Court Upholds Interest Charges on Delayed Tax Payment, Dismisses Appeal

Case Name**: Lenoleum House vs Income Tax Officer

**Key Takeaways**:

1. Interest under section 220(2) can be charged from the date of the original demand notice, even if the assessment was later modified by appellate authorities.

2. The time spent in litigation does not exempt the assessee from paying interest on delayed tax payment.

3. Appeals against interest charges under sections 220(2), 234B, and 234C are not maintainable under Chapter XX of the Income Tax Act, 1961.

**Issue**: 

Was the Income Tax Appellate Tribunal correct in upholding the levy of interest under sections 234B, 234C, and 220(2) of the Income Tax Act, 1961, for delayed tax payment, even when the assessment was modified by appellate authorities?

**Facts**:

- The original assessment for the Assessment Year 1993-94 was completed by the Deputy Commissioner of Income Tax (Appeals), Gorakhpur.

- The Commissioner of Income Tax (Appeals) granted substantial relief to the assessee on 22.9.1995.

- The Income Tax Appellate Tribunal (ITAT) withdrew this relief on 29.8.2002.

- Following the ITAT order, the Assessing Officer passed an order on 3.1.2003, revising the tax liability and levying interest under sections 234B, 234C, and 220(2).

- The assessee appealed against this order, which was partially allowed by the CIT(A) but later reversed by the ITAT.

- The assessee then filed this appeal in the High Court.

**Arguments**:

Assessee's arguments:

1. The demand was made on 3.1.2003, so 30 days should have been granted for payment before charging interest.

2. Interest under section 220(2) should not be charged for the period before 3.1.2003.

Revenue's arguments:

1. The original notice of demand was sent on 31.3.1995, creating a liability to pay tax within 30 days.

2. The order dated 3.1.2003 was merely a recalculation based on appellate orders, not a new determination of income.

**Key Legal Precedents**:

1. Income-tax Officer, Kolar Circle, Kolar and another Vs. Seghu Buchiah Setty, AIR 1964 SC 1473

2. Central Provinces Manganese Ore Co. Ltd. Vs. Commissioner of Income-tax, (1986) 160 ITR 961

3. Bharat Commerce and Industries Ltd. vs. Union of India and others, 188 ITR 277 (Del.)

4. Vikrant Tyres Ltd. Vs First ITO(2001) 247 ITR 821

**Judgement**:

The court dismissed the appeal, ruling in favor of the revenue department. Key points of the judgment:

1. The liability to pay tax accrued on the date of the original assessment for AY 1993-94.

2. Interest under section 220(2) can be charged from the date of the original demand notice.

3. The assessee cannot benefit from the time spent in litigation.

4. The appeal against the charge of interest was not maintainable under Chapter XX of the Income Tax Act, 1961.

**FAQs**:

1. Q: Can interest be charged for the period when the assessment was modified by appellate authorities?

  A: Yes, interest can be charged from the date of the original demand notice, even if the assessment was later modified.

2. Q: Does the time spent in litigation exempt the assessee from paying interest?

  A: No, the time spent in litigation does not exempt the assessee from paying interest on delayed tax payment.

3. Q: Can an assessee appeal against the levy of interest under sections 220(2), 234B, and 234C?

  A: No, appeals against interest charges under these sections are not maintainable under Chapter XX of the Income Tax Act, 1961.

4. Q: What is the significance of the order dated 3.1.2003?

  A: The order dated 3.1.2003 was merely a recalculation based on appellate orders, not a new determination of income. It does not reset the clock for interest calculation.

5. Q: How is interest under section 220(2) calculated in cases where the original assessment is modified by appellate authorities?

  A: Interest is computed from the date of the original demand notice with reference to the tax finally determined, even if the assessment was varied or set aside by appellate authorities and later restored.

1. This Income Tax Appeal has been preferred under Section 260A of the Income Tax Act, 1961, against the order of Income Tax Appellate Tribunal, Allahabad Bench, Allahabad dated 11.6.2004, passed in ITA No.316(Alld)/2003 for the A.Y.1993-94.

