Auro Food Ltd. vs Commissioner of Income Tax and another

K. Sampath, J.—The prayer in the writ petition is for the issue of a writ of certiorarified mandamus to call for the records relating to the

petitioner in C. No. 2031(64)/1988-89-TN-V on the file of the first respondent, and quash the impugned order dated November 7, 1988, and

consequently direct the first respondent to waive interest of Rs. 4,29,670 levied u/s 220(2) of the Income Tax Act, 1961, for the assessment year

1980-81.

The grievance of the writ petitioner-company is that the application filed by it for waiver of interest u/s 220(2A) of the Income Tax Act, 1961

(hereinafter referred to as the Act), has not been properly disposed of by the first respondent. The petitioner-company is an assessee on the

records of the Deputy Commissioner of Income Tax, Special Range-V, Madras, the G.I. number being 1-A. It filed its return of income for the

assessment year 1980-81 declaring the total income at Rs. 23,06,268 after adjusting carried forward unabsorbed allowances u/s 80J and after

making a claim for deduction of Rs. 10,06,800 u/s 80J for the year. The company had computed the claim for deduction u/s 80J without deducting

the liabilities from the capital employed in respect of the units. The assessment was completed by the Income Tax Officer by his order dated

August 29, 1983, and the total income was assessed at Rs. 64,23,287 and tax demanded was Rs. 41,43,022 including interest u/s 139(8) of Rs.

66,147 and interest u/s 217 of Rs. 81,960. The balance tax payable was Rs. 36,03,585. The petitioner-company had requested for stay of

collection demanded in the assessment until the decision of the Supreme Court regarding the validity of retrospective amendment to rule 19A for

purposes of section 80J was known and stay of tax was granted by the Commissioner.

The assessment was revised on the basis of the order of the Commissioner of Income Tax (Appeals) to take into account the correct relief u/s

80J on the basis of the revision made for earlier years. The balance tax had been provisionally determined on February 25, 1985, at Rs.

21,80,651 and was paid on February 26, 1985. The petitioner-company had also made further ad hoc payments of Rs. 1,215 on February 27,

1986, and Rs. 2,00,000 on March 12, 1936. The Inspecting Assistant Commissioner made the final assessment on August 5, 1987, and the

balance tax payable was determined at Rs. 22,92,123 and a refund of Rs. 2,24,452 was arrived at. The Deputy Commissioner of Income Tax,

Special Range-III, by his order dated July 26, 1988, and subsequently revised on August 5, 1988, levied interest of Rs. 4,06,367 u/s 220(2) of

the Act.

The petitioner-company was in a tight financial position due to the following reasons :

(1) It was in the process of implementing expansion and setting up a new unit which are not yet over. Additional finance was required to be

invested to complete and implement the projects.

(2) Due to the recent change in-the policy of the Government, it was not being supplied wheat from the FCI and had to resort to buying wheat

from the open market. Since no wheat was available in the South, it had to be purchased from North India where huge amount of money was

blocked due to delay in receiving the wheat and also bulk buying and storing the same.

(3) In the earlier years it had made borrowings and invested in new units which were still not remunerative. Further, the interest and instalments had

become payable which had to be met from existing resources. In the circumstances, any further huge payments would only over-burden the

company and worsen the day-to-day workings.

The petitioner-company had at all times co-operated with the Department and had paid all taxes due to the Government promptly and the

prayer before the first respondent was for waiver of interest levied u/s 220(2) of the Act. The first respondent by order in proceeding C. No.

2031(64)/1988-89/TN-V, dated November 7, 1988, rejected the application on the ground that the reduction or waiver of the interest was not

warranted because of the absence of the factors mentioned in section 220(2A) of the Act. Aggrieved, the present writ petition has been filed.

It is submitted by learned counsel for the petitioner-company as follows :

The order of the first respondent is not a speaking order. It is very cursory and has side-tracked the whole issue. He also refers to another order

by another Commissioner in identical circumstances where waiver was granted. He also produced the balance-sheet of the petitioner-company for

the year 1979 to show that the petitioner-company was in difficulties. He also cited a number of decisions in support of his stand. I will be referring

to the decisions in the course of the order.

Learned senior counsel for the Department submitted that the petitioner-company had the benefit of the money from March 17, 1981, to

February 27, 1986. It had taken all steps not to pay the amount by indulging in litigation. The balance-sheet of the year 1979 cannot be looked

into. The demand is made in the year 1988 and the latest balance-sheet has not been produced. The first two conditions set out in section 220(2A)

of the Act have not been satisfied. He prays for dismissal of the writ petition.

