Commissioner of Income Tax vs Gordhanbhai Jethabhai

G.T. Nanavati, J.—In this reference made u/s 256(1) of the Income Tax Act, 1961, the Income Tax Appellate Tribunal has referred the following three questions to this court :

"(1) Whether, on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was right in law in holding that in view of the provisions contained in section 246(f) in the instant case the appeal against the order of rectification u/s 154 was competent ?

(2) Whether, on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was right in law in holding that the original order of assessment cannot be rectified u/s 154 of the Act as there was no mistake apparent from the record of the original assessment ?

(3) Whether the Tribunal was right in law in holding that before charging interest u/s 215, the Income Tax Officer had to consider section 215(4) and rule 40 and that having not been done, the order u/s 154 cannot be held as valid ?"

The assessee filed a return of his income on July 29, 1969, and the assessment order was made on January 18, 1972. It appears that some time before January 15, 1976, the Income Tax Officer noticed that whereas the assessee had filed an estimate showing the advance tax payable as nil, the tax that was determined on regular basis was Rs. 1,25,915 and the tax deducted at source was Rs. 79,961. Thus, on 75 per cent. of the difference of Rs. 45,954, i.e., on the amount of Rs. 34,470, interest at the rate of 9 per cent. was payable u/s 215 of the Act. A notice was, therefore, issued to the assessee and then by an order dated January 15, 1976, the Income Tax Officer computed the interest payable by the assessee at Rs. 8,703.

The contention raised by the assessee before the Income Tax Officer that the Income Tax Officer who passed the assessment order should be deemed to have waived interest was not accepted by the Income Tax Officer on the ground that there was nothing on record to show that interest was waived. Aggrieved by that order, the assessee preferred an appeal to the Appeal Assistant Commissioner. It was dismissed as the Appellate Assistant Commissioner was of the view that, in the absence of anything on record to show that the Income Tax Officer had decided to reduce or waive interest, no presumption can be raised from mere omission to record such finding. He was also of the view that provisions of rule 40 are required to be construed "strictly and rigidly" and in the absence of a specific finding recorded by the Income Tax Officer to that effect, no presumption can be drawn that he had waived or decided to reduce interest payable by the assessee. The Income Tax Officer having failed to discharge his mandatory obligation to levy interest, the record disclosed an apparent mistake and, therefore, the rectification order passed by the Income Tax Officer u/s 154 was quite proper. The assessee then approached the Tribunal. On a perusal of the record, the Tribunal found that the assessment was completed more than one year after submission of the return and that the delay in assessment was not attributable to the assessee. The Tribunal, following the decision of the Bombay High Court in Shantilal Rawji Vs. M.C. Nair, IV Income Tax Officer, E Ward, Bombay and Another, held that the Income Tax Officer can be said to have exercised his discretion under the proviso and it could not properly be said that he had overlooked the law. The Tribunal further held that it was not open to the Income Tax Officer to rectify the order dated January 18, 1976, by passing an order u/s 154 as there was no mistake apparent on the face of the record. The appeal of the assessee was allowed. The Revenue then moved the Tribunal for referring the above-stated three questions to this court.

As regards question No. 1, it was contended by the learned advocate for the Revenue that section 246 does not provide for an appeal against an order passed u/s 215 of the Act. An order rectifying an order made u/s 215 is also not appealable because it cannot be regarded as an order which has the effect of enhancing the assessment. He submitted that an order whereby interest is charged does not have the effect of enhancing the assessment. It is not an dispute in this case, that the order which was challenged by the assessee before the Appellate Assistant Commissioner was the rectification order passed u/s 154. Therefore, the question as to whether an order passed u/s 215 is appealable or not really does not arise for out consideration. What we have to consider is as to whether the impugned order, being an order passed u/s 154, would fall within the purview of section 246(f) as it then stood. It is only with respect to that provision that we have to decide whether the appeal filed by the assessee before the Appellate Assistant Commissioner was maintainable. What was contended on behalf of the Revenue was that, unless the rectification order has the effect of enhancing the assessment or reducing the same, it is not appealable. In our opinion, section 246(f) cannot be interpreted so narrowly. If we accept the contention raised on behalf of the Revenue, that would amount to interpreting the word "assessment" in a very narrow sense. The words which we find in the section are "having the effect of enhancing the assessment" and not "having the effect of enhancing the assessment made u/s 143 or 144 of the Act". The word "assessment" has a very wide import. The Madras High Court in N. Vs. N. NAGAPPA CHETTIAR AND OTHERS v. Income Tax OFFICER, PUDUKOTTAI., had held that levying interest is a part of the process of assessment. The Supreme Court in Central Provinces Manganese Ore Co. Ltd. Vs. Commissioner of Income Tax, has in terms held that levy of interest is a part of the process of assessment. Although sections 143 and 144 do not specifically provide for the levy of interest and the levy is, in fact, attributable to section 139(8) or section 215, it is nevertheless a part of the process of assessing the tax liability of the assessee. Therefore, it is not possible to say that the order levying interest does not have the effect of enhancing the assessment. The liability of the assess gets enhanced as a result of such order and, therefore, it must be regarded as an order having the effect of enhancing assessment. We are, therefore, of the opinion that the order which was passed by the Income Tax Officer in this case u/s 154 was appealable and the Tribunal was right in taking that view.

