Commissioner of Income Tax vs Mahabir Parshad and Sons

Sometimes, in income tax matters, as in other branches of law, a considerable amount of judicial time is consumed in resolving a purely procedural wrangle. Thus, under the Indian income tax Act, 1922 as well as its successor income tax Act, 1961, the question as to how far an order charging interest is appealable to the AAC and then to the Appellate Tribunal, has engaged considerable attention of the courts and an attempt at legislative clarification has really not solved the problem. Before proceeding to set out how the difficulty arises, the facts of the present reference u/s 256(1) of the income tax Act, 1961 (herein after referred to as "the Act") may be briefly stated. For the assessment year 1962-63, the respondent assessee, Mahabir Parshad & Sons, a registered firm, had to file its return of income within the time prescribed u/s 139(1) of the Act, i.e., 30-6-1962. The return was not filed on that date. The assessee applied for extension of time on 30-11-1962, 19-2-1963 and 30-9-1963, the application on the last date being for extension up to 31-10-1963. The return was, however, actually filed on 20-11-1963. While completing the assessment of the firm for the above assessment year u/s 143(3) of the Act, the ITO directed that interest should be charged u/s 139(1). The assessment form, which was prepared as a consequence of this assessment order, shows that the total income was determined at Rs. 4,93,557 and the tax payable thereon at Rs. 52,476.84 and interest of Rs. 21,392.52, u/s 139, was added raising the total amount to Rs. 73,869.36. From this, the advance tax paid (Rs. 25,442.77) and the provisional tax paid (Rs. 22,691.51) were deducted and the net amount payable by the assessee was determined at Rs. 25,735.08. The notice of demand issued on the same day showed the sum payable by the assessee as having been determined at Rs. 73,869.36 and clarifies that, after deduction of advance tax and provisional assessment tax, a balance of Rs. 25,735.08 was payable.

The assessee had returned an income of Rs. 4,57,369 and the ITO had made certain additions to the returned income raising the total income to Rs.4,93,557 as already stated. The assessee, therefore, filed an appeal before the AAC against the assessment order. The order of the AAC shows that there were as many as seven grounds of appeal. Six of them related to disallowances made by the ITO and the allocation of the income of the firm among the partners. One of the grounds of appeal was that the ITO had erred in charging a penal interest of Rs. 21,392 for late submission of the return income. The AAC dealt with other grounds raised by the assessee but he was of the opinion that the point regarding the levy of interest could not be agitated in this appeal as section 246, which enumerates the various orders from which an appeal could be filed to the AAC, does not provide for an appeal against the levy of interest u/s 139. He, therefore, declined to adjudicate on this ground. But notwithstanding this conclusion, he also went into the merits and was of the opinion that the levy of interest was justified on the facts and circumstances of the case.

There were appeals both by the ITO and the assessee to the Tribunal. It was contended on behalf of the assessee that the levy of interest was not valid because (a) the ITO had not passed any order levying interest, (b) the ITO had not given the assessee an opportunity of showing cause why interest should not be charged, and (c) in any event, the ITO should have exercised the discretion vested in him to waive or reduce the interest u/s 139(8) of the Act read with rule 117 of the income tax Rules, 1962 (hereinafter referred to as "the Rules"). The Tribunal came to the conclusion that it was open to an assessee to object to the levy of penal interest in the course of its appeal against the assessment order under the provisions of section 246(c). It was pointed out that the levy of interest was an integral part of the process of assessment and that, therefore, the assessee can deny its liability to be assessed in respect of the item of interest u/s 246(c). Referring to a decision of the Bombay High Court [apparently in the case of Commissioner of Income Tax, Bombay City Vs. Jagdish Prasad Ramnath, , the Tribunal held that in an appeal against the regular assessment, it should be open to the assessee to take all points which may legitimately reduce not only the taxable income or the tax or the proper head of assessment but also reduce the quantum of penal interest. The Tribunal, therefore, held that the AAC was not justified in rejecting the assessee''s claim on a preliminary ground and directed the ITO to consider the claim of the assessee for waiver on the merits and in accordance with law. We may mention here that section 139(8) had been introduced by the Finance Act, 1963. Under certain departmental instructions, this section was considered to have retrospective effect and this was the reason why the Tribunal gave the directions to the ITO in the manner aforesaid.