2. The brief facts of the case are that the assessment was originally completed by DCIT(A), Gorakhpur. The CIT(A), Allahabad vide order dated 22.9.1995, granted substantial relief to the assessee. The appellate order was given effect to, on which the demand was revised and worked out excess payment as refundable. The revenue filed an appeal before the Income Tax Appellate Tribunal. The assessee also filed cross objection and appeal against the CIT(A) order. The Income Tax Appellate Tribunal vide order dated 29.8.2002, withdrew substantial relief granted by the CIT(A) vide order dated 22.9.1995. Consequent to the ITAT order, the A.O. passed an order under Section 254/251/143(3) dated 3.1.2003, whereby the total income was determined at Rs.3,66,010/- and tax liability was revised. Besides the tax, interest under Section 234B, 234C and 220(2) amounting to Rs.77,712/-, 9,054/- and Rs.3,02,918/- have also been levied. The liability and demand of tax as well as levy of interest under Section 234B, 234C and also 220(2) are all disputed in this appeal.

3. This appeal has been admitted on the following questions of law:-

“(i) Whether, it was open to the Tribunal to examine the maintainability of the appeal of the assessee before the Commissioner of Income Tax (Appeals) against the order dated 3.1.03?

(ii) Whether, the appeal filed by the assessee against the order dated 3.1.03 was not-maintainable under section 246 of the Act though that appeal had been filed against the order passed under Sections 254/251/143 (3) of the Act to challenge the liability of tax and also of interest?

(iii) Whether, the interest under Section 220(2) of the Act could be demanded from the date of original demand note though the assessment order creating such demand had been varied by the Commissioner of Income Tax (Appeals) on 22.9.95 and fresh demand note was first issued on 3.1.03?”

4. We have heard Sri S.D. Singh, learned counsel for the appellant and Sri Govind Krishna, learned counsel for the revenue.

5. The main contention of learned counsel for the appellant is that the notice of demand was served on 4.1.2003, hence the imposition of interest was wholly unjustified, as 30 days time had not expired. It is submitted that the determination of net income was done on 3.1.2003, hence the interest prior to this date could not be charged. He has laid emphasis on the word “determined” used in the order of A.O. dated 3.1.2003.

6. Sri Govind Krishna, Advocate appearing for the revenue submits that the income of the assessee was not “determined” vide order dated 3.1.2003. Keeping in view the Dy. CIT(A) order dated 19.10.1993; CIT(A) order dated 22.9.1995 and ITDT order dated 29.8.2002, the calculation was made in compliance of the appellate orders. It is submitted that it was the the duty of the assessee to compute and pay the tax as per the provisions of the Act for the financial year 1993-94. The assessee has failed to calculate the correct gross profit rate on the sales which was finally decided by the Income Tax Appellate Tribunal, and accordingly the additions were made. The order of the Income Tax Appellate Tribunal dated 29.8.2002 was further challenged in Income Tax Appeal No.65 of 2003, which was dismissed in limine vide order dated 26.7.2007, therefore, the questions of additions on account of unexplained cash credit under Section 68 of the Income Tax Act and the enhancement of gross profit is are not in dispute in this appeal.

7. The Assessing Officer, after the decision of Income Tax Appellate Tribunal dated 29.8.2002, had issued fresh notice of demand and challan charging interest under Section 234B, 234C and 220(2) of the Income Tax Act, 1961.

8. The said order of A.O. dated 3.1.2003, was challenged before the Commissioner, Income Tax (Appeal), who disposed off the said appeal giving the following findings:-

“I have given careful consideration to the matter. There is specific order of the Assessing Officer for charging interest u/s 234B & 234C. It cannot be said that there is no such order. The interest u/s 234B has to be charged in respect of total income determined at Rs.3,66,010/- as per the order dated 3.1.2003 under appeal before me. The interest u/s 234C is to be charged with reference to the income shown in the return at Rs.18,840/-. If there is any default under this section, such interest cannot be charged with reference to assessed income. The I.T.O. is directed to verify and if interest u/s 234C has been charged with reference to assessed income is should be brought down and re-calculated with reference to the returned income. Subject to this remark the charging of interest u/s 234B and 234C are confirmed.

