Commissioner of Income Tax vs Khodey Brewing and Distilling Industries Ltd.

V.K. Singhal, J.—The Income Tax Appellate Tribunal has referred the following question of law arising out of its order dated February 1, 1996, in respect of the assessment year 1981-82 u/s 256(1) of the Income Tax Act, 1961 :

"Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that interest u/s 139(8), 215 of the Act levied in the original assessment does not survive when a reassessment is done u/s 148 of the Act particularly in view of the apex court''s decision reported in CIT v. Sun Engineering Works P. Ltd. ?"

The facts of the case are that there was reassessment u/s 147 of the Income Tax Act in the case of the assessee. The interest charged u/s s 139(8) and 215 was deleted by the Commissioner of Income Tax (Appeals) following the decision given by this court in the case of Charles D''souza Vs. Commissioner of Income Tax, Karnataka-II, . In the appeal preferred before the Tribunal, it was found that there is another decision in the case of Income Tax Officer and Another Vs. K.L. Srihari (Huf), K.L. Narayana and K.L.A. Padmanabhasa and Another (Huf), and, accordingly, the order passed by the Commissioner of Income Tax (Appeals) was upheld by the Tribunal. This reference was made in the light of the judgment given in CIT v. Sun Engineering Works P. Ltd, .

The argument of learned standing counsel for the Department is heard. Learned counsel for the assessee submitted that the judgment given by the apex court in the case of Sun Engineering Works P. Ltd , was an altogether different issue and so far as the question of levy of interest in the reassessment proceedings u/s s 139(8) and 215 is concerned, the matter was considered by this court in the case of Income Tax Officer and Another Vs. K.L. Srihari (Huf), K.L. Narayana and K.L.A. Padmanabhasa and Another (Huf), , wherein following the decision given in the case of Commissioner of Income Tax, Karnataka-II, Bangalore Vs. Mysore Iron and Steel Limited, , it was observed that the effect of reopening an assessment is that the original assessment gets totally effaced and if there is effacement of the original assessment order the interest levied thereunder cannot survive. In the case of V. Jaganmohan Rao and Others Vs. Commissioner of Income Tax and Excess Profits Tax, Andhra Pradesh, , it was observed by the court that once proceedings u/s 34 (old Act) are validly initiated the jurisdiction of the Income Tax Officer is not restricted to the portion of the income that escapes assessment.

On behalf of the assessee, it is pointed out that the Taxation Laws (Amendment) Act, 1984, have inserted Clause (b) in Explanation 2 of Section 139(8) where it is provided that, where as a result of an order u/s 147 or 154 or Section 155 or Section 250 or Section 254 or Section 260 or Section 262 or Section 263 or Section 264, the amount of tax on which interest was payable under this Sub-section has been increased or reduced, as the case may be, the interest shall be increased or reduced. In a proceeding u/s 147 no interest is to be charged and, therefore, it should be deemed to have been reduced to nil and the earlier interest will come to an end. It is also pointed out that in the case of ITO v. K. L. Srihari, SLP Nos. 21273-21276 of 1995 decided on March 24, 1998, the decision given in the cases of V. Jaganmohan Rao and Others Vs. Commissioner of Income Tax and Excess Profits Tax, Andhra Pradesh, and Income Tax Officer, Azamgarh and Another Vs. Mewalal Dwarka Prasad, and Commissioner of Income Tax Vs. M/s. Sun Engineering Works (P.) Ltd., , were considered. A contention was raised that there is a difference in the views expressed in the later case of Commissioner of Income Tax Vs. M/s. Sun Engineering Works (P.) Ltd., . It was observed that, if the fresh assessment of the entire income of the assessee is made, then the earlier assessment order shall be deemed to have been effaced. The question regarding the difference of view taken in Commissioner of Income Tax Vs. M/s. Sun Engineering Works (P.) Ltd., , was left open. There can be a circumstance where the reassessment in respect of the escaped income alone is being" taken or the assessment which was framed u/s 143(1) or Section 143(3) has become final. In reassessment proceedings that income is not taken into consideration.

Learned counsel for the assessee has brought to our notice that in the assessment order dated September 24, 1984, directions were given for charging of interest under Sections 139(8) and 215 of the Act besides other penalty proceedings. It is submitted that in the meantime there was an appeal and in pursuance of an appeal order dated January 31, 1986, the liability of tax was determined vide order dated February 13, 1986. The reassessment was framed on July 17, 1987, in which the interest of fixed deposit of Rs. 14,589 which was not included in the income earlier was offered by the assessee and, therefore, the proceedings u/s 147 were initiated. It is submitted that u/s 147 there is no liability of interest. In this regard various judgments have been relied on for the point that at the relevant time there was no liability u/s 147 for interest.

