Full Judgment Text
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PETITIONER:
INCOME TAX OFFICER ’A’ WARD, INDORE
Vs.
RESPONDENT:
GWALlOR RAYON SILK MANUFACTURING (WEAVING) co.LTD., BIRLAGRA
DATE OF JUDGMENT18/09/1975
BENCH:
FAZALALI, SYED MURTAZA
BENCH:
FAZALALI, SYED MURTAZA
KRISHNAIYER, V.R.
CITATION:
1976 AIR 43 1976 SCR (1) 855
ACT:
Income tax Act, 1961-Section 220(2) and (3)-Scope of-
Rate of interest on arrears of tax fixed by the Act-Assessee
agrees to pay higher rate of interest-Whether Income tax
officer had power to accept-Upward revision of rate of
interest by the Finance Act-If assessee could claim to pay
only the rate agreed but not the rate fixed by the Finance
Act.
HEADNOTE:
Sub-section (2) of 9. 220 of the Income-tax Act. 1961
makes an assessee liable to pay simple interest at 4% p.a.
if the amount specified in any notice of demand under s. 156
was not paid within the period limited under sub-s. (1).
Sub-section (3) states that without prejudice to the
provisions contained in sub-s. (2) on an application made by
the assessee before the expiry of the due date under sub-s.
(1) the Income-tax officer may extend the time for payment
or allow payment by instalments, subject to such conditions
as he may think fit to impose in the circumstances of the
case.
Out of a large sum of money which became payable by the
respondent as income-tax, half the amount was paid and in
respect of the remaining half which was allowed to be paid
in three instalments, the respondent had under taken to pay
interest at the rate of 5% p.a. even though s. 220(2) of the
Income-tax Act, 1961 prescribed 4% as the rate of interest
payable on such arrears. The Income-tax Officer accepted the
term. By the Finance Act, 1965 the rate of interest payable
under this section was raised from 4% to 6% p.a. On receipt
of a notice from the Income-tax officer, that on the unpaid
balance of the tax arrears the company was liable to pay
interest at 6% p.a., the respondent moved the high Court
contending that it was not open to the Income-tax officer to
vary the rate from 5% to 6% even in spite of the change made
by the Finance Act, 1965, in that a vested right could not
be taken away by a statute which did not apply
retrospectively. The High Court allowed the writ petition.
On appeal to this Court it was contended by the
respondent that sub-ss. (2) and (3) of s. 220 were
independent provisions which operated in fields of their
own.
Allowing the appeal to this Court,
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^
HELD: (1) Sub-sections (2) and (3) form part of the
same section namely, s. 220 and are therefore closely allied
to each other. It is true that the two sub-sections deal
with separate issues but the non-obstante clause of sub s.
(3) clearly restricts the order passed under sub-s. (3) to
the conditions mentioned in sub-s. (2) of s. 220 of the Act.
[860 B]
(2) It is the Finance Act which fixes the rate of
interest payable under sub-s. (2) of s. 220. It is not
within the competence of the Income-tax officer to vary the
rate of interest fixed by the Finance Act under subs. (2) of
s. 220 from time to time. [860C-D]
Esthuri Aswathaiah v. Commissioner of Income fax Mysore
60 I.T.R. 411 and 416, followed.
(3) Sub-section (3) of s. 220 does not empower the
Income-tax officer to enter into any indefeasible settlement
with the assessee or to clothe the Income tax officer with
any such ,power so as to vary the statutory inhibition
contained
856
in sub-s. (2). Any order which is passed under sub-s. (3)
would be subject to the rate of interest mentioned in sub-
s. (2) and as soon as the rate mentioned in sub-s. (2) is
varied or enhanced by the legislature it would have to be
read into sub-s. (2) from the date of the amendment and any
order passed under sub-s. (3 ) would be subject to the rate
so fixed. If this is not the position then the order passed
under sub-s. (3) being prejudicial to sub-s. (2) becomes
illegal and invalid and the Income-tax officer exceeds the
limits of his jurisdiction in passing such an order. [860F-
H]
In the instant case there was no question of the
Finance Act operating retrospectively nor was there any
question of the Finance Act taking away a vested right which
had accrued to the assessee because the order of the Income-
tax officer under sub-s. (3) of s. 220 does not amount to
any final settlement or agreement. The notice had merely
given effect to the legal provisions of the Finance Act.
