Commissioner of Income Tax vs Sukhjit Starch and Chemicals Ltd.

G.S. Singhvi, J.—This is a petition u/s 256(2) of the Income Tax Act, 1961 (for short, "the Act"), for directing the Income Tax Appellate Tribunal, Amritsar Bench, Amritsar (for short, "the Tribunal"), to draw up the statement of case and refer the following questions to this court for its opinion :

"(1) Whether, on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was right in law in deleting the interest charged u/s 216 levied in this case for underestimating the advance tax thereby reducing the amount payable in the first two instalments ?

(2) Whether, on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was right in law in holding that in cases where assessments are framed u/s 143(1) and not u/s 143(3) interest u/s 216 is not chargeable for deficient payment in the first two instalments ?"

The facts of the case are that for the accounting period ending on December 31, 1987 (relevant to the assessment year 1988-89), the petitioner filed a return on June 28, 1988, declaring an income of Rs. 73,79,650. While framing the assessment u/s 143(1) of the Act, the Assessing Officer noticed that the assessee had paid total advance tax of Rs. 38,75,000 during the year out of which the first two instalments were only of Rs. 5,00,000 each- He felt that the assessee had estimated the advance tax by reducing the amount payable in the first two instalments and, therefore, charged interest amounting to Rs. 80,832 u/s 216 of the Act. The Commissioner of Income Tax (Appeals), Jalandhar (for short, "the CIT (Appeals)"), partly accepted the appeal of respondent No. 1 and directed that interest u/s 216 be charged in respect of the shortfall with reference to the assessed tax. The assessee as well as the Revenue preferred appeals against the order dated September 11, 1989, passed by the Commissioner of Income Tax (Appeals). The Tribunal disposed of both the appeals by a common order dated November 11, 1994. It dismissed the appeal of the Revenue, but allowed the one filed by the assessee resulting in quashing of the levy of interest u/s 216. Paragraphs 5 and 6 of the Tribunal''s order, which contain the reasons for quashing the levy of interest, read as under :

"We have considered the rival submissions. A plain reading of Section 216 of the Income Tax Act, 1961, makes it dear that interest cannot be levied under that section unless the Income Tax Officer finds that the assessee had underestimated the advance tax payable by him. Payment of interest is mandatory under the provisions of Sections 215 and 217 of the Income Tax Act, 1961. On the other hand, the levy of interest u/s 216 is discretionary. The question of exercising discretion would arise only when the Income Tax Officer finds that the assessee had underestimated the advance tax payable by it. The term ''underestimate'' indicates that the Income Tax Officer must find that the assessee had made too low an estimate. The estimate can be said to be an ''underestimate'' if it is deliberate or intentional. Such a finding of an ''underestimate'' cannot be made without appreciation of the facts, which are pleaded or which are available on record and such a finding can be given only when an order is passed u/s 143(3) and not in an order passed u/s 143(1).

Accordingly, we will hold that no interest was chargeable u/s 216 because the Assessing Officer had failed to record a finding that there had been an ''underestimate'' of advance tax by the assessee. We may point out that considering the fact that order passed u/s 216 is appealable and also that penalty is imposable for an intentional false estimate, the word ''may'' used in Section 216 cannot be construed as ''shall'' ".

The Revenue filed a reference application u/s 256(1) of the Act. The same was dismissed by the Tribunal vide order dated June 5, 1995, with the following observations :

"The proposed question No. 1 presumes that the interest u/s 216 has been levied for underestimating the advance tax and thereby reducing the amount payable in the first two instalments in this connection, it is relevant to note the findings of the Tribunal recorded in para. 6 as under :

''6. Accordingly, we will hold that no interest was chargeable u/s 216 because the Assessing Officer had failed to record a finding that there had been an underestimate of advance tax by the assessee . . .''.

Thus the proposed question No. 1 does not arise out of the order of the Tribunal.

The proposed question No. 2 is merely academic in view of the clear finding of fact recorded by the Tribunal in para. 6 reproduced above. Even otherwise, the answer to the second question is self-evident as there could be possibly no debate on the proposition that no judicial finding based on enquiry and application of mind can possibly be recorded in an order passed u/s 143(1), which is made on the basis of the assessee''s return without any enquiry or discussion with the assessee, wherein the income returned can never be altered except by making prima facie adjustments of an arithmetical nature. Accordingly, we are of the opinion that both the questions as prayed for by the learned Commissioner, are not referable to the High Court. Accordingly, the reference application filed by the Revenue is dismissed."

Shri R.P. Sawhney, senior advocate appearing for the Revenue, argued that even though the order passed by the Assessing Officer does not contain a finding that the assessee had underestimated income for the purpose of advance tax, he was justified in charging interest u/s 216 because the assessee had deliberately filed an incorrect return of estimated income. Learned counsel submitted that the assessee was aware of the income of the previous year and, therefore, the estimate of income for the purpose of advance tax should have been filed on that basis which it had failed to do. He further argued that the plea raised by the assessee before the Tribunal was contrary to the one raised before the Commissioner of Income Tax (Appeals) and, therefore, the former had committed a serious illegality by deleting the interest. Shri Sawhney also submitted that the decision of the Gujarat High Court in Commissioner of Income Tax Vs. Nagri Mills Ltd., relied upon by the Tribunal does not lay down the correct law and, therefore, the reference sought by the Revenue may be granted.

Shri S.C. Nagpal referred to Section 216 of the Act and argued that without recording a finding of underestimation of income, the Assessing Officer cannot levy interest under that section. He then referred to the order of assessment dated November 7, 1988, to show that the Assessing Officer did not even make a mention of underestimation of income and submitted that without doing so, he could not have levied interest u/s 216. Shri Nagpal submitted that the judgment of the Gujarat High Court in the case of Commissioner of Income Tax Vs. Nagri Mills Ltd., lays down the correct law.

We have considered the respective submissions. In our opinion, the Tribunal has correctly interpreted Section 216 and the orders passed by it do not give rise to any question of law requiring determination by this court. A reading of Section 216 shows that recording of a finding that the assessee had underestimated the income is sine qua non for levy of interest. The question as to whether such underestimation should be actuated by ulterior motive need not detain us because a bare perusal of the order passed by the Assessing Officer shows that instead of directing his attention to the requirement of Section 216, the Assessing Officer proceeded to levy interest by assuming that it was a case of underestimation of income. In our opinion, the power u/s 216 of the Act cannot be exercised by the Assessing Officer on pure imagination and conjecture as was done in the present case. Therefore, we have no hesitation to hold that the levy of interest was totally unwarranted and unjustified and the order passed by the Tribunal quashing the levy of interest does not suffer from any legal infirmity giving rise to a question of law.

For the reasons mentioned above, we hold that neither of the questions of law sought by the Revenue arise in this case and the petition is liable to be dismissed. Ordered accordingly.