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Judgment
Dr. B.P. Saraf, J.—The petitioner in this case is aggrieved by the levy of interest by the assessing authority under s. 215 of the IT Act, 1961 ("the Act") while giving effect to the revisional order of the CIT under s. 263 of the Act. The dispute pertains to the asst. yr. 1978-79, the relevant previous year being the year ended on 30th June, 1977. The case of the assessee is that prior to the substitution of sub-s. (3) of s. 215 of the Act by the Taxation Laws (Amendment) Act, 1984 w.e.f. 1st April, 1985, there was no provision for levy of interest under s. 215(1) of the Act or enhancement thereof on the basis of the tax determined on revised assessment and in that view of the matter, the IAC ("AO") acted illegally and without jurisdiction in levying the interest under s. 215(1) of the Act on the basis of the tax redetermined on revision of the assessment order and the CIT was not justified in law in confirming the same.
The material facts are as follows :
In the financial year relevant to the asst. yr. 1978-79, the assessee paid a sum of Rs. 10,50,000 by way of advance tax (including the tax deducted at source). The assessee submitted its return of income for the above assessment year on 26th June, 1978 declaring total income of Rs. 17,82,820. Later, the ITO by his order of assessment dt. 28th November, 1980, assessed the total income of the assessee at Rs. 18,05,40 and determined the tax payable on the basis thereof at Rs. 10,42,647. As the amount of advance tax paid by the assessee was not less than seventy-five per cent. of the assessed tax, no interest was levied under s. 215(1) of the Act. On the other hand, the amount of advance tax being in excess of the assessed tax, the assessee was granted interest under s. 214 of the Act to the tune of Rs. 9,858. Later, the CIT initiated proceedings under s. 263 of the Act for suo motu revision of the order of assessment and after hearing the assessee, directed the AO to treat a sum of Rs. 12,14,904, which had been treated in the original assessment as a revenue expenditure, as a capital expenditure and to recompute the income of the assessee accordingly. The AO gave effect to the above revisional order of the CIT by his order dt. 9th June, 1983 and redetermined the income of the assessee at Rs. 26,86,190 and the tax payable thereon at Rs. 15,51,275. The AO also levied a sum of Rs. 1,50,939 as interest under s. 215 of the Act as the advance tax paid by the assessee fell short of seventy-five per cent. of the tax determined on the basis of revised assessment. This interest was charged for the period from 1st April, 1978 to 28th November, 1980, i.e., from the first day of the assessment year to the date of the original assessment. The assessee applied under r. 40 of the IT Rules, 1962 (the "Rules") for waiver of the interest charged under s. 215 of the Act. The AO waived interest only for the period from 1st July, 1979 to 28th November, 1980 and confirmed the levy of interest amounting to Rs. 70,740 from 1st April, 1978 to 31st June, 1979. The assessee filed a revision application to the CIT under s. 264 of the Act wherein it was contended, inter alia, that no interest could be levied under s. 215 of the Act, as it stood at the material time, on the tax determined on the basis of the revised assessment. The case of the assessee was that interest could be levied under s. 215 only if the amount of advance tax paid by the assessee was less than 75 per cent. of the tax determined on the basis of the regular assessment, which according to the assessee was the original assessment. It was contended by the assessee that there was no provision in s. 215 of the Act for charging interest or further interest in the event of the assessed amount or the tax determined on the basis of the original assessment having been increased as a result of any subsequent order of the higher authority. This contention of the assessee did not find favour with the CIT. The CIT was of the opinion that the AO was obliged to pass all consequential orders necessary for giving effect to the revisional order under s. 263 of the Act including recalculation of interest and/or levy of interest under s. 215 of the Act on the basis of such revised order of assessment passed with a view to giving effect to the order of the higher authority. Aggrieved by the order of the CIT, the assessee has approached this Court by filing this writ petition.
We have heard Mr. S. J. Mehta, learned counsel for the assessee, who submits that though at the time this writ petition was filed, there was a conflict of opinion in different High Courts as to whether interest can be enhanced or reduced under s. 215 of the Act while giving effect to the order of higher authorities, this controversy now stands concluded by the decision of the Supreme Court in Modi Industries Limited, Modinagar and Others Vs. Commissioner of Income Tax, Delhi and Another, wherein it has been held that under the law as it stood prior to 1st April, 1985, the amount on which interest was payable under s. 215 of the Act could not vary due to enhancement of tax as a result of any subsequent proceedings.
