ITO, NEW DELHI vs. M/S. MODIPON LIMITED, UTTAR PRADESH

Brief facts of the case are that the assessee, M/s. Modipon Ltd is a public Ltd company and is engaged in the business of manufacturing and selling polyester filament and nylon-6 yarns. For the assessment year 1987-88 they filed the return of income on 29/07/1987 declaring a total income of Rs.82,94,178/- and by order dated 29/03/1990 the learned Assessing Officer determinedly income of the assessee at Rs.11,40,79,686/-. Subsequently, pursuant to the order dated 30th June 1999, passed by the Commissioner of Income Tax (Appeals), Learned Assessing Officer passed an order dated 15/09/1992 reducing the income of the assessee to Rs.5,83,45,420/-. By order dated 05/11/1993 Assessing Officer further reduced the same to Rs.5,60,33,906/-. Again on 26/12/1996 Learned Assessing Officer passed an order giving effect to the consolidated order dated 22/07/1996 passed by the Tribunal, reducing the income to Rs.92,49,259/-. Again on 29/04/1997 Ld. Assessing Officer passed yet another order under section 154 of the Act further reducing income to Rs.66,80,645/-.

While the matter stood thus, Ld. CIT(A) passed an order dated 07/06/2002 in appeal for the assessment year 1986-87 directing the Learned Assessing Officer to consider the allowability of excise duty payment of Rs.88,80,914/- in the assessment year 1986-87, further observing that in case, the assessing officer decides to allow the deduction for this year, then he should withdraw the equivalent claim which has already been allowed in the subsequent assessment year, that is assessment year 1987-88. Pursuant to the said order, Learned Assessing Officer passed an order dated 15/09/2014 under section 250/143(3) of the Act for the assessment year 1986-87 and has allowed the deduction for payment of excise duty of Rs.88,80,914/- in that year and consequently revised the computation of taxable income for the assessment year 1987-88 making an addition of Rs.88,80,914/- and also charging interest under section 220 (2) of the Act to the tune of Rs.1,62,85,376/- for the period between 01/05/1990 to 15/09/2014.

Assessee challenged the charging of interest under section 220 (2) of the Act by way of appeal before the Ld. CIT(A), stating that such an interest can be charged only if the assessee has defaulted in payment of demand as per notice of demand issued under section 156 of the Act, and inasmuch as in the case of the assessee the demand in respect of the addition of Rs.88,80,914/- was raised for the 1st time on 15/09/2014 and there was no default on the part of the assessee of not making the payment within time of the demand, interest under section 220 (2) of the Act is not chargeable. Assessee maintained that there was no notice of demand at any earlier stage.

Ld. CIT(A) by way of impugned order, while placing reliance on the decision of the Hon’ble Apex Court in Vikrant Tyres Ltd vs. ITO 247 ITR 821 (SC) and the decision of the Hon’ble jurisdiction and High Court in the case of Bharat Commerce vs. CIT 210 ITR 13 (del) held that the Learned Assessing Officer was legally incorrect in charging interest under section 2220 (2) of the Act and interest in this matter has wrongly been charged. Ld. CIT(A), accordingly, directed the Assessing Officer to rectify the mistake occurred in his order dated 15/09/2014 and to delete the interest of Rs.1,62,85,376/- charged under section 220 (2) of the Act under section 154 of the Act.

Revenue is, therefore, in appeal before us challenging the impugned order stating that Ld. CIT(A) committed an error by placing reliance on the decision of the Hon’ble Apex Court in M/s. Vikrant Tyres Ltd (supra), since in the said case assessee had paid the initial demand under section 143(3) of the Act whereas in the instant case the initial demand under section 143(3) of the Act was not paid. It is further stated by the Revenue in the grounds of appeal that reliance on the decision of the Hon’ble jurisdictional High Court in the case of Bharat Commerce and Industries Limited (supra) is also misplaced, inasmuch as the said judgement supports the case of the revenue that the 1st notice of demand does not die on the appeal being accepted by the 1st authority.

It is the argument of the Ld. DR that it is not the case of the assessee that they made any payment pursuant to the demand that was raised as per the order dated 29/03/1990 as such merely because they are was modified subsequently several times, the demand does not die. According to him proper course available to the assessee was that the assessee had to make the payment as per the income determined in assessment order under section 143(3) of the Act and then to claim refund, if any is generated, by the orders of the appellate authorities. It is not open for the assessee not to make any payment pursuant to the original demand and to rely upon the subsequent orders of the appellate authorities to avoid the interest which the assessee is liable under section 220 (2) of the Act. Ld. DR based the argument on the analogy that in case the assessee is entitled to refund, he is entitled to such refund with interest from the date of such entitlement, as such, on the same footing the assessee is also liable to interest from the date on which the demand had fallen due.