Now I come to the interest charged u/s 220(2) at Rs.3,02,918/-. The demand was raised by order dated 3.1.2003 where the income was assessed at Rs.3,66,010/-. The income was no doubt enhanced by the Hon'ble I.T.A.T. and the heavy relief allowed by the CIT(A) stood withdrawn. Even then interest u/s 220(2) has to be calculated from the expiry of period of 30 days from the date of service of the demand notice dated 3.1.2003. The interest charged before this period cannot be sustained and has to be cancelled in view of the decision of the Hon'ble Supreme Court in the case of Vikrant Tyres Ltd. Vs First ITO(2001) 247 ITR 821. The above decision squarely applied in the case of the appellant. Hence the interest charged Rs.3,02,918/- u/s 220(2) of the I.T. Act, 1961 is cancelled. In the result, the appeal for A.Y. 1993-94 is partly allowed.”

9. The revenue preferred an appeal against order of CIT(A) dated 25.3.2003 before the Income Tax Appellate Tribunal. The appeal was allowed with the following findings:-

“It is clear from the decision of the Hon'ble Delhi High Court in the case of Bharat Commerce and Industries Ltd. vs. Union of India and others, 188 ITR 277 (Del.) that no appeal lies against the AO's order under section 220(2) of the I.T. Act. It is also clear that interest under section 220(2) is chargeable from the date of original assessment order and CIT(A) has no power to hear the appeal against the interest charged under section 220(2) of the I.T. Act. Therefore, the order of the CIT(A) on this issue is reversed and order of AO is confirmed. The appeal of the Revenue is allowed.”

10. Learned counsel for the appellant has relied upon Income-tax Officer, Kolar Circle, Kolar and another Vs. Seghu Buchiah Setty, AIR 1964 SC 1473 and Central Provinces Manganese Ore Co. Ltd. Vs. Commissioner of Income-tax, (1986) 160 ITR 961”.

11. In Income-tax Officer, Kolar Circle, Kolar and another (supra), the majority and minority views were as under:- Per Sarkar and Hidayatullah, JJ.:-

“Where an appeal is preferred by an assessee against an order of assessment passed by the Income-tax Officer, and in the appeal the appellate order reduces the assessment, then the original assessment order is vacated. Consequently, the notice of demand served upon the assessee under S. 29. Income-tax Act, 1922 falls to the ground and the default based thereupon under S. 45 of the Act also ceases to be default anymore. In such a case, therefore, on the Income-tax Officer's order being revised in appeal the default based on it and all consequential proceedings must be taken to have been superseded and fresh proceedings have to be started to realise the dues as found by the revised order. Per Shah, J. (Contra):

A person, who has failed to comply with a notice of demand would continue to be a defaulter notwithstanding the reduction of liability by order of the appellate authority. There would be only one exception to this rule i.e., when the order of assessment is wholly set aside. But that is not a real exception for against the assessee no steps can be taken because there is no debt due by him.”

12. The law laid down in the above case do not apply to the facts of case because the original notice of demand to the assessee was sent on 31.3.1995, which was served on him. So it was his liability to pay the tax as per the demand notice within a period of 30 days from the service. Admittedly the tax was not paid by the assessee, hence the interest has been charged on the delayed payment.

13. In Central Provinces Manganese Ore Co. Ltd. (supra), Hon'ble Supreme Court has held as under:-

“Interest is levied under section 139(8) or section 215 of the Income-tax Act, 1961, because by reason of the omission or default mentioned in the respective provision, the Revenue is deprived of the benefit of the tax for the period during which it has remained unpaid.

The levy of interest is part of the process of assessment. Although sections 143 and 144 do not specifically provide for the levy of interest and the levy is, in fact, attributable to section 139(8) or section 215, it is nevertheless a part of the process of assessing the tax liability of the assessee. Inasmuch as the levy of interest is a part of the process of assessment, it is open to an assessee to dispute the levy in appeal provided he limits himself to the ground that he is not liable to the levy at all.”

14. The above law relied upon by learned counsel for the appellant do not apply in this case because the assessee had not demonstrated before the Income Tax Officer that there is any case for reducing the levy of interest under Section 139(8) or under Section 215 of the Income Tax Act, 1961. As mentioned above, the original notice of demand was sent on 31.3.1995 creating a demand of Rs.3,29,371/- which was not paid by the assessee till the order under Section 254/251/143(3) dated 3.1.2003. In the above cases, it was further held that no appeal lies in regard to the improper exercise of discretion to calculate or reduce interest under Section 139(8). Chapter XX of the Income Tax Act, 1961, also do not provide any right of appeal against interest levied under Sections 234B, 234C and 220(2) of the Income Tax Act.