[861 B]
(4) In is manifest that the Income-tax officer could
not have passed any order against the statutory provisions
of sub-s. ( 2) of s. 220 either with or without the consent
of’ the assessee. Even the order of the Income-tax officer
accepting the Offer. Of the assesse to pay interest at the
rate of 5% p.a. was legally invalid because if the rate of
interest fixed by the statute was 4% the parties could not
be allowed to contract out of the statute. The only relief
which the assessee could get was to pay interest at 4% p.a.
prior to the Finance Act, 1965 and at 6% after 1st April,
1965. [861D-E]
Biswanath Ghosh v. Income-tax officer, Ward, B. and
Another 95 I.T.R. 372, 374, approved.
JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeals Nos. 76 to
80 of 1971
From the Judgment and orders dated the 17th October,
1968 of the Madhya Pradesh High Court in Misc. Petitions No.
277, 279 to 282 of 1966.
G. C. Sharma, P. L. Juneja and S. P. Nayar, for the
appellant.
S, Chowdhury, Leila Seth and U. K. Khaitan, for
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respondent.
The Judgment of the Court was delivered by
FAZAL ALI, J. These appeals are by Income-tax officer,
’A’ Ward, Indore, against the judgment of the Madhya Pradesh
High Court and involve a question of law regarding the
interpretation of s. 220 sub-ss. (2) and (3) of the Income-
tax Act, 1961. In order to understand the scope and ambit of
the question involved, it may be necessary to mention a few
facts leading to these appeals.
The respondent firm carries on the business of
manufacturing cloth. In 1947 the then Maharaja of Gwalior
granted to the firm exemption from tax for a period of
twelve years from the date when the firm started its
factories. Under the Part States (Taxation Concessions)
Order, 1950 the Commissioner of Income-tax of the region
concerned approved of the exemption only to the weaving
division of the respondent for ten years, but deferred
decision regarding the staple fibre division until the’
factory started functioning in 1954. The Commissioner was
approached again for granting exemption but he refused to do
so. The respondent thereafter moved the Hi h Court of Madhya
Pradesh for cancelling the order of the
857
Commissioner refusing exemption. The writ petition before
the High Court succeeded and the respondent’s right to
exemption was upheld by the High Court. Thereafter the
Revenue filed an appeal to this Court which was allowed and
by its order dated April 28, 1964 reported in (1964) 53
I.T.R. 466 this Court reversed the decision of the High
Court and maintained the order of the Commissioner refusing
exemption. As a result of the cancellation of; the
exemption, a huge amount of income-tax became due from the
respondent, and the provisional assessments made for the
years 1959-60 to 1965-65 reached the aggregate amount of
over Rs. 6.60 crores which was payable by the firm was
actually demanded from the respondent. In fact the effect of
the order of this Court was that the amount exempted became
payable at once and was according demanded from the
respondent but the respondent instead of paying the amount
tried to negotiate with the Revenue for certain concessions.
In this connection a series of correspondence followed
between the respondent and the Income-tax ‘Department
including a letter which was written by the assessee on
December 26, 1964 by which the assessee paid a sum of Rs. 3
crores and wanted the balance of Rs. 3.60 crores to be paid
in instalments. The assessee further undertook to pay
interest on the arrears at the rate’ of 5% per annum, even
though under sub-s (2) of s. 220 of the Income tax Act, 1961
hereinafter referred to as ’the Act he was required‘ to pay
interest at the rate of 4% only. In view of these favourable
terms offered by the assessee, the Income-tax officer
acceded to its request by his letter ‘dated January 16,
1965. The assessee had agreed to pay the arrears in the
following manner:
Rs. 1,00,00,000 by March 15, 1966.
Rs. 1,20,00,000 by March 15, 1967.
Rs. 1,34,76,000 by March 15, 1968.