Per contra, Ld. AR submitted that in order to attract the provisions under section 220 (2) of the Act, there shall be demand, the assessee must commit default in complying with the demand within stipulated time and then only the question of interest arises. He placed reliance on the decision of the Hon’ble jurisdictional High Court in Bharat Commerce and Industries Limited (supra) and also the decision of the Hon’ble Apex Court in Vikrant Tyres Ltd (supra). According to him the argument of the Ld. DR does not hold much water because firstly, there was no demand pursuant to the assessment order dated 29/03/1990, secondly, the addition of Rs.11,40,79,686/-does not comprise of the excise duty component of Rs.88,80,914/- as such the order dated 29/03/1990 cannot be taken support of to fasten the interest liability on the assessee. Ld. AR submitted that for the first-time the demand in respect of the disallowance of excise duty had arisen only from the order dated 07/06/2002 of Ld. CIT(A) pursuant to which Learned Assessing Officer decided to allow the claim in respect of excise duty in respect of the assessment year 1986-87 and consequently to make an addition of equivalent amount in the income of the assessment year 1987-88. It is, therefore, clear, according to the Ld. AR, that the demand of Rs.88,80,914/- had come into existence for the 1st time only through the order dated 15/09/2014 and hence is not permissible to fasten the liability in respect of the period earlier to the order dated 15/09/2014.

We have gone through the record in the light of the submissions made on either side. Insofar as the facts are concerned, there is no dispute. When the Learned Assessing Officer determined the income of the assessee at Rs.11,40,79,686/- by order dated 29/03/1990, clearly the excise duty of Rs.88,80,914/- was not comprised therein. Such addition of Rs.11,40,79,686/- was reduced by successive orders of the Learned Assessing Officer either to give effect to the orders of the Ld. CIT(A) or the Tribunal or under section 154 of the Act and ultimately by order dated 29/04/1997 the income was determined at Rs.66,80,645/- much below the returned income. As a matter of fact the income tax computation form incorporated at page No. 63 and 64 of the paper book clearly shows that the latest demand was in the negative by way of refund of Rs.44,75,708/-which was adjusted in the assessment year 1994-95. It is an admitted fact that the Revenue did not prefer any appeal against the order dated 22/07/1996 passed by the Tribunal, and allowed it to become final. In such an event, we find it difficult to agree with the Ld. DR that the demand pursuant to the order dated 29/03/1990 was still alive and had anything to do with the order dated 15/09/2014 which is relevant for this proceedings, let alone whether in fact any demand was raised pursuant to the order dated 29/03/1990. Assessee vehemently disputes the raising of any such demand and there is nothing for us to show that any notice was issued rising such a demand.

It is an admitted fact that the demand of Rs.44,40,457/-on the addition of Rs.88,80,914/-relatable to the disallowance of excise duty emanates not from the order dated 29/03/1990 but as a consequence of the order dated 07/06/2002 passed by the Ld. CIT(A) in respect of the assessment year 1986-87 and the decision taken by the Learned Assessing Officer to allow the excise duty in the assessment year 1986-87 and consequently to a sum of Rs.88,80,914/-. This demand of Rs.44,40,457/- is not a part of the demand that would have arisen from the order dated 29/03/1990. The very basis for demand is the allowing the excise duty in the assessment year 1986-87 in view of the order of the Ld. CIT(A) on 07/06/2002.

In Bharat Commerce and Industries Limited (supra), though the demand notice based on the order of rectification was served on November 18, 1992, Rs. 11, 83, 631 the interest demand under section 220 (2) proceeded on the assumption that the assessee was liable to pay interest on the amount determined in the rectification order and as if it was not paid earlier. It was contended before the Hon’ble jurisdictional High Court that section 220 (2) gives power to the authority to levy interest only the amount specified in any particular demand has not been paid in accordance with section 220 (1) and that the tax determined in the rectification order does not relate back to the assessment order. Hon’ble court held that this submission was correct and was liable to be accepted. It was further held that section 220 (2) states that if the amount specified in any notice of demand under section 156 is not paid within the period Ltd under subsection (1), the assessee shall be liable to pay interest at a particular rate, and so far as the amount determined in the rectification order is concerned, a demand notice was issued only after the rectification order was issued and , therefore, interest can be levied thereon only if there is non-payment of the amount covered by the rectification order, on issue after demand for the amount assessable. The rectification order cannot include interest under section 220 (2) payable on the tax additionally assessed in the rectification order unless there is a demand for the amount so additionally assessed. The Hon’ble court further held that subsection (4) of section 154 of the income tax Act states that where an amendment is made under such section, an order shall be passed in writing by income tax authority concerned and subsection (6) states that were any such amendment has the effect of enhancing an assessment order reducing a refund already made, the Assessing Officer shall serve the assessee a notice of demand in prescribed form specifying a sum payable, and such notice of demand shall be deemed to be issued under section 156 and the provisions of the Act shall apply accordingly.

