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Judgment
Chinnappa Reddy, J.—The respondent-assessee, a HUF, did not submit its return of income for the assessment year 1962-63 within the prescribed period. By his order dated August 31, 1966, the ITO assessed the respondent to tax of Rs. 19,751.95. By the same order, he directed payment of interest of Rs. 3,647''54 u/s 139 of the I.T. Act, 1961. The assessee preferred an appeal to the AAC against the levy of interest only. The appeal was dismissed as not maintainable. On further appeal, the Income Tax Appellate Tribunal held that the appeal was maintainable and directed the AAC to dispose of the appeal on merits. At the instance of the Commissioner of Income Tax, the following question has been referred to us u/s 256(1) of the I.T. Act, 1961 :
"Whether the assessee''s appeal to the Appellate Assistant Commissioner against the interest levied on it u/s 139(1)(iii)(b) of the Income Tax Act, 1961, was maintainable in terms of Clause (c) of Section 246 of the Act?"
Now, under the third clause of the proviso to Section 139(1), an ITO is invested with the discretion to extend the time for furnishing the return beyond the dates mentioned in Clauses 1 and 2, in which case, interest at nine per cent, per annum shall be payable from the first of October or the first of January, as the case may be, of the assessment year to the date of the furnishing of the return on the amount of tax payable on the total income. On the submission of a return within the extended period, the ITO has to proceed to make an order of assessment u/s 143. After completing the assessment and determining the amount of tax, the ITO then levied the interest payable under the third clause of the proviso to Section 139(1). Section 246 of the Act makes no express provision for an appeal against the levy of interest u/s 139. But, according to the respondent, the interest levied must also be considered to be " tax " and an appeal would lie u/s 246(c) which provides for an appeal against an order against an assessee if the assessee objects to the amount of tax determined.
In several cases arising under the Indian I.T. Act of 1922, it was held by the High Courts of Andhra Pradesh, Bombay, Madras and Allahabad that no appeal lay u/s 30 of that Act against the levy of interest u/s 18A(6). Vide Boddu Seetharamaswamy Vs. Commissioner of Income Tax, Madras, , Commissioner of Income Tax, Bombay City Vs. Jagdish Prasad Ramnath, , Deo Sharma Vs. Commr. of Income Tax, U.P., Lucknow, and South India Flour Mills Private Ltd. Vs. Central Board of Direct Taxes, New Delhi, and Others, . In the Andhra Pradesh case, Subba Rao C.J. said (p. 160):
"The imposition of penal interest mentioned in Section 18A(6) is not a part of the process of assessment of the income of the assessee. Penal interest is imposed only to compel an assessee not to underestimate his income during the current year. A special procedure is prescribed for imposing it and that is regulated by Section 18A(6) of the Act. Under that section, the penal interest imposed u/s 18A(6) is added to the tax determined u/s 23. The fact that the interest is added to the tax determined u/s 23 brings out the distinction between the tax determined and the penal interest imposed. Section 29 enables the Income Tax Officer to collect the total amount, i. e., the tax and the penal interest, in the same manner. To put it shortly, the adding of interest to the tax is only for the purpose of facilitating the collection of the entire amount found due from the assessee. This will not make the penal interest the amount of income assessed u/s 23. As the order imposing penal interest is not an order assessing the income u/s 23, it follows that no appeal lies u/s 30."
In the Bombay case, Chagla C.J., after pointing out that the I.T. Act drew a well founded distinction between tax, penalty and penal interest, observed that if an appeal merely raised the question of liability to pay penal interest, then the appeal would not be maintainable. He explained the reason for the failure to provide for an appeal as follows (p. 199) :
"Therefore, the scheme of the Act is that penal interest must follow upon the regular assessment; the appeal should be against the regular assessment and in the regular assessment, it should be open to the assessee to take all points which may legitimately not only reduce the taxable income or the tax to be paid or with regard to the proper head under which the income should fall but also reduce the quantum of penal interest and the Legislature having provided for this in the regular appeal itself did not think it necessary that a separate right of appeal should be given to the assessee to appeal against the quantum of penal interest."
These cases show that interest is not tax or additional tax and, therefore, an order levying interest is not appealable. However, Sri B.C. Jain, learned counsel for the assessee, contended that these decisions are not good law in view of the observations of their Lordships of the Supreme Court in certain cases to which I shall now refer.