Soon after the request of the assessee was granted by the
Income-tax officer, sub-s. (2) of s. 220 of the Act was
amended by the Finance Act, 1965 by which the rate of
interest was increased from 4 to 6% per annum. In view of
this amendment, the Income-tax Officer by his letter dated
January 10,1966 informed the assessee that on the unpaid
balance of tax arrears the respondent would be liable to pay
interest at the rate of 6% per annum with effect from April
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1, 1965 instead of 5% as agreed to by the Income-tax officer
in his previous letter. The Income-tax officer pointed out
that this course was necessitated in view of the amendment
made by the Finance Act, 1965. Consequently a notice of
demand under s. 156 of the Act was served on the respondent
which resulted in his filing writ petitions before the High
Court with the result mentioned above.
The main point urged in the petitions before the High
Court by the respondent was that the Income-tax officer
having acceded to the request of the assessee a settlement
between the parties was arrived at to pay the balance of
arrears at the rate of interest at 5% per annum and it was
not open to the Income-tax officer to vary that
858
rate to the prejudice of the assessee even in spite of a
change in the rate of interest by the Finance Act 1965,
because a vested right could not be taken away by a statute
which in terms did not apply retrospectively. This plea
appears to have found favour with the High Court, though not
on the ground expressly taken by the respondent. The High
Court found that in view of the notice of demand the
liability of the assessee to pay the arrears arose only
after the expiry of 35 days and this period had expired
before the Finance Act, 1965 amending s. 220(2) of the Act
and therefore the Revenue had no jurisdiction to demand
payment of the arrears at the rate of 6% interest. Thus it
would appear that the High Court actually decided the case
on a point which was not raised by the respondent in his
petition but after making out a new case made out at the
time of arguments and without giving any opportunity to the
Revenue to rebut the same. The High Court has written a
detailed judgment regarding the time as to when the
liability of the assesse to where a notice of demand under
s. 156 of the Act is issued would arise. It is, however, not
necessary for us to consider the reasons given by the High
court in detail because in the view that we take we find
that the basis on which the High Court has decided this case
is wholly irrelevant and is not at all germane to the issue
that was involved. It was not a case of a notice of demand
under s. 156 of the Act simpliciter, but the admitted
position was that in view of the decision "f the Supreme
court the respondent was in arrears of tax and had to pay
heavy amounts of over Rs. 6.6 crores. The respondent
voluntarily paid the amount of Rs. 3 crores and requested
the Income-tax officer to allow it to pay the balance in
instalments and Persuaded the Income-tax officer to accept
the request even by agreeing to pay a higher rate of
interest of 5% than the rate prescribed under s. 22()(2) of
the Act. The liability to pay the arrears was never disputed
and the only dispute between the parties was as to rate of
interest that was payable.
Section 22n, sub-ss. (’2) and (3) run thus:
"(2) If the amount specified in any notice of
demand under section 156 is not paid within the period
limited under sub-section (1), the assessee shall be
liable to pay simple interest at four per cent per
annum from the day commencing after the end of the
period mentioned in sub-section (1).
Provided that, where as a result of an order under
section 154. Or section 155, or section 250, or section
254, or section 260 or section 262, or section 264. the
amount on which inter
st was payable under this section had been reduced. the
interest shall be reduced accordingly and the excess
interest paid, if any, shall be refunded.
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(3) Without prejudice to the provisions contained
in sub section (2), on an application made by the
assessee before
859
the expiry of the due date under sub-section (1), the
Income-tax officer may extend the time for payment or
allow payment by instalments, subject to such
conditions as he may think fit to impose in the
circumstances of the case."
The fact that the arrears were demanded from the assessee is
not disputed as would appear from the statement made by the
respondent in paragraph 2 of the writ petition filed before
the High Court where it was averred thus:
"Subsequently when assessments for the assessment
years 1959-60 to 1964-65 were provisionally made, a
huge amount aggregating to over Rupees six and a half
crores became payable and was demanded from the
petitioner."