In Vikrant Tyres Ltd (supra) the Hon’ble Apex Court dealt with the issue of chargeability of interest under section 220 (2) of the act in detail and observed that,-

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 sub-section (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 day 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. 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. It is a settled principle in 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. & Ors. v. State of Assam [1997 (6) SCC 479] 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. & Ors. [1999 (4) SCC 192] 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 substractions, 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. The High Court also fell 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. That 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. In a similar fact-situation, a Division Bench of the Kerala High Court in I.T.O. v. A.V. Thomas & Company (1986) 160 ITR 818 had held that the condition precedent for invoking Section 220(2) is that even after the notice of demand under section 156 and after a further period of 35 days as provided under section 220(1), the assessee should continue as a defaulter in the matter of payment of tax demanded. It further held that only in case the assessee defaults in payment of tax assessed, 35 days after the notice of demand under section 156, the liability to pay interest accrues. In that case also, admittedly, the assessee had paid the tax when he received the demand notice under section 156, hence, the High Court held that the requirements under section 220(2) for attracting the liability to pay interest did not exist. We are in agreement with the said view of the Kerala High Court. Though this judgment was brought to the notice of the Karnataka High Court in the impugned judgment, the said High Court thought it fit not to place reliance on the same which, in our opinion, is erroneous. In the light of the above, we are of the opinion that Section 220(2) of the Act cannot be invoked to demand any interest from the appellant for the assessment years in question.

In view of the settled position of law we find it difficult to agree with the submissions of the Ld. DR that the assessee should have paid the tax on the amount determined by order dated 29/03/1990 and should have claim refund as and when the addition was reduced or deleted by the appellate authorities or by the Learned Assessing Officer while exercising jurisdiction under section 154 of the Act, or that the demand under order dated 29/03/1990 did not die because of the subsequent orders reducing the income and such a demand was very much alive to infuse breath into order dated 15/09/2014 to justify the chargeability of interest. As observed in the preceding paragraphs we do not find any evidence to show that any notice of demand in the prescribed form specifying the sum payable pursuant to the order dated 29/03/1990 was issued or that but for the order dated 07/06/2002 passed by the Ld. CIT(A) in respect of assessment year 1986-87 the so-called demand, if any, pursuant to the order dated 29/03/1990 was in force. Inasmuch as the new demand had arisen only to the orders of the Ld. CIT(A) passed on 07/06/2002 and the consequential action taken by the Learned Assessing Officer, we find it difficult to hold that the Learned Assessing Officer could charge interest on the newly arisen demand for any period prior to the order giving rise to such demand.

It is clear from the judgements relied upon by the assessee that insofar as the amount determined in the rectification order, the demand could be issued only after the rectification order was issued and , therefore, interest can be levied thereon only if there is non-payment of the amount covered by the rectification order, on issue of a demand for the amount assessable, as such the rectification order cannot include interest under section 220 (2) payable on the tax additionally assessed in the rectification order unless there is a demand for the amount so additionally assessed. In the facts and circumstances stated supra, by no stretch of imagination could it be said that the addition made in the rectification order had anything to do with the determination of the income by way of order dated 29/03/1990 or to say that there is pending demand right from 29/03/1990 in respect of the amount added in the rectification order also as such the interest is chargeable from 01/05/1990 to 15/09/2014 under section 220 (2) of the Act.

In the above discussed factual and legal position, we find merits in the augments of the Ld. AR and find that the decisions of the Hon’ble directional High Court in Bharat Commerce and Industries Limited (supra) and Hon’ble Apex Court in Vikrant Tyres limited (supra) are applicable to the facts of the case on all fours. Ld. CIT(A) rightly followed the binding precedents of the Superior Courts and deleted the interest charged under section 220 (2) of the Act and it cannot be said that the impugned order suffers any illegality or irregularity. Whether or not the assessee made any payment pursuant to the order dated 29/03/1990 is of little consequence to decide the chargeability of interest under section 220 (2) of the Act on the amount determined in the rectification order is concerned. A demand in respect of such amount could be raised only after passing the rectification order and it is the default, if any, in payment of such demand that would attract the interest under section 220 (2) of the Act. It is, therefore, simple and plain that the rectification order itself cannot include the interest under section 220 (2) of the Act, and the tax determined in the rectification order does not relate back to the assessment order We , therefore, find that the impugned order does not suffer any illegality or irregularity and this appeal is devoid of merits. The appeal is, therefore, liable to be dismissed and is accordingly dismissed.

In the result appeal of the Revenue is dismissed.