not recoverable and enforceable. The Act, except for advance payment of tax or tax deducted at source, does not provide for any provisional collection of tax or for collection of a tax set aside or reduced by the appellate, revisional or rectification orders subsisting. Neither the Income-tax Officer nor the Tax Recovery Officer can collect nor is the assessee liable to pay the amount set aside or reduced by appellate, revisional or rectification orders.

26. By reason of the provisions of the Taxation Laws (Continuation and Validation of Recovery Proceedings) Act, 1964, read with Section 225(3) of the Act, although no fresh notice of demand is necessary but whenever by reason of appellate, revisional or rectification order the amount specified in the notice of demand is wholly or partly reduced a consequential order is necessary and that has been done in the instant case as well by giving effect to the appellate order. It is the statutory duty of the Income-tax Officer to recompute the total income and the tax payable thereon by giving effect to appellate or revisional or rectification orders.

27. As observed by the Kerala High Court in the case of ITO v. A.V. Thomas and Co. : [1986]160ITR818(Ker) .

'True, perhaps that no fresh notice is required in this case. But a consequential order is necessary and that has been issued by the assessing authority which is evidenced in this case by exhibit P-5. As stated earlier, issue of notice alone will not attract the liability to pay interest. The liability is attracted only if there is non-compliance of the demand made in the notice.'

28. It is submitted that the aforesaid observation of the Kerala High Court fully applies in the instant case. Each appellate order in the instant case required consequential order recomputing the tax and the redeter-mined and recomputed tax was not the same as determined in the assessment order dated September 24, 1979. Each re computation giving effect to appeal order is a fresh assessment order under Section 143 as has been held by this court in the case of Kooka Sidhwa and Co. v. CIT : [1964]54ITR54(Cal) .

29. Even if it is assumed that the notice of demand, as such, issued in September, 1979, subsisted all along and no fresh notice was required to be issued the amount specified in that notice was never payable, enforceable or recoverable even after the final determination. Hence, even on the interpretation of the provisions of Section 220(2) of the Act, it is submitted that the petitioner has no liability to pay interest on the balance demand determined to be payable by the order dated May 3, 1986, right for the September 24, 1979.

30. This court in the case of CIT v. Chloride India Ltd. : [1990]186ITR217(Cal) .

'There is yet another approach that could be made to the controversy. What happens to an assessment by the Income-tax Officer when such assessment is subject to an appeal and pursuant to the appellatedecision, the matter is reopened obliging the Income-tax Officer to pass a fresh order When he makes a fresh order of assessment, he determines afresh the tax payable by the assessee. It is not as if two assessment orders survive against the assessee then. The first order is substituted by the second order. The first order, when it did operate was legal and recovery and enforcement could legally have been made pursuant to that order. But, after the passing of the second order, the obligation of the assessee arises from that order and where it is a fresh assessment determining tax payable for the year consequent upon the appellate decision setting aside the order of the Income-tax Officer, the order of the Income-tax Officer would no longer survive. It is true that it lived earlier. But by the passing of the fresh order it is the fresh order that would operate.'

31. The aforesaid principle shall apply to the facts of the instant case as well. Fresh income and tax were determined by the order dated May 3, 1986. Hence, the liability became enforceable by reason of that order and not from the order dated September 24, 1979. Interest, therefore, could not be demanded under Section 220(2) of the Act from September 24, 1979.

32. This matter is also covered by a judgment of this court delivered by Mr. Justice S.C. Sen, on January 21, 1987, on a writ petition filed by Century Enka Ltd., in C.O. No. 14001 (W) of 1985. In that case also there was a demand pursuant to the original assessment order passed by the Income-tax Officer. On appeal, the Commissioner of Income-tax (Appeals) allowed in part the appeal of the petitioner therein and consequently a refund was granted by the Income-tax Officer by passing a fresh order pursuant to the order of the Commissioner of Income-tax (Appeals), The Income-tax Appellate Tribunal, on appeal by the Department, reversed the order of the Commissioner of Income-tax (Appeals). The Income-tax Officer again passed a fresh order in pursuance of the order of the Income-tax Appellate Tribunal and determined a sum of Rs. 18,97,663 to be payable by the assessee. The Income-tax Officer also charged interest under Section 220(2) with effect from the date on which the amount of tax was refunded to the petitioner. The circular of the Board dated April 3, 1982 (see Circular No. 334 [1982] 135 ITR 10) and the judgment of the Kerala High Court in ITO v. AV. Thomas and Co. : [1986]160ITR818(Ker) , were noted and discussed. It was held :

'The Taxation Laws (Continuation and Validation of Recovery Proceedings) Act, 1964, merely lays down that where tax dues are reduced in appeal or are not varied in appeal, no fresh notice of demand will berequired to be served upon the assessee. But the Income-tax Officer will have to send an intimation of the fact of such reduction to the assessee. The provisions of this Act do not have the effect of nullifying the payment that has been made originally by the assessee. Refund of the tax paid by the assessee pursuant to the order of the Appellate Assistant Commissioner does not have the effect of making the taxpayer an assessee in default merely on the ground that the order of the Appellate Assistant Commissioner was ultimately reversed by the Tribunal. Therefore, the notice dated August 30, 1985, in so far as it seeks to recover interest on the amount refunded to the petitioner must be set aside and is hereby quashed.'

33. It is submitted that by reason of the subsequent appellate orders the original order dated September 24, 1979, on the points in issue decided by the appellate orders expressly merged in the appeal orders and only the appeal orders and orders consequential thereto were operative and the assessment order or notice of demand dated September 24, 1979, or amount of tax specified therein were no longer executable, valid and subsisting.

34. For the foregoing reasons, it must be held that the impugned notice is without jurisdiction and authority of law. There is no mistake, much less any mistake apparent from the records which could be rectified under Section 154 of the Act. The application, therefore, succeeds. Rule is made absolute. The impugned notice and order if any made, pursuant to such notice are set aside and quashed.

35. There will be no order as to costs.


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