C.I.T. vs J.K. Synthetics Ltd.
2007 Latest Caselaw 2245 Del

JUDGMENT

S. Muralidhar, J.

1. In this reference relevant to the Assessment Year 1975-76, the following question of law has been referred to us for opinion by the Income Tax Appellate Tribunal, Delhi Bench 'D', New Delhi ('Tribunal'):

Whether on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was correct in law in dismissing the revenue's appeal on the ground that prior to 1.4.1985 there was no provision to increase interest levied Under Section 139(8) of the Income-tax Act consequent to an order Under Section 154, when the facts of the case show that interest originally levied Under Section 139(8) was much higher and that there was as such no question of enhancement in this case?

2. The Income Tax Officer ('ITO') levied interest under Section 139(8) of the Income Tax Act, 1961 ('Act') in the sum of Rs. 6,86,616/- on the tax payable by the assessed for the Assessment Year 1975-76. The assessment order was then challenged by way of appeal by the assessed, first before the Commissioner of Income Tax (Appeals) [CIT(A)] and then the Tribunal. Pursuant to the order of the Tribunal, the amount of interest charged stood reduced to Rs. 3,07,113/-.

3. Subsequently, on 18th October, 1984, the ITO passed an order under Section 154 of the Act rectifying a mistake in respect of deduction erroneously allowed to the assessed under Section 80J of the Act for the Assessment Year 1975-76. The effect of this order was that the revised total income stood at Rs. 4,00,13,414/- and this led to a corresponding increase in the interest payable thereon.

4. The assessed appealed against the order dated 18th October, 1984. Among the grounds of appeal was one pertaining to the interest charged on the revised income. As against the earlier figure of Rs. 3,07,113/-, the interest was sought to be increased to Rs. 3,83,877. By an Order dated 26th February, 1985 the CIT (A) accepted the contention of the assessed that the interest could not be enhanced as it was contrary to the Circular No. 1(15)63/TPL dated 8th September, 1963 [wrongly mentioned as 9th September, 1983 in the order of the CIT(A)]. The appeal was allowed and the enhancement of interest was accordingly deleted.

5. The appeal filed by the Revenue was dismissed by the Tribunal on 5th January 1988 by the Tribunal by an order, the relevant portion of which reads as under:

3. Shri G.C. Sharma, Sr. Advocate appearing for the respondent, submitted that for enhancement of interest only the provision of amendment to Exp; 2(b) of Section 139 of the Income tax Act 1961 were applicable and such provision came on the statute book w.e.f. 1.4.85. Therefore, these could not be made applicable for enhancing interest from Rs. 3,07,113 to Rs. 3,83,877 for the year 1975-76. For the Revenue Shri J.S. Rao was not in a position to controvert such submission.

6. It appears that at the time of framing the question of law for being referred to this Court, a contention was raised by the Revenue before the Tribunal that since the interest originally determined was itself higher there was no question of a consequential enhancement of increase in the interest as a result of the order dated 18th October, 1984. This explains how the question referred for our opinion was framed by the Tribunal in the manner indicated although such a contention does not appear to have been raised in the proceedings prior thereto.

7. On behalf of the Revenue it is contended by Ms. Sonia Mathur, learned standing counsel, that the provision of Section 139(8) of the Act would not really apply in the facts and circumstances of the case since there was no attempt to enhance the interest in the sum of Rs. 6,86,616/- as originally determined. She submits that the revised interest as a result of the appeal affect being given to the order of the Tribunal may perhaps have resulted in an increase in the interest chargeable but that was not affected by the provision in question. On the other hand it is contended by Mr. P.N. Monga, learned Counsel for the assessed that the order passed by the ITO under Section 154 of the Act on 18th October, 1984 did result in an enhancement of the interest and, therefore, could not be permitted since the Explanation 2(b) to Section 139(8), which permitted charging of corresponding increased interest, was introduced only with effect from 1.4.1985 and was not retrospective. He relied upon the decision in Panna Lal v. Commissioner of Income-Tax (1999) 179 ITR 16 (P&H) in support of this submission. Relying on the decision of the Bombay High Court in Jivatlal Purtapshi v. Commissioner of Income-Tax, Bombay he contended that a point not raised by the Revenue in the appeal before the Tribunal ought not to be permitted to be raised for the first time by way of a question referred to this Court.

8. To appreciate the contentions of the learned Counsel for the parties, a reference may be made to Section 139(8)(a) and (b) of the Act which read as under:

(8)(a) Where the return under Sub-section (1) or Sub-section (2) or Sub-section (4) for an assessment year is furnished after the specified date, or is not furnished, then whether or not the Assessing Officer has extended the date for furnishing the return under Sub-section (1) or Sub-section (2), the assessed shall be liable to pay simple interest at fifteen per cent per annum, reckoned from the day immediately following the specified date to the date of the furnishing of the return or, where no return has been furnished, the date of completion of the assessment under Section 144, on the amount of the tax payable on the total income as determined on regular assessment, as reduced by the advance tax, if any, paid, and any tax deducted at source:

Provided that the Assessing Officer may, in such cases and under such circumstances as may be prescribed, reduce or waive the interest payable by any assessed under this sub-section.