It was next contended on behalf of the Revenue that the Tribunal was wrong in holding that before charging interest u/s 215, the Income Tax Officer is required to consider the effect of section 215(4) and rule 40 of the Income Tax Rules, 1962, particularly when he seeks to charge interest u/s 154 and as the Income Tax Officer had not done so, the order passed by him should be regarded as invalid. Now, under sub-section (1) of section 215, interest becomes payable by the assessee under the circumstances specified therein. There was a similar provision in the old Act. It was section 18A(6). Sub-section (6) as originally enacted left no discretion to the Income Tax Officer and the Income Tax Officer and the Income Tax Officer was obliged to direct payment of interest. But, by Act 25 of 1953, which was enacted with retrospective effect from April 1, 1952, the following proviso was added as the fifth proviso to section 18A(6) (see [1953] 23 ITR 146) :

"Provided further that in such cases and under such circumstances as may be prescribed the Income Tax Officer may reduce or waive the interest payable by the assessee."

Thus, before the proviso was added to section 18A(6), an obligation was imposed by the statute itself upon the assessee to pay interest under the circumstances mentioned in that section. Payability of interest was automatic. But by the amendment, the Legislature conferred upon the Income Tax Officer discretion to reduce or waive interest. The history of this provision and the way it is worded and also the case law clearly indicate that interest becomes payable by the assessee as a result of operation of law and it is not made dependent upon the discretion of the Income Tax Officer. The discretion which is conferred upon the Income Tax Officer is not with respect to determination of payability of the interest but with respect to reduction or waiver of interest payable by the assessee. While deciding whether interest u/s 215(1) is payable by the assessee or not, what the Income Tax Officer has to consider is as to whether the required conditions are satisfied or not. He would be under no obligation to consider whether interest should be reduced or waived. Such a question would arise only after payability of interest is determined. The point of time when he has to decide whether to reduce or waive the interest would be subsequent. The Income Tax Officer would, therefore, be under no obligation to consider that which he is required to consider at a subsequent stage while taking a decision with respect to what is to be decided earlier. Therefore, in our opinion, the Tribunal was wrong in be decided earlier. Therefore, in our opinion, the Tribunal was wrong in holding that, before charging interest u/s 215, the Income Tax Officer is under an obligation to consider whether interest should be reduced or waived in terms of section 215(4) and rule 40 of the Rules.

The next question which falls for determination is as to whether the Tribunal was right in holding that the original order of assessment could not have been rectified by an order passed u/s 154 as there was no mistake apparent on the face of the record. It was submitted by the learned advocate for the Revenue that, if the assessee wants the benefit of section 215(4) read with rule 40, then he has to make an application to the Income Tax Officer, and only then, the Income Tax Officer can consider whether interest should be reduced or waived. In support of his contention, he relied upon the decision of the Rajasthan High Court in Golecha Properties (P.) Ltd. v. CIT [1988] 171 ITR 47 wherein it is held (at page 57) :

"Since reduction or waiver of interest can be granted only on good cause being shown by the assessee, it is obvious that the authority cannot act suo motu, the facts constituting ground for waiver or reduction being within the special knowledge of the assessee who has to disclose them."

The Rajasthan High Court further held that, on a harmonious construction of sections 139(8)(a) and (b) and 215(4) read with rules 40 and 117A of the Rules, the conclusion is inevitable that the liability for payment of interest thereunder is incurred automatically in the event of default by the assessee specified therein. This liability for interest is attracted automatically by operation of law without the further requirement of any order to that effect. The order made therein merely quantifies the amount of interest. However, the Income Tax Officer is empowered to reduce or even waive the interest at the instance of the assessee, if good cause is shown for the same by the assessee. It is, therefore, obvious that no prior show cause notice is required to be given to the assessee, since liability to pay the interest is attracted automatically by operation of law, but the rigour thereof is mitigated by empowering the Income Tax Officer to reduce or even waive the amount, if good cause is shown by the assessee after incurring that liability. It is, therefore, the duty of the assessee to invoke the authority''s power of reduction or waiver of the amount of interest when the liability has been incurred by operation of law and, therefore, the occasion for the authority to decide this question would arise only when the assessee invokes that power by proper application setting out the grounds on which reduction or waiver of interest is sought.