15. Section 234B of the Income Tax Act, 1961, provides for interest for defaults in payment of advance tax. Section 234C provides for interest on deferment of advance tax. During the course of argument, learned counsel for the appellant has not pressed these points.

16. As far as the interest under Section 220(2) is concerned, it provides as under:-

“220-(2) 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 one 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 :

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, or an order of the Settlement Commission under sub-section (4) of section 245D, the amount on which interest was payable under this section had been reduced, the interest shall be reduced accordingly and the excess interest paid, if any, shall be refunded : Provided further that in respect of any period commencing on or before the 31st day of March, 1989 and ending after that date, such interest shall, in respect of so much of such period as falls after that date, be calculated at the rate of one and one-half per cent for every month or part of a month.”

17. Sub section (1) of Section 220 provides as under:-

“220-(1) Any amount, otherwise than by way of advance tax, specified as payable in a notice of demand under section 156 shall be paid within thirty days of the service of the notice at the place and to the person mentioned in the notice :

Provided that, where the Assessing Officer has any reason to believe that it will be detrimental to revenue if the full period of thirty days aforesaid is allowed, he may, with the previous approval of the Joint Commissioner, direct that the sum specified in the notice of demand shall be paid within such period being a period less than the period of thirty days aforesaid, as may be specified by him in the notice of demand.”

18. Learned counsel for the appellant has argued that the demand was made vide order dated 3.1.2003 hence 30 days time should have been granted for payment of tax and accordingly no interest prior to that could have been charged under Section 220(2) of the Income Tax Act because the net income was determined vide order dated 3.1.2003.

19. We have considered the rival submissions and the law relied upon by the appellant. In this case, the assessment was originally completed by the Dy. CIT(A), and a relief was granted by CIT(A) vide order dated 22.9.1995, which was withdrawn by the subsequent order passed by the ITAT dated 29.8.2002. The order of the ITAT dated 29.8.2002 was further challenged in Income Tax Appeal No.65 of 2003 before this Court which was dismissed vide order dated 26.7.2007.

20. Under the provisions of Income Tax Act, 1961, it was the duty of the assessee to compute his correct income and submit his return. The tax as well as advance tax liability was also to be fulfilled by the assessee as per the provisions of the Act. If the Assessing Authority arrives at a different computation of tax and redetermined the tax liability then that tax along with interest and penalty has to be deposited by the assessee subject to decision of appeal. In this case the return of the assessee was not accepted by the Assessing Authority and some additions were made. Ultimately those additions were confirmed by the ITAT as well as by this Court. In the circumstances, the tax as well as the advance tax liability accrued on the date of original assessment. The order dated 3.1.2003 by which notice of demand and interest has been claimed, cannot be said to be the “determination” of the income tax. It is merely recalculation of the income and the interest by way of execution of the orders of the appellate authorities which have attained finality. In the circumstances, the liability to pay tax had accrued on the date of original assessment for the assessment year 1993-94.

21. It is admitted that the original notice of demand under Section 156 of the Act, creating a demand of Rs.3,29,371/- dated 31.3.1995 on the assessed income of Rs.5,23,020/- was duly served upon the assessee on 8.5.1995. As per provisions of Section 220(1) of the Income Tax Act, the assessee was required to satisfy the demand within 30 days from the date of service of notice of demand. Admittedly, the assessee did not deposit the said amount of tax of Rs.3,29,371/-. The Circular no.334 issued by the CBDT on 3.2.1982, provides that if the assessee fails to pay the tax payable on the basis of the original demand notice, then interest under Section 220(2) can be charged. The circular further provides that where assessment made originally by the A.O. was either varied or even set-aside by the appellate authority, but on further appeal, the original order of A.O. is restored either in part or wholly, the interest under Section 220(2) shall be computed with reference to the date reckoned from the original demand notice and with reference to the tax finally determined.