We have considered the above submission and perused the decision of the Supreme Court referred to above. Sec. 215 of the Act provides for interest payable by the assessee in cases where the advance tax paid by the assessee is less than seventy-five per cent. of the assessed tax. This section as it stood at the material time reads :
"215. Interest payable by assessee
(1). Where, in any financial year, an assessee has paid advance tax under s. 212 on the basis of his own estimate and the advance tax so paid is less than seventy-five per cent. of the assessed tax, simple interest at the rate of twelve per cent. per annum from the 1st day of April, next following the said financial year upto the date of the regular assessment shall be payable by the assessee upon the amount by which the advance tax so paid falls short of the assessed tax.
(2) Where before the date of completion of a regular assessment, tax is paid by the assessee under s. 140A or otherwise -
(i) interest shall be calculated in accordance with the foregoing provision upto the date on which the tax is so paid; and
(ii) thereafter, interest shall be calculated at the rate aforesaid on the amount by which the tax as so paid (in so far as it relates to income subject to advance tax) falls short of the assessed tax.
(3) Where as a result of an order under s. 154 or s. 155 or s. 250 or s. 254 or s. 260 or s. 262 or s. 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.
(4) In such cases and under such circumstances as may be prescribed, the ITO may reduce or waive the interest payable by the assessee under this section.
(5) In this section and ss. 217 and 273, "assessed tax" means the tax determined on the basis of the regular assessment (reduced by the amount of tax deductible in accordance with the provisions of ss. 192 to 194, s. 194A, s. 194C, s. 194D and s. 195) so far as such tax relates to income subject to advance tax and so far as it is not due to variation in the rates of tax made by the Finance Act enacted for the year for which the regular assessment is made."
Sub-s. (3) of s. 215 was substituted by the Taxation Laws (Amendment) Act, 1984 w.e.f. 1st April, 1985 by the following :
"(3) Where as a result of an order under s. 147 or s. 154 or s. 155 or s. 250 or s. 254 or s. 260 or s. 262 or s. 263 or s. 264, the amount on which interest was payable under sub-s. (1) 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 ITO shall serve on the assessee, 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 s. 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."
It is clear from a reading of s. 215 of the Act as it stood at the material time that, prior to the substitution of sub-s. (3) thereof w.e.f. 1st April, 1985, there was no provision for enhancement of the amount of tax payable by the assessee as a result of subsequent orders of the higher authorities. Provision was made to that effect from 1st April, 1985. Sub-s. (3) of s. 215 of the Act as it stood prior to 1st April, 1985 provided only for reduction of the amount of the interest charged under s. 215 of the Act in the event of the quantum of income assessed and tax payable having been reduced as a result of further proceedings under the Act. In the absence of this provision, even reduction would not have been possible. However, sub-s. (3) did not provide for enhancement of interest as a result of any proceedings under the Act. This clearly indicates that interest payable under s. 215(1) has to be calculated only with reference to the amount of shortfall determined in the original order of assessment and increase in the tax liability of the assessee as a result of any subsequent order of any higher authority would not affect the amount of interest payable under the said section. This position now stands well settled by the decision of the Supreme Court in Modi industries Ltd. vs. CIT (supra). In that case, the Supreme Court held that the expression "regular assessment" appearing in sub-s. (1) of s. 215 means and refers to the original assessment made under s. 143/144 only. Referring to s. 215 of the Act, it was observed (at p. 788) :
"(D) The legislative intent is apparent from the provisions dealing with interest payable by the assessee (ss. 215, 216 and 217). Interest under s. 215 is payable by an assessee only when he pays advance tax under s. 212 on the basis of his own estimate. If an assessee pays advance tax pursuant to a demand made by the ITO under s. 210, the assessee has no liability to pay interest even if the payment of advance tax falls short of the tax ultimately computed to be paid. The liability to pay interest on the shortfall in payment of advance tax arises only when the amount of advance tax paid turns out to be less than seventy five per cent. of the tax determined on the basis of assessment after some statutory adjustments. The interest on the deficient amount will have to be paid from the 1st April of the appropriate financial year to the date of the regular assessment. Here also, the interest will not run beyond the date of the assessment order. If, upon making an assessment, the ITO finds that advance tax paid is less than seventy-five per cent. of the tax due from the assessee after making the statutory adjustment, then he will serve a notice of demand on the assessee, calling upon him to pay tax due, to be paid by him. Thereafter, the tax will be recovered in accordance with the provisions of Chapter XVII-D collection and recovery (ss. 220 to 231). If there is any delay in payment of the tax, the assessee may be liable to pay interest under sub-s. (2) of s. 220. These provisions go to show that once an assessment order is made, liability to pay interest on the amount of the shortfall in payment of advance tax ceases under s. 215.