This was the solitary decision on which the learned advocate for the Revenue relied for his extreme proposition that, for invoking exercise of discretion u/s 215(4), an application by the assessee is necessary and the Income Tax Officer has no power to act suo motu. Neither section 215 nor rule 40 provides for the making of an application by the assessee. Merely because payability of interest is automatic in the sense that it becomes payable by operation of law, it would not be proper, in our opinion, to read into section 215(4) or rule 40, the requirement of making an application to the Income Tax Officer for reduction or waiver of interest. The Legislature has specified certain circumstances under which the Income Tax Officer has to consider whether to reduce or waive interest. One of these circumstances is whether a person is, u/s 163, treated as an agent of another person and is assessed upon the latter''s income. Before treating that person as an agent, the Income Tax Officer is required to issue notice to him and decide whether he should be treated as an agent or not. In such a case, all the relevant facts would be within the knowledge of the Income Tax Officer and, therefore, it is difficult to appreciate what useful purpose can be served by reading into rule 40, the requirement of making an application by that person for the purpose of obtaining reduction or waiver of interest and by denying power to the Income Tax Officer to decide on his own whether the interest should be reduced or waived. In our opinion, fairness would demand that, if the Income Tax Officer is possessed of the required information or the record discloses sufficient justification he should, on his own, exercise the discretion and pass an appropriate order as that would be in consonance with the intention of the Legislature. Though the word "may" is used in rule 40, it can safely be said that the intention of the rule-making authority was to see that, in the cases or the circumstances mentioned in that rule, the Income Tax Officer should exercise his power of reduction or waiver of interest. Therefore, with due respect, we cannot agree with the view taken by the Rajasthan High Court. In our opinion, there is no justification for reading the requirement of making an application by the assessee in section 215(4) or rule 40. The Income Tax Officer can and should exercise his discretion if the record or the circumstances require that he should exercise the discretion even though he is not moved in that behalf by the assessee.

Before going to the next contention, we may state that the learned advocate for the Revenue also drew our attention to the passing observations made by this court in Commissioner of Income Tax, Gujarat-I Vs. Ramjibhai Hirjibhai and Sons, and by the Supreme Court in Central Provinces Manganese to be moved by an application. In Commissioner of Income Tax, Gujarat-I Vs. Ramjibhai Hirjibhai and Sons, the question which was referred to this court was whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the Income Tax Officer had no jurisdiction u/s 154 of the Act to charge interest u/s 139 for late submission or return. This court held that, because of the default of the assessee, the Income Tax Officer was under an obligation to levy penal interest and as the assessee had not moved the Income Tax Officer to condone or waive the penal interest u/s 139(8) read with rule 117A of the Rules, it was open to the Income Tax Officer to initiate rectification proceedings and levy interest as omission on his part at the time of original assessment was apparent from the record. Thus, the context in which the said observations came to be made was quite different. While justifying the action of the Income Tax Officer in initiating rectification proceedings, it was observed that the said action of the Income Tax Officer was not improper as the assessee had not moved him to condone or waive the interest. This court was not called upon to examine whether, for condonation or waiver of penal interest, an application by the assessee is a must or whether the Income Tax Officer can suo motu exercise that power. In the case of Central Provinces Manganese Ore Co. Ltd. Vs. Commissioner of Income Tax, the Supreme Court has observed that, since the assessee had made no application to the Income Tax Officer for reduction or waiver of the interest u/s 139(8) or u/s 215, no question arose of the relevant authority having denied improperly a reduction or waiver of the interest and that being so, no revision petition could be maintained in that regard by the assessee before the Commissioner of Income Tax. The assessee in that case had approached the Bombay High Court by way of two writ petitions and its grievance was against the view of the Commissioner that, in order to maintain its revision petitions challenging the levy of interest, the assessee was obliged to abandon the challenge to the assessment of its income. After pointing out that the decision whether a case is made out for waiver or reduction of the interest levied u/s 139(8) or u/s 215 cannot be the subject of an appeal u/s 246(c), the Supreme Court held that this matter can more appropriately be dealt with by the Commissioner in the exercise of his revisional jurisdiction of the Commissioner can be invoked in such a case, it is obviously necessary for the assessee to demonstrate before the Income Tax Officer that here is a case for waiving or reducing the levy of interest. As the assessee in that case had not made such an attempt, the Supreme Court negatived the contention raise don its behalf that it was improperly denied the benefit available u/s 139(8) or u/s 215. It is, therefore, not possible to accept the contention that, in view of these observations made by the Supreme Court, it should be held that section 215(4) and rule 40 required the making of an application to the Income Tax Officer and that the Income Tax Officer has no power to act on his own under these provisions.