22. The appellant cannot take benefit of the time spent in the litigation because for the said period the department could not utilise the amount of tax. The rational behind the provisions of Section 220(2) to levy interest on delayed payment of tax is not to penalise the party but to make a provision for compensation for the department, on the failure of the assessee to make payment on the first notice of demand. The notice of demand dated 3.1.2003 cannot be said to be a first notice of demand because first notice of demand has already been issued to the assessee after completing the original assessment completed by the Dy. CIT(A), Gorakhpur. In these circumstances, there was no requirement in law to grant a further period of 30 days, after the service of the notice and thus it cannot be said that the demand has been raised for the first time on 3.1.2003.

23. In these circumstances, we do not find any substance in the argument of learned counsel for the appellant that interest under Section 234B, 234C and 220(2) could not have been charged before expiry of 30 days of serving the notice of demand. Accordingly, question no.3 is decided against the assessee and in favour of revenue.

24. Learned counsel for the appellant submitted that it was not open to the Tribunal to examine the maintainability of the appeal of the assessee before the Commissioner of Income Tax (Appeals) against the order dated 3.1.2003.

25. The right to appeal can be availed, only when it is specifically provided for in the statute. Certainly, it was the appeal against the demand of interest for delayed payment by the Assessing Officer.

26. The Tribunal relying upon the case of Bharat Commerce and Industries Ltd. vs. Union of India and others, 188 ITR 277 (Del.), in which Abdul Kareem Hajee (K.P.) Vs. ITO (1983) 141 ITR 120 (Kerala) and Mohammed Essa Moosa Sait Vs. GTO (1987) 167 ITR 338 (Kerala) has held that no appeal lies against the order of the A.O. for charging interest under Section 220(2) of the Income Tax Act.

27. The appeals and revisions are provided under Chapter XX of the Income Tax Act, 1961. Section 246 of the Act defines the appealable orders and contains a provision that any assessee aggrieved by any of the following orders of an Assessing Officer may appeal against such order. In this chapter there is no provision to file an appeal for the grievance against charging of interest under Section 220(2), 234B and 234C. Accordingly, the order of A.O. dated 3.1.2003 was not appealable before the CIT(A).

28. The CIT(A) should not have entertained an appeal against the order which was not appealable. In Vikram Tyres Ltd. Vs. First ITO, (2001) 247 ITR 821, Hon'ble Supreme Court has held that:-

“(i) that the condition precedent under section 220 was that there should be a demand notice and there should be a default in paying the amount so demanded within the time stipulated in the notice. The assessee satisfied the demands under the notices issued under section 156 and nothing was due pursuant to the notices of demand. After the judgment of the High Court on a reference fresh demand notices were issued and in satisfaction of those demands the assessee had paid the amounts as demanded within the time stipulated therein. In such a situation, on a literal meaning of section 220(2), the Department had no right to demand interest for the period commencing from the date of refund of the tax upon the appellate order till the taxes were finally paid after disposal of the reference.

(ii) That section 3 of the Taxation Laws (Continuation and Validation of Recovery Proceedings) Act, 1964, did not apply. That section only revived a notice of demand which had never been satisfied by the assessee and which notice got quashed during some stage of the challenge and finally the quashed notice got restored by an order of a higher forum. In such a situation, section 3 restored the original notice of demand which was never satisfied by the assessee and did away with the need to issue a fresh notice. That section could not be resorted to for reviving a demand notice which was already fully satisfied.”

29. The above legal position is not applicable in the present case because in the case in hand, the demand was raised on 31.3.1995 which was not satisfied. The ITAT has considered all the aspects of the matter, and we agree with the findings of ITAT.

30. Considering all the facts and circumstances of the case and the provisions of appeal contained in Chapter XX of the Income Tax Act, 1961, we are of the view that the appeal before the CIT(A) against the charge of interest was not maintainable under aforesaid sections. We thus do not find any illegality in the order of Income Tax Appellate Tribunal. Accordingly, the questions no.1 and 2 are also decided against the assessee and in favour of the revenue.

31. In the result, all the three questions are decided against the assessee and in favour of the revenue.

32. The appeal is dismissed. The revenue may proceed accordingly.

Order Date :-4-10-2012