The Rajasthan High Court in Commissioner of Income Tax Vs. Mannalal Nirmal Kumar, ; Commissioner of Income Tax Vs. Smt. Padam Kumari Surana, ; Gopi Rani Lita v. CIT; Commissioner of Income Tax Vs. Kapoor Chand Ram Chand, and Commissioner of Income Tax Vs. Multimetals Ltd., , Charles D''souza Vs. Commissioner of Income Tax, Karnataka-II, SLP dismissed by the Supreme Court [1990] 186 ITR 28, B. Babu and Co. Vs. Sixth Income Tax Officer and Another, , CIT v. Padma Timber Depot [1988] 169 ITR 600; Prakash Lal Khandelwal Vs. Income Tax Officer and Another, ; K.L. Narayana Vs. Income Tax Officer and Another, ; Income Tax Officer and Another Vs. K.L. Srihari (Huf), K.L. Narayana and K.L.A. Padmanabhasa and Another (Huf), ; Commissioner of Income Tax Vs. United Machinery and Appliances, ; S. Mageshwari Vs. Assistant Commissioner of Income Tax and another, ; K. Venkatesh Nayak Vs. Income Tax Officer and another, ; Commissioner of Income Tax Vs. Triple Crown Agencies, ; CIT v. Harbhajan Singh (SLP (Civil) No. 15877 of 1986) ; [1991] 191ITR78-79 (SC); Shakti Tiles Industries Vs. Commissioner of Income Tax, ; Commissioner of Income Tax Vs. Rajesh Talkies, ; Commissioner of Income Tax Vs. Kamlapat Moti Lal, ; Chief CIT v. Haryana Rang Udyog-CC. Nos. 7729 of 1997 [1997] 228 ITR 156 ; Modi Rubber Ltd. Vs. Commissioner of Income Tax, , has held that assessment u/s 148 is not a regular assessment and, therefore, interest u/s s 217 and 139(8) cannot be charged. So far as the proposition is concerned, there cannot be any dispute that in reassessment no interest could be charged.

The question arises as to whether the liability which has already been incurred comes to an end. At this stage directions which were given by the Income Tax Officer in his order dated September 24, 1984, to charge interest and such interest was levied in the reassessment order dated July 17, 1987. As a matter of fact, the Income Tax Officer should have passed separate orders as was directed in the order dated September 24, 1984. The entire confusion has arisen because the directions given in the order dated September 24, 1984, were made part of the reassessment proceedings. The income which was assessed in the proceedings u/s 147 was by including the interest of Rs. 14,589 on which no interest could have been charged in the reassessment proceedings. The earlier order dated September 24, 1984, had become final. Against the levy of interest in the reassessment order dated July 17, 1987, an appeal was preferred by the assessee and the Commissioner of Income Tax relying on the decision of this court in Charles D''souza Vs. Commissioner of Income Tax, Karnataka-II, has deleted the interest. The Tribunal has referred the decision given in the case of Income Tax Officer and Another Vs. K.L. Srihari (Huf), K.L. Narayana and K.L.A. Padmanabhasa and Another (Huf), and the earlier order of the Commissioner of Income Tax (Appeals). In the case of Charles D''souza Vs. Commissioner of Income Tax, Karnataka-II, , it was observed that the interest can be levied only in the case of regular assessment, i.e., the assessment made u/s 143 or 144 and it will not include the assessment or reassessment made u/s 147. So far as this provision of law is concerned the liability of interest under the proceedings u/s 147 will not arise. But that would be only in respect of the income determined in the proceeding''s u/s 147.

In Income Tax Officer and Another Vs. K.L. Srihari (Huf), K.L. Narayana and K.L.A. Padmanabhasa and Another (Huf), , the question was that the interest was not levied u/s s 139(8) and 215 in the original assessment order. In the present case, the interest was not levied but was directed to be levied. There was further observation that the original assessment gets totally effaced if such assessment is reopened. In the case of Commissioner of Income Tax Vs. M/s. Sun Engineering Works (P.) Ltd., , it was observed that the order made in relation to the escaped turnover does not affect the operative portion of the order particularly if it has acquired finality and the original order retains both its character and identity. In other words, it was considered that the reassessment proceeding''s cannot be to the benefit of the assessee.

The judgment of Commissioner of Income Tax Vs. M/s. Sun Engineering Works (P.) Ltd., , was considered by the apex court in K. L Srihari''s case [1992] 197 ITR 594 and on perusal of the original assessment order dated March 19, 1983, and the reassessment order dated July 16, 1987, u/s 147, it was found that fresh assessment was made of the entire income which has effaced the earlier proceeding''s. If the observations of this judgment are kept in view and it is seen from the reassessment order which has been passed in the case of the assessee, then it will be seen that there is no fresh determination of income which has already been determined in the earlier assessment proceedings. That figure has only been brought for reference and it cannot be considered that it was determination of the income to that extent. The decision, therefore, given in the case of Income Tax Officer and Another Vs. K.L. Srihari (Huf), K.L. Narayana and K.L.A. Padmanabhasa and Another (Huf), does not assist the argument of learned counsel for the assessee. We are of the opinion that if the assessment orders have been framed and the directions have been given in the said assessment order for charging the interest, the order will become final and the directions have to be implemented by the Income Tax Officer. It is only in respect of the reassessment that the interest would not be levied in the proceedings u/s 147.

