COMMISSIONER OF Income Tax vs LANKASHI TEA and SEED ESTATE (P) LTD.

D. N. BARUAH, J. :

At the instance of the Revenue, the following question has been referred under s. 256(1) of the IT Act, 1961, for the opinion of this Court :

"Whether, on the facts and in the circumstances of the case and in proper appreciation of the law enumerated in s. 216 of the IT Act, 1961, the Tribunal has erred in sustaining the CIT(A) decision cancelling the interest charged under s. 216 of the IT Act, 1961, when advance tax was underestimated by reason of the underestimation of the assessees current income as compared to the final income actually ascertained at the end of the year ?"

The assessee is a company incorporated under the Companies Act, 1956. It owns a tea estate. As per the assessment made by the assessing authority, the assessee was to pay the first and the second instalment of tax at the rate of Rs. 45,158, but the assessee furnished the statement of advance tax showing advance tax payable to be nil. For the second instalment also it furnished advance tax payable at Rs. 35,475 only. According to the AO the assessee did not pay the two instalments of advance tax at the rate of Rs. 45,158 and deferred the date of payment also. So, the AO, after giving opportunity of being heard to the assessee, imposed interest under s. 216 of the Act for a sum of Rs. 5,210. Similarly, for the subsequent year, i.e., 1983-84, as per the assessed tax, the assessee was to pay the first and second instalments at the rate of Rs. 37,583, but the assessee paid Rs. 15,034 and Rs. 15,033 only, respectively. The assessee did not pay these instalments on the due dates. For these reasons, the assessing authority imposed interest at Rs. 2,400.

For the asst. yr. 1984-85 also, the assessee was to pay Rs. 84,000 by way of advance tax as the first and second instalments but the assessee paid Rs. 37,583 in each instalment. The assessee also did not pay these instalments on the due date and deferred the payment of these instalments. For this assessment year also, the AO, after giving opportunity of being heard to the assessee, levied interest at Rs. 6,498 under s. 216 of the Act.

The assessee took up the matter before the CIT(A), who, after considering the fact, held that interest under s. 216 was not rightly imposed. The Revenue approached the Tribunal, which also upheld the decision of the CIT(A). Hence, the present reference.

We have heard Mr. Joshi, learned standing counsel, appearing for the Revenue, and Dr. Saraf, learned counsel appearing on behalf of the assessee.

Mr. Joshi submits that interest has been levied rightly by the AO under the provisions of s. 216 of the Act when the advance tax paid was far below the income. Therefore, it was improper on the part of the CIT(A) as well as the Tribunal to set aside the order passed by the assessing authority. Dr. Saraf, on the other hand, submits that mere underestimation is not enough for the purpose of interest. There must be something to show that this underestimation was with a view to pay reduced tax. Sec. 216 of the Act provides for imposition of interest in case of underestimation. Sec. 216 is quoted below :

"216. Interest payable by assessee in case of underestimate, etc. - Where, on making the regular assessment, the AO finds that any assessee has -

(a) under s. 209A or s. 212 underestimated the advance tax payable by him and thereby reduced the amount payable in either of the first two instalments; or

(b) under s. 213 wrongly deferred the payment of advance tax on a part of his income.

he may direct that the assessee shall pay simple interest at fifteen per cent per annum - (i) in the case referred to in cl. (a), for the period during which the payment was deficient, on the difference between the amount paid in each such instalment and the amount which should have been paid, having regard to the aggregate advance tax actually paid during the year; and

(ii) in the case referred to in cl. (b), for the period during which the payment of advance tax was so deferred.

Explanation. - For the purposes of this section, any instalment due before the expiry of six months from the commencement of the previous year in respect of which it is to be paid shall be deemed to have become due fifteen days after the expiry of the said six months."

Going though s. 216 it is very clear that when the AO finds that any assessee has underestimated the advance tax payable by him and thereby reduces the amount payable in either of the first two instalments, he may direct that the assessee shall pay simple interest at fifteen per cent per annum.

Therefore, mere underestimation may not always attract imposition of interest. It must be with a view to reduce the amount of tax payable. The provisions of ss. 215 and 216 are different. Under s. 215 charging of interest is mandatory, whereas under s. 216 the charging of interest is discretionary. Interest is charged only when the AO is satisfied that such underestimation was only with a view to reduce the tax. Thereby it also means that there must be deliberate action on the part of the assessee of underestimation. Therefore, it is the duty of the AO to ascertain whether the assessee underestimated the income deliberately with a view to pay reduced tax. In this connection, reference can be made to a decision of this Court in Commissioner of Income Tax Vs. Namdang Tea Co. India Ltd., This Court held thus :

"We will assume for the purpose of the present discussion that there was an underestimation in determining the advance tax payable. Sec. 216 does not make it mandatory for the AO to charge interest in all cases of underestimation. The scheme of the provision is quite different from the scheme in s. 215 where the liability for interest is mandatory. Under s. 216, it is within the discretion of the assessing authority to charge or not to charge interest. He may charge interest if the underestimation was of such a nature and under such circumstances that it has to be regarded as devoid of bona fides."

Mr. Joshi, learned counsel for the Revenue, has drawn our attention to a decision of the Bombay High Court in Oudh Sugar Mills Ltd Vs. Commissioner of Income Tax, Relying on the said decision Mr. Joshi submits that interest can be charged under s. 216 of the Act when there is or has been underestimation of advance tax payable due to underestimation of correct income.

We are in full agreement in respect to the above proposition. But underestimation may be caused for various reasons. In the same judgment, it is held thus :

"It is difficult to accept the contention of the assessee that in order to decide whether there is any underestimation of advance tax for the purpose of levy of interest under s. 216, one should not take into account any underestimation of current income by the assessee. The estimation of advance tax under s. 212(3A) is dependent on the estimation of current income. Therefore, it is not possible, artificially, to sever the two. Undoubtedly, there may also be other reasons for underestimation of advance tax such as an error in calculation or taking into account certain deductions which may be erroneous and so on. But s. 216 refers to underestimation of advance tax under sub-ss. (1), (2), (3) and (3A) of s. 212. It does not limit such underestimation of advance tax to underestimation for reasons other than underestimation of current income."

From the above also, it is clear that the underestimation by itself is not sufficient. The Allahabad High Court in Commissioner of Income Tax Vs. Elgin Mills Co. Ltd., has held that furnishing of underestimation should be deliberate.

In view of the above position, we are of the opinion that mere underestimation is not sufficient to burden the assessee with interest under s. 216 of the Act. It must be the duty of the AO or for that matter the appellate authorities, namely, the CIT(A) and the Tribunal, to look into the facts of the case and see that underestimation was made deliberately just to reduce the burden of tax. The AO, however, did not give any reason that the underestimation was not bona fide. The CIT(A) and the Tribunal having not found anything on record rightly set aside the order passed by the AO.

In view of the above, we are of the opinion that the Tribunal was justified in sustaining the decision of the CIT(A) under s. 216 of the Act. Accordingly, we answer the question in the negative and in favour of the assessee and against the Revenue.