Commissioner of Income Tax vs Vepalodai Salt Corpn.

Srinivasan, J.—This case arises on a reference made pursuant to a direction by this Court u/s 256(2) of the income tax Act, 1961 (''the Act''). In an appeal against the assessment, the assessee who is a registered firm contended that the income derived from production of salt should be exempted u/s 10(1) of the Act, as it would amount to agricultural income. That contention was negatived by all the authorities including the Tribunal.

The ITO had levied interest u/s 139 of the Act, for belated filing of the return by the assessee.

When the levy of interest was challenged before the AAC at the time of the hearing of the appeals, the AAC held that an appeal against levy of interest was not maintainable and rejected the contentions raised by the assessee. At the time of the hearing of the appeals by the Tribunal, the assessee filed additional grounds contesting the levy of interest.

The Tribunal held that even though an order u/s 139(1) of the Act, levying interest was not as such appealable, the levy of interest could be contested in an appeal filed against the assessment order. The Tribunal took the view that the levy of interest u/s 139(1) could be sustained only when there was an application for extension of time in the prescribed manner under the said section. Ultimately, the Tribunal directed the ITO to examine all the aspects referred to in the order of the Tribunal and disclosed (sic) of the additional grounds filed before the Tribunal with regard to the levy of interest u/s 139. In the result, the appeals were allowed by the Tribunal to that extent and the matter was remanded to the ITO with reference to the levy of interest.

After the application for reference was dismissed by the Tribunal, the department filed an application u/s 256(2) in this Court which was ordered directing the Tribunal to refer the following questions of law:

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the assessee could dispute the levy of interest u/s 139 of the income tax Act, 1961, for the belated filing of return of income in an appeal filed against the assessment?

Whether, on the facts and in the circumstances of the case, in the event of the answer to the first question being in the affirmative, the Tribunal could direct the ITO to examine the claim of the assessee in accordance with rule 117A of the income tax Rules, 1962?

Whether the view of the Tribunal that the levy of interest u/s 139(1) could be sustained only if the assessee had made an application for extension of time before the ITO is correct?

As regards question No. 1, the matter is governed by the decision of the Supreme Court in Central Provinces Manganese Ore Co. Ltd. Vs. Commissioner of Income Tax, . The Supreme Court has held that in an appeal against the assessment, the levy of interest could also be challenged. The relevant observations of the Supreme Court are as follows:

Now, the question is whether orders levying interest under sub-section (8) of section 139 and u/s 215 are appealable u/s 246 of the income tax Act. Clause (c) of section 246 provides an appeal against an order where the assessee denies his liability to be assessed under the Act or against any assessment under sub-section (3) of section 143 or section 144, where the assessee objects to the amount of income assessed or to the amount of tax determined or to the amount of loss computed or to the status under which he is assessed. Inasmuch as the levy of interest is a part of the process of assessment, it is open to an assessee to dispute the levy in appeal provided he limits himself to the ground that he is not liable to the levy at all....

The learned counsel for the revenue urged that the appeal before the Tribunal with reference to interest was confined to the quantum and not to the levy itself. The learned counsel based his submission on the fact that the Tribunal had directed the ITO to consider the matter under rule 117A of the income tax Rules, 1962 (''the Rules''). According to the learned counsel, rule 117A provides for reduction or waiver of interest and if the grounds of appeal before the Tribunal related to the levy as such, the Tribunal would not have had any occasion to refer to rule 117A. We cannot agree with this contention of the learned counsel. The relevant discussion of the subject in the order of the Tribunal commences with the following sentence:

The appellant has filed additional grounds of appeal contesting the levy of interest u/s 139....

This makes it clear that the additional grounds raised by the assessee related to the levy of interest as such and not merely to the quantum thereof. It is clear from the order of the AAC that the assessee had contested levy of interest itself before him. Hence, the contention urged by the learned counsel for the revenue that the appeal before the Tribunal was confined to the quantum of interest and not to the levy as such has to be rejected. Once that contention is rejected, question No. 1 has to be answered in the affirmative and against the revenue.

Question No. 2 even as it is framed depends on the answer given to question No. 1. As question No. 1 has been answered against the revenue, question No. 2 is also answered against the revenue.

Question No. 3 arises on account of the following observations made by the Tribunal in its order:

...The levy of interest u/s 139(1) can be sustained only when the appellant has made an application for extension of time in the prescribed manner and while extending time in interest has been levied as provided under the proviso to section 139(1).

There is no warrant for the observation made by the Tribunal in view of the language of the relevant provisions in section 139(1). Interest is leviable u/s 139(8). Whenever there is a delay in filing the return, the assessee shall be liable to pay interest at the prescribed rate u/s 139(8). The proviso to section 139(8) gives a discretion to the ITO to reduce or waive the interest payable by the assessee under the said sub-section under such circumstances as may be prescribed. Those circumstances have been prescribed in rule 117A of the income tax Rules, 1962. The proviso to section 139(1) provides for an application in the prescribed manner for extension of time for furnishing the return. The said proviso makes it clear that notwithstanding the extension granted on an application made in the prescribed manner, interest shall be chargeable in accordance with the provisions of sub-section (8) of section 139. That would not mean that whenever there is no application for extension of time, the assessee will not be liable for interest. Whether there is an application for extension or not, the liability for payment of interest arises u/s 139(8) if there is a delay in filing the return. This position is recognised by the Supreme Court in the decision in Ganesh Dass Sreeram v. ITO (1987) 35 Taxman 36A. It is useful to refer to the following observations:

The substantive provision of sub-sections (1) and (2) of section 139 specify the time within which the return has to be filed. The provisos to sub-sections (1) and (2) confer power on the ITO to extend the date for filing the return on an application in that regard made by the assessee. So, it is clear that the expression ''time allowed'' in sub-section (4) of section 139 is not confined only to the extension of time granted by the ITO but also to the time originally fixed for the filing of returns under sub-sections (1) and (2) of section 139.

There may be two types of cases in the late filing of returns, namely (1) the assessee, after getting the date extended by the ITO under sub-section (1) or sub-section (2) of section 139 does not file the return within the extended date, but filed the same before the end of the four assessment years concerned; and (2) the assessee, without filing any application for extension of time, files the return beyond the period mentioned in sub-section (1) or sub-section (2) but before the end of the four assessment years in question. In either case, the provision of clause (iii) or the proviso to sub-section (1) of section 139 will apply. In other words, the ITO will be entitled to charge interest on the amount of tax in accordance with the provision of clause (iii) of the proviso to sub-section (1) of section 139. Thus, where time has been extended by the ITO on an application made in that regard by the assessee and the assessee does not file the return within the time allowed and where no such application has been made by the assessee, but the return is filed by him beyond the time allowed, but before the end of the four years concerned, in either case, the ITO will be entitled to charge interest in accordance with the provision of clause (iii) of the proviso to sub-section (1) of section 139. There is, therefore, no substance in the contention of the appellants that as the appellants had not made any application praying for the extension of time for the filing of returns, the ITO had no authority to charge interest under the provision of clause (iii) of the proviso to sub-section (1) of section 139. Hence, question No. 3 has to be answered in the negative and in favour of the revenue. Thus, question Nos. 1 and 2 are answered against the revenue and question No. 3 is answered in favour of the revenue. There will be no order as to costs.