In these circumstances, therefore, the conditions precedent
to the application of subs. (2) of s. 220 of the Act were
undoubtedly fulfilled, in this case. It would be seen that
before the assessee entered into correspondence with the
Revenue, the rate of interest prescribed under sub-s. (2) of
s. 220 was only four per cent and yet the assessee offered
to pay a higher rate namely 5% per annum is he was allowed
to pay the arrears in instalments. This request of the
assessee was accepted by the Income-tax officer on January
16, 1965 when there was no amendment in the provisions
contained in s. 220(2) of the Act and the order passed by
the Income-tax officer must be construed as one made under
sub-s. (3) of s. 220 of the Act.
It was suggested before the High Court that the order
of the Income-tax officer amounted to an irrevocable
agreement which could not be varied merely because the rate
of interest contained in sub-s. (2) of s. 220 of the Act was
enhanced. Mr. S. C. Choudhry learned counsel for the
respondent, however, has fairly conceded that there was no
question of an agreement or settlement because s. 220(3)
does not empower the Income-tax officer to enter into
agreement or settlement in order to bind the Revenue. We
find ourselves in complete agreement with this view. Section
220(3) merely empowers the Income-tax officer to extend the
time for payment or allow payment by instalments on such
conditions as he may impose. In the instant case the Income-
tax officer merely exercised his powers under sub-s. (3) of
s. 220 by imposing the condition that the assessee shall be
allowed to pay the arrears by instalments if he paid
interest at the rate of 5% per annum offered by him. What is
important however, is that sub-s. (3) is not independent of
sub-s. (2) but is inter-connected with it. The words
’without prejudice to the provisions contained in sub-
section (2) ’ clearly show that any order passed by the
Income-Tax officer under sub-s. (3) must neither be
inconsistent with nor prejudicial to the provisions
contained in sub-s. (2). In other words, the Position is
that although sub-s. (3) is an independent provision the
power under this sub-section has to be exercised subject to
the terms and conditions mentioned in sub-s. (2) so far as
they apply to the facts mentioned in sub-s. (3). Thus if
sub-s. (2) of s. 220 provided that the rate of interest
chargeable would be
860
four per cent per annum any order passed under sub s. (3)
could not vary that rate, and if it did, then the order to
that extent would stand superseded. The argument o the
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assessee. is that sub-ss. (2) and (3) of s. 220 were
independent provisions which operated in fields of their
own. We are, however, unable to accept this somewhat broad
proposition of law. Sub-sections (2) and (3) form part of
the same section, namely s. 220, and are therefore closely
allied to each other. It is no doubt true that the two sub-
sections deal with separate issues but the non obstante
clause of sub-s. (3) clearly restricts the order passed
under sub-s. (3) to the conditions mentioned in sub-s. (2)
of s. 220 of the Act.
Further more, it is the Finance Act which fixes the
rate of interest payable under sub-s. (2) of s. 220 and it
is common knowledge that every year the Finance Act makes
important amendments in the rates payable under the various
provisions of the Income-tax Act. In these circumstances,
therefore, it is not within the competence of the Income-tax
officer to vary the rate of interest fixed by the Finance
Act under sub-s. (2) of s. 220 from time to time. We are
fortified in this view by a decision of this Court in
Esthuri Aswathaiah v. Commissioner of Income tax, Mysore(1)
where this Court observed thus
"The Income-tax officer has no power to vary the
rate on which the income of the previous year is to be
assessed. The rate of tax is fixed by the Finance Act
every year. By section 3, the tax is levied at that
rate for an assessment year in respect of the income of
the previous year. Once the length of the previous year
is fixed and the income of the previous year is
determined, that income must be charged at the rate
specified in the Finance Act and at no other rate."
As we have already pointed out sub-s. (3) of s. 220 of
the Act does not empower the officer to enter into and
indefeasible settlement with the assessee or to clothe the
Income-tax officer with any such power so as to vary the
statutory inhibition contained in sub-s. (2). Any order
which is passed under sub-s. (3) would be subject to the
rate of interest mentioned in sub-s. (2) and as soon as the
rate mentioned in sub-s. (2) is varied or enhanced by the
Legislature it would have to be read into sub-s. (2) from
the date of the amendment and any order passed under sub-s.
(3) would be subject to the rate so fixed. In fact if this
is not the position, then the order passed under sub-s. (3)
being prejudicial to sub-s. (2) becomes illegal and invalid
and the Income-tax officer exceeds the limits of his
jurisdiction in passing such an order.