The question is whether the writ petitioner-company is entitled to any relief in the present writ petition or in any event it is at least entitled to a

remission to the first respondent for a fresh appraisal of the case.

As observed by the Supreme Court in Central Provinces Manganese Ore Co. Ltd. Vs. Commissioner of Income Tax, (headnote) :

Interest is levied u/s 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 a part of the process of assessing the tax liability of the assessee and, therefore, it is open to the assessee to dispute the levy

in appeal provided he limits himself to the ground that he is not liable to the levy at all.

Then we go to the waiver part of it. Section 220(2A) of the Act runs as follows :

Notwithstanding anything contained in sub-section (2), the Chief Commissioner or Commissioner may reduce or waive the amount of interest paid

or payable by an assessee under the said sub-section if he is satisfied that -

(i) payment of such amount has caused or would cause genuine hardship to the assessee;

(ii) default in the payment of the amount on which interest has been paid or was payable under the said sub-section was due to circumstances

beyond the control of the assessee; and

(iii) the assessee has co-operated in any inquiry relating to the assessment or any proceeding for the recovery of any amount due from him.

The assessee has to satisfy the conditions set out.

Before the introduction of this section by the Taxation Laws (Amendment) Act, 1984, with effect from October 1, 1984, the court was

exercising powers disallowing interest if the assessee made out a case for waiver. In Official Liquidator, High Court Vs. Income Tax Officer, ""K

Ward and Others, , the court purported to exercise powers u/s 446(2)(b) of the Companies Act read with rule 9 of the Companies (Court) Rules,

1959, of the Calcutta High Court and disallowed interest on being satisfied that the claim for statutory interest under the Act, 1961, would amount

to hardship, cause grave miscarriage of justice and injury to the contributories.

In section 220(2A) the power to waive interest was originally, given to the Central Board of Direct Taxes.

Dealing with a case arising u/s 220(2A) of the Act as it then stood in Carborundum Universal Ltd. Vs. Central Board of Direct Taxes, New

Delhi, , the Supreme Court held that (headnote) :

Since the power of the Board u/s 220(2A) to waive interest was discretionary, the petitioner had an opportunity to represent its case in writing

and the Board had taken into consideration the report of the Commissioner and it was not the case of the petitioner that the Commissioner''s

recommendations were different; the petitioner was not entitled to the right of being personally heard by the Board before its petition u/s 220(2A)

was disposed of by the Board.

In that case, on the basis of the tax demand as finally raised for the assessment years 1979-80 and 1982-83, the Income Tax Officer raised a

demand u/s 220(2) of the Act from the petitioner. A written representation to the Central Board was given u/s 220(2A) for waiver of the demand

for interest. After considering the report of the Commissioner, the Board declined to waive the demand for interest. Petitions for special leave to

appeal were filed before the Supreme Court. The petitioner also did not claim that the Commissioner''s report had not been considered. In those

circumstances, the Supreme Court held that the petitioner was not entitled to the right of being personally heard by the Board. That case arose at a

time when the Board was exercising the powers of waiver or reduction of tax on a recommendation of the Commissioner. The present provision

gives the power to the Commissioner. The Supreme Court observed that the question of the procedural safeguard of the notice of the

Commissioner''s report and an opportunity to canvass its contents would be examined as and when it arose in a different situation. The Supreme

Court held that the power u/s 220(2A) was discretionary.

The next question is whether this discretion can be called in question under article 226 of the Constitution of India.

In Apex Apex Finance and Leasing Ltd. Vs. Commissioner of Income Tax, Delhi and Others, , the Supreme Court observed as follows

(headnote) :

The question whether the Commissioner was justified on the facts and in the circumstances of the case, in refusing to exercise his power u/s 273A

of the Income Tax Act, 1961, to waive interest and penalty where the assessee has disclosed income voluntarily in a revised return, is a question to

be examined on the merits and the High Court, on a writ petition challenging such a refusal, ought not to dismiss the petition on the ground that the

order was not liable to interference in exercise of its extraordinary jurisdiction.

The Supreme Court set aside the order of the High Court refusing to interfere and remanded the case for fresh disposal.

In a matter arising under the Wealth-tax Act in Smt. Harbans Kaur etc. Vs. Commissioner of Wealth-tax, Jullundur, , where waiver in full was

not ordered, the Supreme Court observed as follows (headnote) :

The words ''the Commissioner may in his discretion.....reduce or waive the amount of penalty'' in section 18B of the Wealth-tax Act, 1957,

clearly show that the power conferred on the Commissioner is to be exercised by him in such a manner as he deems just and proper. If the

conditions stipulated in the section are satisfied, the Commissioner has a discretion in the matter. In exercise of that discretion, the Commissioner

can, either reduce the amount of the penalty or he may waive the entire penalty. It is for the Commissioner to decide on the facts of a particular

case whether a waiver in entirety or a reduction alone is warranted. Of course, when the Commissioner, instead of giving a complete waiver,

chooses to give only a reduction of the penalty amount, he must indicate in his order that he has applied his mind in that regard.