In Modi Industries Limited, Modinagar and Others Vs. Commissioner of Income Tax, Delhi and Another, , the question has arisen as to whether the interest is payable u/s 214 if the amount of tax determined as payable by the Income Tax Officer is reduced in appeal. It was observed that (page 787) :

"After computation of the total income u/s 143, the Income Tax Officer will have to determine the tax payable by an assessee. This he can do only after giving credit to the assessee for the amount of Income Tax standing to his credit. Once the amount of advance tax has been treated as Income Tax payable by the assessee and dealt with as such in the assessment order, there is no scope for treating it as advance tax once again. The excess realisation of advance tax, upon assessment and adjustment, becomes refundable u/s 237. No further interest is payable on it u/s 214. Interest, if any, on delayed refund is payable u/s 243. If a further sum of money becomes refundable as a result of any appellate order, that amount has to be refunded u/s 240 and with interest, if any, u/s 244. The refund amount is not treated any more in the Act as a portion of the advance tax paid by the assessee, What is refunded pursuant to an appellate order is a portion of what was treated and dealt with as payment of Income Tax by the assessee. Its character is in no way different from the tax paid pursuant to notice of demand u/s 156 by an assessee. Any tax refundable pursuant to the appellate order has to be dealt with in accordance with the provisions of Section s 240 and 244. There is no scope for invoking the provisions of Section 214 in such a situation."

In this case the word "regular assessment" as used in Section 214 was interpreted to mean the assessment u/s 143/144 of the Income Tax Act. It was observed that the amount on which interest is to be paid is the amount of advance tax payable in excess of the tax payable as calculated in the regular assessment (first assessment), the amount on which the interest was payable does not vary due to the reduction or enhancement of tax as a result of any subsequent proceeding''s. The matter was again considered in Commissioner of Income Tax, Madras Vs. Amalgamations Ltd., , where also the original assessment order was set aside and the assessment was framed afresh. The question was answered in the negative and in favour of the Revenue. The detailed discussions of Section 214 and liability of interest on the refund as discussed in the case of Modi Industries Limited, Modinagar and Others Vs. Commissioner of Income Tax, Delhi and Another, , makes it clear that the refund is limited up to the date of assessment and thus the liability for interest up to the date of assessment is not affected by the subsequent appeal or revision, etc., though the quantum may be affected. The case of Income Tax Officer and Another Vs. K.L. Srihari (Huf), K.L. Narayana and K.L.A. Padmanabhasa and Another (Huf), relied on by learned counsel for the assessee, where it was observed that the effect of reopening an assessment is that the original assessment gets totally effaced, can have limited application, i.e., where the entire income is reassessed again but, if it is only a case of addition of a particular item of income in reassessment proceedings then on the basis of the judgment of Income Tax Officer and Another Vs. K.L. Srihari (Huf), K.L. Narayana and K.L.A. Padmanabhasa and Another (Huf), interest on such reassessed amount cannot be charged. The income which has already been determined in the assessment order and confirmed/ reduced/enhanced in appeal, in the light of the decision given in the case of Modi Industries Limited, Modinagar and Others Vs. Commissioner of Income Tax, Delhi and Another, , the liability of interest up to the date of the assessment would be determined in accordance with the provisions of Section s 243, 139(8) and Section 215 of the Act. The provisions of Section 139(8) and Section 215 are not applicable to the reassessment proceedings but to the regular assessment proceedings which have already been applied, and that order has become final. The only objection which could be raised is that the interest has been levied in the reassessment proceeding''s. If the separate order was passed for levy of interest u/s 139(8) and Section 215, that order could not have been said to have been passed in the reassessment proceedings. Simply because the two orders have been combined in one order it could not be considered that the interest have been levied in reassessment proceedings. Since the original assessment in the present case has not been affected at all and only the interest income has been added in the reassessment proceedings, finality which has been given to assessment cannot be considered to be non-existent nor any consequences flowing therefrom would obliterate the liability of the assessee.

The assessment is a term which includes computation and determination of the income and tax due thereon. Under the Income Tax Act, the procedure is given for assessment by which the income is determined. There is an application of mind in determining the income and computation of tax liability. If the income is once determined, there may be rectification of a particular item of income but that will be limited to that item itself and the entire assessment is not affected. In reassessment also there can be circumstances where the total income is recomputed again and in that case the original assessment order is effaced. But in a case where there is no determination of the income in reassessment proceedings of the figure which has already been assessed and has only been added to the income determined in reassessment proceedings it cannot be considered that the said income is reassessed.

There may be a number of contentions which can be raised against the assessed income or have already been raised and have become final in appeal, revision, reference, etc. In reassessment proceedings on the income from interest of Rs. 13,000 has been determined by reassessment which will not affect the assessment which has already been made on the figure of Rs. 1,60,90,603. Following the decision given in the case of Modi Industries Limited, Modinagar and Others Vs. Commissioner of Income Tax, Delhi and Another, , we are of the view that the liability of interest under Sections 139(8) and 215 could be restricted up to the date of assessment and it cannot be said that there is no liability of interest under Sections 139(8) and 215 in respect of the default which has already been found and determined in the assessment proceedings and for which directions were given to charge the interest in the assessment proceedings and has been computed in compliance thereof.

The ITRC stands disposed of with the above observations.