In C.A. Abraham, Uppoottil, Kottayam Vs. The Income Tax Officer, Kottayam and Another, , the Supreme Court considered the question whether penalty u/s 28 of the 1922 Act could be levied on a partner of a dissolved firm by virtue of the provisions of Section 44 of that Act which enabled the assessment of a partner of a dissolved firm in respect of the income of the dissolved firm. The Supreme Court held that it could be done since the expression " assessment " included not merely the computation of income but the declaration and imposition of the tax liability and the machinery for enforcement thereof. It held that the levy of penalty u/s 28 was part of the machinery for assessment of tax liability. The Supreme Court, while considering the question, made these observations (p. 430):
"By Section 28, the liability to pay additional tax which is designated as penalty is imposed in view of the dishonest and contumacious conduct of the assessee. It is true that this liability arises only if the Income Tax Officer is satisfied about the existence of the conditions which give him jurisdiction and the quantum thereof depends upon the circumstances of the case. The penalty is not uniform and its imposition depends upon the exercise of discretion by the taxing authorities ; but it is imposed as a part of the machinery for assessment of tax liability."
In Commissioner of Income Tax, Andhra Pradesh Vs. Bhikaji Dadabhai and Co., , the question arose whether the Finance Act of 1950, which repealed the provisions of the Hyderabad Income Tax Act save those relating to "levy, assessment and collection of income tax", saved the provisions relating to levy of penalty. The Supreme Court held that the provisions relating to levy of penalty were also saved and referring to C.A. Abraham, Uppoottil, Kottayam Vs. The Income Tax Officer, Kottayam and Another, , observed (p. 128) :
"This court regarded penalty as an additional tax imposed upon a person in view of his dishonest or contumacious conduct. It is true that under the Hyderabad Income Tax Act, distinct provisions are made for recovery of tax due and penalty, but that in our judgment does not alter the true character of penalty imposed under the two Acts."
In Mathuradas B. Mohta Vs. Commissioner of Income Tax, Poona, , the Bombay High Court thought that the ratio of these two decisions was that whatever addition was made in the amount of tax by reason of the provisions of the Act which formed part of the machinery for assessment of tax liability was a tax.
We do not think that we will be justified in interpreting the observations of the Supreme Court made in other contexts as laying down a broad proposition equating "penalty" and "penal interest" with "tax". The concepts of "tax", "penalty" and "penal interest" are too well known for that. It is one thing to say that the levy of "penalty" and "penal interest" is part of the process of the assessment; it is quite a different thing to equate "penalty" and "penal interest" with "tax". In a later case, the Supreme Court itself explained their observations in C.A. Abraham, Uppoottil, Kottayam Vs. The Income Tax Officer, Kottayam and Another, . In Commissioner of Income Tax, West Bengal I, and Another Vs. Anwar Ali, , dealing with an argument that there was no difference between tax and penalty, they said (p. 700 of 76 ITR) :
"The justification of this view was founded on certain observations in C.A. Abraham, Uppoottil, Kottayam Vs. The Income Tax Officer, Kottayam and Another, . It is true that penalty proceedings u/s 28 are included in the expression ''assessment'' and the true nature of penalty has been held to be additional tax, But one of the principal objects in enacting Section 28 is to provide a deterrent against recurrence of default on the part of the assessee. The section is penal in the sense that its consequences are intended to he an effective deterrent which will put a stop to practices which the Legislature considers to he against the public interest. It is significant that in C.A. Abraham, Uppoottil, Kottayam Vs. The Income Tax Officer, Kottayam and Another, , this court was not called upon to determine whether penalty proceedings were penal or of quasi-penal nature and the observations made with regard to penalty being an additional lax were made in a different context and for a different purpose."
We do not, therefore, read the observations of the Supreme Court in C.A. Abraham, Uppoottil, Kottayam Vs. The Income Tax Officer, Kottayam and Another, and Commissioner of Income Tax, Andhra Pradesh Vs. Bhikaji Dadabhai and Co., , as overruling the view taken in the series of decisions to which we referred earlier. We, therefore, hold that the appeal to the AAC was not maintainable. The question referred to us is answered accordingly. The Commissioner of Income Tax will get his costs from the assessee which we fix at Rs. 250.
R. C. Nos. 75 and 76 of 1969 :
These two cases raise the same questions as R. C. No. 74 of 1969. The question is answered as R. C. No. 74 of 1969. The Commissioner will get his costs from the assessee which we fix at Rs. 250 in each case.