From the various decisions referred to above already it can be stated without fear of contradiction that the power vested u/s 220(2A) of the

Act is a discretionary power and it is one coupled with the duty to be exercised judicially and reasonably based on relevant facts. The authority

concerned should not act as a mere tax gatherer, but as a quasi-judicial authority vested with the power of mitigating hardship to the petitioner.

In G.T.N. Textiles Ltd. Vs. Deputy Commissioner of Income Tax and Another, , it was held rejecting the contention of the assessee that the

Commissioner had looked into the fact as to whether genuine hardship would be caused to the assessee and found that that was not a case where

the payment of interest caused undue hardship to the assessee and the discretion vested in the Commissioner had, therefore, been properly

exercised. No error was committed warranting interference by the High Court under article 226 of the Constitution.

In Central Provinces Manganese Ore Co. Ltd. Vs. Commissioner of Income Tax, already referred to, the Supreme Court has observed as

follows (page 968) :

Since the statute provides for the waiver or reduction of interest, it is open to the Income Tax Officer before imposing a levy u/s 139(8) and to the

Inspecting Assistant Commissioner before doing so u/s 215 to issue notice to the assessee and hear him in the matter. In case where the

jurisdictional fact attracting the levy cannot be disputed, for example, that the return has been furnished u/s 139 with delay, it will be a question

merely of satisfying the relevant authority that there are circumstances calling for a reduction or waiver of the interest.

In that case, the assessee had not made any application for waiver or reduction. Hence, no question arose of the concerned authority denying

an opportunity to the assessee. The Supreme Court directed the assessee to file an application within a period of six weeks to be considered by

the Commissioner of Income Tax.

It admits of no, doubt and it is also admitted on all hands that all the three conditions set out in section 220(2A) of the Act have to be

cumulatively satisfied.

Now, let us examine whether the petitioner-company has made out a case satisfying those requirements. As already stated, the petitioner-

company had stressed before the Commissioner that it was in a tight financial position due to, (a) its modernization and expansion, (b) the non-

availability of wheat on favourable terms from the Government with a result that wheat had to be purchased in the open market at very high rates,

and (c) borrowings made in earlier years and invested in the new units had not yet started yielding results.

By no stretch of imagination can reason ""a"" be taken as satisfying any of the requirements set out in section 220(2A), particularly when the

petitioner-company is not in the doldrums or in financial hardship. It has been doing well and it has ventured to modernize and expand its activities.

So far as condition No. 2 in section 220(2A) of the Act is concerned, the petitioner-company cannot say that the default in the payment of the

amount was due to circumstances beyond its control. In Mahalakshmi Rice Mills Vs. Commissioner of Income Tax, Karnataka-I, , the Karnataka

High Court held that the expression ""co-operation"" in any enquiry relating to the assessment should be held to mean that the assessee did not resort

to any litigation, obstruction or evasive tactics in, concluding the assessment and no more. It is on record that the petitioner-company had gone up

to the Supreme Court challenging the earlier assessment order and by so doing, the petitioner-company had not co-operated with the Income Tax

Officer in completing the assessment.

I have already referred to some of the decisions relied on by learned counsel for the petitioner-company. The other decisions relied on by

learned counsel are :

(1) P.M. Manuel Vs. Income Tax Officer and Others, ; (2) R.P. David and Others Vs. Agricultural Income Tax Officer and Another, ; (3) A.V.

Thomas and Co. Ltd. Vs. Income Tax Officer, ""A"" Ward and Others, ; (4) Lohia Machines Ltd. and Another Vs. Union of India (UOI) and

Others, ; and (5) Birla Cotton Spg. and Wvg. Mills Ltd. Vs. Income Tax Officer and Others, .

In the first of the decisions, the Kerala High Court held that where an application is made for waiver of interest levied u/s 215 of the Income

Tax Act, 1961, the Income Tax authorities have to objectively consider the circumstances and find out whether the assessee is entitled to it. There

should not be a mechanical consideration of the claim put forward by the assessee and it should not be that if some benefit is given to the assessee,

he will be satisfied. If the conditions laid down for the exercise of discretion are satisfied, the authority has no discretion to refuse to exercise the

discretion. If there is omission to exercise the discretion on account of the failure on the part of the authority to genuinely address itself to the matter

before it, mandamus can be issued directing such authority to rehear and determine the matter afresh according to law. There is no quarrel over the

proposition of law laid down. In my view, the first respondent has exercised his discretion properly and no exception can be taken to the order

passed by the first respondent. May be he has not written several pages giving in extenso the basis of his reasons for dismissal. The facts of the

present case do not require any elaborate discussion for arriving at the conclusion that the petitioner-company is not entitled to waiver of interest as

claimed by it. The decision of the Kerala High Court does not in any way help the writ petitioner.