It was next contended by the learned advocate for the Revenue that proceedings u/s 215 are quasi-judicial in nature and contemplated the passing of an order under that section. That order is required to be made after the regular assessment order and even if such order is passed along with the regular assessment order, it will not form part of the order of assessment and, therefore, mere omission on the part of the Income Tax Officer to refer to penal interest payable thereunder in the order of assessment cannot lead to an inference that the Income Tax Officer has waived interest payable by the assessee. In support of this contention, the decision of the Karnataka High Court in Commissioner of Income Tax, Karnataka-I, Bangalore Vs. Executors of the Estate of Late H.H. Rajkuverba Dowager Maharani Saheb of Gondal, was relied upon. In that case, it was held that the proceedings under sections 215 and 217 are quasi-judicial in nature. Therefore, an order has to be passed by the Income Tax Officer to give effect to section 217. An order u/s 217 can be made only after the regular assessment is made. "Regular assessment" defined u/s 2(40) means the assessment made u/s 143 or section 144. It, therefore, does not include an order made u/s 215 or section 216 or section 217 of the Act. Section 217(1) read with section 215(1) lays down that the computation of interest payable u/s 217 is possible only after the tax due on the basis of regular assessment is determined and the amount of tax deductible in accordance with sections 192 to 194, 194A and 195 is adjusted. Moreover, if an order passed u/s 215 or section 216 or section 217 formed part of an order of assessment, it would have become appealable u/s 246(c) itself and there would have been no need to enact section 246(m) providing for appeal against an order u/s 216 only. Therefore, an order made u/s 217 does not form part of an order of assessment and it has to be passed only after the regular assessment is made. Since an order u/s 215 or section 216 or section 217 does not form part of an order of assessment, the mere omission on the part of the Income Tax Officer has waived the interest payable without giving any reasons for doing so. Though we agree that the proceedings u/s 215 are quasi-judicial in nature, and that it would be necessary for the Income Tax Officer to pass an order, if interest is to be levied, we cannot agree with the view that form the section 217 an inference that the had waived interest payable thereunder cannot be drawn. In our opinion, the view taken by the Karnataka High Court is too technical. Though an order u/s 215 or section 216 or section 217 has to be made after the regular assessment, the law does no prohibit the passing of an order u/s 215, or section 216 or section 217 almost simultaneously with the order of assessment and on the same sheet of paper. If the view of the Karnataka High Court is accepted, then in all cases where there is no specific order passed u/s 215 or section 216 or section 217, it will have to be held that it is a case of an omission to pass an order and, in all those cases, a rectification order can be passed. The Income Tax Officer, instead of passing a specific negative order, may not pass any order. This possibility, in our opinion, with due respect, is overlooked by the Karnataka High Court. It is not uncommon to come across orders passed by the Income Tax Officer where no reasons are given if the contention raised by the assessee on a point arising for consideration is decided in favour of the assessee. Therefore, not recording a finding and not passing a specific order in favour of the assessee cannot always be regarded as an error justifying the passing of a rectification order. In our opinion, the reason given by the Bombay High Court in Shantilal Rawji Vs. M.C. Nair, IV Income Tax Officer, E Ward, Bombay and Another, for taking a contrary view appears to be more sound. Therein, the Bombay High Court has observed (at page 443) :

"If this proviso was in force, it is clear that the Income Tax Officer had the discretion to reduce or waive the interest payable by the assessee. Therefore, looking at the record and looking at the assessment order, it could not be said that the Income Tax Officer had failed to discharge his statutory obligation. A discretion having been vested in the Income Tax Officer by the proviso, it was open to the Income Tax Officer not to impose the penalty, and there is nothing on the record to show that the failure to impose the penalty was due to a failure to discharge his obligation u/s 18A(6) and not to the exercise of the discretion under the proviso. If a particular position is arrived at which can be explained by one or other action being taken by the Income Tax Officer, it is impossible to contend that for the purpose of section 35, we must assume that position was arrived at by the Income Tax Officer having taken one particular action and that action was contrary to law. Rather the assumption should be that the Income Tax Officer acted in accordance with law rather than contrary to law. The assumption should also be that the Income Tax Officer knew the law and not that he was ignorant of the law. Therefore, if the proviso was in force and the Income Tax Officer did not impose a penalty, the court would rather lean in favour of the view that the Income Tax Officer had exercised his discretion under the proviso rather than the view that he had overlooked the law. Therefore, it would be order with regard to the levying of penal interest must necessarily be ascribed to an error of law on the part of the Income Tax Officer."