In the instant case the Finance Act of 1965 became
effective form April 1, 1965 and the Income tax officer in
his letter dated
(1) 60 I.T.R. 411,416.
861
January 10,, 1966, to the assessee had merely given effect
to the legal provisions of the Finance Act by insisting that
in view of the variation in the rate of interest under sub-
s (2) of s. 220 the assessee would have to pay interest at
the rate of 6% per annum only from April 1, 1965. There was
absolutely no question of the Finance Act operating
retrospectively, near there was any question of the Finance
Act taking away a vested right which had accrued to the
assessee because we have already held that the order of the
Income tax officer under sub-s. (3) of s. 220 does not
amount to any final settlement or agreement.
There is yet another view of the matter. In the present
case the assessee himself wanted extension of time for being
allowed to pay the arrears by instalments. The assessee
could be permitted to seek this indulgence under sub-s. (3)
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of s. 220 only within the four corners of the law and not
outside the same. The moment the Finance Act, 1965, came
into operation and the rate of interest in sub-s. (2) of s.
220 was increased from 4% to 6% per annum any order passed
by the Income tax officer would automatically operate in
accordance with the Finance Act with effect from April 1
1965. This is what has happened in the present case. Thus it
is manifest that the Income-tax Officer could not have
passed any order against the statutory provisions of sub-s.
(2) of s. 220 either with or without the consent of the
assessee. Even the order of the Income-tax officer dated
January 16, 1965, accepting the offer of the assessee to pay
interest at the rate of 5% per annum was legally invalid,
because if the rate of interest fixed by the statute was 4%
the parties could not be allowed to contract out of the
statute. The only relief, therefore, which the assessee
could get is that it was liable to pay interest at the rate
of 4% and not 5% per annum for the period January to march
1965. But from April 1, 1965 it was bound to pay interest at
the rate of 6% per annum as found by the income-tax officer.
Reliance was placed by Mr. G. C. Sharma appearing for
me Revenue on a decision of the Orissa High Court in
Biswanath Ghosh v. Income-tax Officer, Ward and Another(1)
where a Division Bench of that Court observed as follows:
"As we find, the Income-tax officer has charged
interest at 6 per cent until the provision was amended
to enhance the rate of interest at 9 per cent. In fact
in the counter affidavit given by the Income-tax
officer in O.J.C. No. 195 of 1972 that position has
been clarified. Mr. Pasayat for the petitioner claims
that the rate of interest must he only at 6 per cent in
view of the fact that default in this case had occurred
prior to the amendment. It is only here that he relies
upon the decision of the Madhya Pradesh High Court in
Gwalior Rayon Silk Manufacturing (Weaving) Co. v.
Income-tax Officer [1969] 73 I.T.R. 95 (M.P.).
(1) 95 I.T.R. 372, 374.
862
That was a case in respect of penalty under section
220(2) of the Act and the court took the view that the
rate of interest as provided on the date when default
occurred would apply to the facts of the case. We do
not agree with the view expressed in the said decision.
It is true that central Act 27 of 1967 has no
retrospective effect, but in respect of continuing
default after the amendment, in our view, the rate of
interest as provided thereunder would apply."
The Orissa High court expressly dissented from the view
taken by the Madhya Pradesh High Court in the present
judgment under appeal and we find ourselves in complete
agreement with the view taken by the orissa High court.
We have already pointed out, the Madhya Pradesh High
Court did not at all go into the question which really arose
in this case with respect to the payment of interest at the
rate of 6 per cent in accordance with the Finance Act, 1965
.
For these reasons, therefore, the appeals are allowed
and the order of the High Court is set aside with slight
modification, namely In that the assessee shall pay interest
on the entire amount of arrears the rate of 4 per cent per
annum only during the period January to March 1965. So far
as rest of the period is concerned, the order of the Income-
tax officer directing the assessee to pay interest at the
rate of 6 per cent per annum is restored. In view of the
peculiar circumstances of the case, however, we leave the
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parties to bear their own costs throughout.
P.B.R. Appeals allowed.
863