In the second decision cited by learned counsel, the matter arose under the Agricultural Income Tax Act. A Bench of this court held that

(headnote of 86 ITR) :

Wherever a statute invests a discretionary power in a public officer, it is normally for exercise in favour of the person concerned unless there is

some sound and relevant reason for denying the benefit of the discretionary power. The intention of the proviso to section 40 of the Madras

Agricultural Income Tax Act, 1955, appears to be that if an appeal is filed, that will be a ground for treating the assessee as not being in default to

the extent of the tax covered by the appeal. Normally once the officer is satisfied that an appeal has been filed, he has to treat the assessee as not

being in default. Though the proviso does not indicate in what cases denial of discretion will be justified, the fact that the assessees are financially

sound and in a position to pay is not in itself a ground for refusing to exercise the discretion under the proviso.

In my view, this decision has no application to the facts of the present case. It is not the reasoning of the first respondent that, he is disallowing

waiver because at the time he decided the, question, the petitioner-company was financially sound and in a position to pay the interest demanded.

The question in that case was whether the filing of the appeal by an assessee under the Agricultural Income Tax Act would show whether the

assessee was in default. The Agricultural Income Tax Officer has been given a discretion to treat the assessee as not being in default so long as

such appeal is undisposed of.

The third decision relied on by learned counsel does not also help the petitioner-company. In that case the tax computed by the Income Tax

Officer was paid in full and within time by the assessee and a portion of the tax was refunded to the assessee consequent to the order of the

Appellate Assistant Commissioner, but, on further appeal, the Tribunal reversed the order of the Appellate Assistant Commissioner and restored

that of the Income Tax Officer and thereafter a fresh notice of demand was served on the assessee calling upon him to pay back to the

Department, the tax refunded to him. It was held that the liability to pay interest to the Department u/s 220(2) of the Income Tax Act, 1961, arose

only from the date when the fresh notice of demand was issued to the assessee and not from the date when the tax was refunded to the assessee

That case also does not in any way advance the case of the petitioner-company.

The fourth decision relied on by learned counsel for the petitioner-company relates to exemption of portion of profits and gains derived from

new industrial undertaking. I am afraid that the decision has no application to the facts of the present case. It related to the exclusion of borrowed

monies and debts and particularly long-term borrowings in the computation of the capital employed by a new industrial undertaking for the

purposes of the tax exemption. Section 80J(1) of the Act was upheld as a perfectly valid piece of subordinate legislation. The Supreme Court held

that rule 19A of the Income Tax Rules, 1962, in so far as it provided for computation of the ""capital employed"" as on the first day of the

computation period, was within the rule-making authority of the Central Board u/s 80J(1). It also held that the Finance (No.2) Act, 1980, in so far

as it amended section 80J by incorporating the provisions of rule 19A as sub-section (1A) in section 80J with retrospective effect from April 1,

1972, was merely clarificatory in nature and was accordingly valid.

The next decision is that of the Calcutta High Court in Birla Cotton Spg. and Wvg. Mills Ltd. Vs. Income Tax Officer and Others, . It does not

support the case of the petitioner-company. It held that (headnote) :

. . . interest cannot be levied in rectification proceedings. Section 220(2) has to be strictly construed. Liability to pay interest would arise u/s

220(2) only in cases where the amount specified in the notice of demand is not paid within the period specified under sub-section (1) of section

220.... Where the amount specified in the notice of demand is either already paid or no longer payable or subsisting, no liability to pay interest u/s

220(2) arise.

The situation in the present case is entirely different. The writ petitioner has invited the problem on itself by not co-operating with the

Department by taking proceedings challenging the assessment. Granting that pursuit of legal remedies by the petitioner could not be construed as

non-co-operation with the Department, the writ petitioner not having satisfied the other two criteria, the first respondent has rightly rejected the

petitioner''s claim for waiver.

The first respondent has exercised his discretion properly and rejected the claim of the writ petitioner for waiver of interest. In these

circumstances, I have no alternative except to dismiss the writ petition. The writ petition is, therefore, dismissed. There will, however, be no order

as to costs. Consequently, the injunction petition W.M.P. No. 22728 of 1988 is also dismissed.