We are in respectful agreement with the decision of the Bombay High Court and following the same, we hold that the inference drawn by the Tribunal in this behalf is not improper and it rightly held that there was no mistake apparent on the record of the original assessment. This view taken by the Bombay High Court is not in any way affected by the decision of the Supreme Court in Central Provinces Manganese Ore Co. Ltd. Vs. Commissioner of Income Tax, .

The learned advocate for the Revenue also submitted that silence without more cannot give rise to an inference of waiver and the act of waiver being a conscious overt act, there must be something on record to show that the Income Tax Officer had decided to waive or reduce interest and why he had taken such decision. In order to support this contention, he relied upon two decisions of the Madras High Court in Commissioner of Income Tax Vs. City Palayacot Co., and Commissioner of Income Tax Vs. City Palayacot Co., the Madras High Court compared the language of section 216 with section 215 and 217 and held that, while, in case sunder section 216, it may be possible to infer waiver because of the existence of an absolute discretion, in cases under sections 215 and 217, it is not possible to infer any waiver from the omission to charge interest especially when the power to waive is restricted to particular interest especially when the power to waive is restricted to particular case. It would also be necessary for the officer, if he exercises the discretion to indicate in his order as to why he waives or reduces the interest liable to be charged.

In the case of R. R. Pictures [1983] 143 ITR 429 the Madras High Court held that the act of waiver is a conscious overt act on the part of the Income Tax Officer and a mere omission or inaction on his part to levy penal interest cannot be construed under any circumstances as an act of waiver. For taking this view, the Madras High Court followed its earlier judgment in Commissioner of Income Tax Vs. City Palayacot Co., .

As a general proposition, it can be said that an act of waiver being a conscious act, no inference of waiver can be drawn from an omission or inaction. But, as pointed out by the Bombay High Court, as the omission is not by a person ignorant of law but by the Income Tax Officer who must be presumed to be and who is also otherwise likely to be well conversant with the relevant provisions of sections 215, 216 and 217, then such an inference can be drawn. If the Income Tax Officer does not pass an order for levy of interest even where levy of interest is mandatory, then only two inferences are possible. One is that he forgot to pass such an order or that he had decided to waive the interest because we cannot assume or infer that, even though he was aware of the said provision, he deliberately did not pass that order. An intention to act contrary to law cannot ordinarily be inferred. We cannot also draw an inference that he forgot to pass an order. That being the state of his mind, the successor-income tax Officer cannot definitely say that either it was a case of overlooking the provisions or a deliberate lapse on the part of the Income Tax Officer. Considering the practice which is ordinarily followed by the Income Tax Officers while making assessment orders and levying interest and the nature of discretion conferred upon the Income Tax Officer and the fairness with which he is expected to exercise his powers, the better inference that can be drawn from the omission to pass any order with respect to payment of interest u/s 215 after passing the order of assessment would be that he had decided to waive payment of interest. Merely because the discretion is not absolute and its exercise is dependent upon the existence of certain facts and circumstances, it is difficult to appreciate how it can be said that no inference as stated above can be drawn from an omission to pass an order u/s 215. It is a matter of common knowledge that, in the assessment orders, many times no reasons are recorded by the Income Tax Officers when they decide the points raised by the assessees in their favour. With due respect, therefore, we cannot agree with the view taken by the Madras High Court in this behalf.

The learned advocates for the assessee had drawn out attention to the decision of the Delhi High Court in Commissioner of Income Tax, Delhi-II Vs. Caxton Press (P.) Ltd., wherein the Delhi High Court, after noticing that it was nobody''s case that the delay in making the assessment was on account of any default by the assessee, held that, for that reason and because in the absence of passing any order for levy of interest, the Tribunal was right in drawing an inference that the Income Tax Officer had waived the interest. This judgment also supports the view which we are taking.

For the reasons stated above, questions Nos. 1 and 2 are answered in the affirmative, that is, against the Revenue and in favour of the assessee. Question No. 3 is answered in the negative, that is, in favour of the Revenue and against the assessee. Reference is disposed of accordingly. No order as to costs.