Explanation 1 xxx xxx xxx

Explanation 2. Where, in relation to an assessment year, an assessment is made for the first time under Section 147, the assessment so made shall be regarded as a regular assessment for the purposes of this sub-section.

(b) Where as a result of an order under Section 147 or Section 154 or Section 155 or Section 250 or Section 254 or Section 260 or Section 262 or Section 263 or Section 264 or an order of the Settlement Commission under Sub-section (4) of Section 245D, the amount of tax on which interest was payable under this sub-section has been increased or reduced, as the case may be, the interest shall be increased or reduced accordingly, and

(i) in a case where the interest is increased, the Assessing Officer shall serve on the assessed, a notice of demand in the prescribed form specifying the sum payable, and such notice of demand shall be deemed to be a notice under Section 156 and the provisions of this Act shall apply accordingly;

(ii) in a case where the interest is reduced, the excess interest paid, if any, shall be refunded.

(c) The provisions of this sub-section shall apply in respect of the assessment for the assessment year commencing on the 1st day of April 1988 or any earlier assessment year, and references therein to the other provisions of this Act shall be construed as references to the said provisions as they were applicable to the relevant assessment year.

9. There is no dispute that the provision for a corresponding increase in the interest as a result of an order passed under Section 154 of the Act was introduced only with effect from 1st April 1985. Prior to the introduction of this provision the only power with the ITO, in terms of the proviso to Section 139(8)(a), was to reduce or waive the interest payable by an assessed. This proviso was apparently introduced by the Finance Act 1963. Circular No. 1(15)-63/TPL issued by the Central Board of Direct Taxes (CBDT) on 8th September 1963 [referred to in the order of the CIT (A)] explains the position in law as obtaining prior to 1st April 1985 in the following manner:

Interest for delay in filing returns

12. Under Section 139, the interest to be paid by an assessed for delay in the filing of the return was to be calculated with reference to the tax determined on regular assessment, and no adjustments were subsequently admissible in respect of such interest. Section 8 of the Finance Act, 1963 introduces two modifications in respect of this position. In the first place, if the assessment is modified as a result of appeal, reference, review or rectification, and the amount of tax payable by the assessed is reduced provision has been made for reduction the amount of interest pro rata, and for refunding the excess interest paid, if any. Secondly, the Income-tax Officer has been given power in certain circumstances to reduce or waive the interest. The circumstances in which this power of reduction or waiver can be exercised will be prescribed by rules to be made for this purpose.

It is to be noted that this provision enable a modification of the amount of interest only in the assessed's favor, and not in the other direction. If the assessment is enhanced as a result of appeal, revision or rectification, the amount of interest payable is not to be enhanced and no additional interest is to be demanded.

10. The CBDT Circular therefore makes it clear that prior to the introduction of Explanation 2(b) to Section 139 with effect from 1st April 1985, Section 139(8)(a) had to be construed as permitting only a reduction of interest and not an enhancement thereof as a result of enhancement in the assessed income.

11. We next proceed to examine the contention of the learned Counsel for the Revenue that there was in fact no enhancement of the amount of interest as originally determined. The learned Counsel for the assessed is right in his submission that this ground was not raised before the Tribunal when the appeal was heard by it. In fact, the counsel for the Revenue appearing before the Tribunal appears not to have contested the point made by the assessed that Explanation 2(b) to Section 139 of the Act was prospective. It is also correct that the decision of the Bombay High Court in Jivatlal Purtapshi v. Commissioner of Income-Tax, Bombay supports the submission that such a contention ought not to be permitted to be raised for the first time in this reference. Nevertheless, since this reference has been pending for several years we do not wish to dispose it on this ground alone. We proceed to decide the question referred to us on merits.

12. The facts of the case as narrated reveal that the recomputed interest - consequent upon the order of the Tribunal at the end of the first round of the litigation- stood reduced to Rs. 3,07,113/-. Therefore one ought to proceed on the footing that the interest amount even in terms of Section 139(8) stood determined at Rs. 3,07,113/- and not Rs. 6,86,616/- as contended. That order of the Tribunal was not challenged by the Revenue and became final. The order under Section 154 was passed by the ITO on 18th October 1984, that is, prior to the introduction of the Explanation 2(b). It was consequent upon the said order that the corresponding amount of interest was sought to be enhanced to Rs. 3,83,877/-. The judgment of the Punjab & Haryana High Court in Panna Lal v. Commissioner of Income-Tax supports the contention of the assessed that Explanation 2 (b) to Section 139(8) was not merely clarificatory and was prospective with effect from April 1st 1985. The reliance placed by learned Counsel for the Revenue on the decision in Modi Industries Ltd. v. Commissioner of Income-Tax is to no avail. Even that decision makes it clear that the increased amount of interest payable in terms of Section 214 would only be prospective. The resultant position is that on the date of the passing of the order, that is 18th October 1984, there was no power in the ITO to direct an enhancement of the interest, a position that has been clarified by the CBDT Circular extracted hereinabove. There is accordingly no legal infirmity in the order of the Tribunal.

13. For the aforementioned reasons, we answer the question referred to us in the affirmative, that is, against the Revenue and in favor of the assessed.

14. The reference is disposed of accordingly.