(E) The provisions of sub-s. (3) of s. 215 are also of great significance in this connection. If the amount of advance tax, which was found deficient and on which interest was payable under s. 215(1) by the assessee is reduced as a result of an order of rectification, appeal or revision etc., the interest shall be reduced accordingly and the excess interest paid, if any, shall be refunded to the assessee. This provision is significant in two ways :
(1) It was necessary to introduce the provisions of sub-s. (3) because "regular assessment" in sub-s. (1) of s. 215 only meant the first assessment made in regular course by the ITO. Prior to the insertion of sub-s. (3), the amount of interest charged under s. 215 could not have been reduced as a result of any further proceedings under the Act whereby the quantum of assessment and consequently the tax payable stood reduced.
(2) The other point of significance is that sub-s. (3) only speaks of reduction of interest when the amount on which interest was payable has been reduced. It does not deal with the situation where the amount on which interest was payable has been enhanced as a result of an order of rectification, appeal or revision. This can only mean the interest payable under s. 215(1) has to be calculated only with reference to the original order of assessment. The amount of shortfall determined in the original order of assessment will be the basis for levying interest. If the tax liability is increased as a result of any subsequent order of a higher authority, further interest under s. 215 need not be paid by an assessee because the liability had crystallised on the date of assessment."
It was held (at p. 789) :
"If the assessment is enhanced by any subsequent proceeding, the liability to pay interest is not increased, but by virtue of the provisions of sub-s. (3) of s. 215 .... there is a reduction in the amount of tax payable by the assessee subsequent to the assessment order, the assessee will get the benefit of that and interest will be reduced accordingly."
The Supreme Court also referred to sub-s. (3) of s. 215 which provides for reduction of interest in the event of reduction of the tax payable as a result of an order in subsequent proceedings and observed :
"If "regular assessment" is to be understood as revised assessment, then it was not necessary to introduce sub-s. (3) in s. 215. Sub-s. (3) only deals with the situation where the assessed tax has been reduced because of further proceedings. The interest payable by the assessee will have to be reduced in such circumstances. But, if the assessment is enhanced, the assessee will not be required to pay a larger amount of interest, because the amount of shortfall has to be computed on the date of the assessment on the basis of the tax determined in the regular assessment. If regular assessment is understood in the wide sense of revised assessment, then in a case of enhancement of assessment, the assessee will have to pay a higher amount of interest over a longer period of time. That is not the implication of the provisions of sub-s. (1) of s. 215 and that has not been specifically provided by sub-s. (3)."
The Supreme Court summed up its judgment by saying that the expression "regular assessment" has been used in no other sense than the first order of assessment passed under s. 143 or s. 144. If any consequential order has to be passed by the ITO to give effect to an order passed by the higher authority, that consequential order cannot be treated as the regular assessment. This position, however, has been changed w.e.f. 1st April, 1985 by substitution of sub-s. (3) of s. 215 as a result of which the quantum of interest payable under s. 215 would depend upon the quantum of tax payable on final determination in appeal, revision or any other proceedings.
It is clear from the above decision of the Supreme Court that interest can be levied under sub-s. (1) of s. 215 only on the basis of the amount of tax payable as per the regular assessment and for the period prior to 1st April, 1985, the interest levied under s. 215(1) even cannot be enhanced in the event of the amount of tax payable by the assessee as per original assessment having been enhanced as a result of subsequent proceedings.
In view of the above, it is clear that the CIT was not correct in holding that interest under s. 215 of the Act could be levied in a consequential order passed with a view to giving effect to the order of the CIT under s. 263 of the Act with reference to the tax determined as payable on the basis of such revised order of assessment.
In the result, this writ petition is allowed. The impugned order of the IAC dt. 9th June, 1983, levying interest under s. 215(1) of the Act on the basis of the amount of tax determined as payable on the basis of the revised assessment order and the impugned order of the CIT confirming the same are set aside. Rule is accordingly made absolute in terms of prayer cl. (a) with no order as to costs.