At the request of the Commissioner, the following question of law has been referred for our decision by the Tribunal : "Whether, on the facts and in the circumstances of the case, the assessee was entitled to object to the levy of interest u/s 139(1), proviso, in course of an appeal to the Appellate Assistant Commissioner of income tax u/s 246 of the income tax Act, 1961?" and that is why the issue comes up before us now.

It may be convenient here to set out the provisions of section 246 to the extent relevant for our purposes:

Appealable orders. --Any assessee aggrieved by any of the following orders of an income tax Officer may appeal to the Appellate Assistant Commissioner against such order--

(a) and (b) ** ** **

(c) an order against the assessee, where the assessee denies his liability to be assessed under this Act or any order of 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;

(d) and (l) ** ** **

(m) an order u/s 216;

The concept of interest was not in the picture when the Indian income tax Act, 1922 (hereinafter referred to as "the 1922 Act") was enacted. Subsequently, however, when the provisions for the payment of advance tax were introduced, it became necessary to provide for the payment of interest both by the assessee as well as by the department if the advance tax paid fell short of or exceeded the ultimate amount payable by the assessee. Subsequently, when the 1961 Act was introduced, it also provided for levy of interest for delay in filing the return u/s 139 and subsequently proviso has also been introduced for the payment of interest in respect of amount of taxes remaining unpaid. The Act does not contain any specific provision as to whether there could be a separate order charging interest from the assessee under any one of these provisions. But there is, as far as we can see, nothing to prohibit the ITO from passing a separate order charging interest. If that were done, then there could be no doubt that the assessee could not file an appeal against the said order because section 246, which provides for appeals against various kinds of orders passed by the ITO, does not make specific reference to any of these sections except section 216. We, therefore, do not think that there can be any doubt that there is no right of appeal against an order charging interest except one u/s 216 which is covered by section 246(m).

There are, however, indications in the statute that the interest, which is charged in connection with advance tax as well as the interest which is charged for the delay in the submission of the return, are to be computed at the time of the assessment. The amount of advance tax paid along with the interest will have to be adjusted against the tax payable on the total income before a demand notice consequent on the assessment can be issued. In fact also the practice is for these items of interest to be computed and charged at the time of the assessment itself. This position is also supported by the language used in section 143(3) and section 144 of the Act, which talk of the assessment order. These sections direct the ITO to assess the total income and loss of the assessee and also determine the sum payable by him or refundable to him on the basis of such assessment. This indicates that the ITO, while passing the assessment order, does not merely determine the tax payable on the basis of the total income. Adjustments will have to be made involving both additions and deductions from the tax which may be determined with reference to the total income. Additions have to be made in the form of interest chargeable on advance tax payments as well as for delay in submission of return. Deductions will be, as in this case, for payment of advance tax and payment of tax on provisional assessment; it may also be for tax deduction at source and interest payable by Government. After making all these adjustments, the ITO raised a demand for the net sum found to be payable on the basis of the assessment. In other words, the charging of interest is an integral part of the process of the assessment except where ITO may choose to determine the liability for interest by an independent order. In any event, in the case presently under consideration, the interest charged is part of the assessment order. As already mentioned, the assessment order contains a direction that interest will be charged and the assessment form which sets out the computation u/s 143(3) also clearly shows that the interest has been calculated and added as a part of the sum determined to be payable on the assessment. The short question before us is whether, when interest is charged in this manner and as part of the assessment, an appeal there against can lie to the AAC.

As stated already, there is a long line of decisions on this question. Most of the decisions relate to the provisions of section 18A(6) and (8) of the 1922 Act and some of them are under the provisions of the 1961 Act. At this stage, it may perhaps be mentioned that in the first instance when a provision for interest for non-payment or short payment of advance tax was charged, it was practically an automatic addition to the amount payable by the assessee. There was no scope for appeal against this figure of interest because it involved a purely arithmetical computation. If the tax payable got reduced, the amount of interest also got reduced; if, on the other hand, there was increase in the amount of advance tax payable or tax payable, the amount of interest would also increase. But whatever grievance an assessee had against this interest would automatically vanish when the assessment appeal was decided because the only objections which he could have in respect of charging of interest were objections regarding the amount of tax and this was well looked into in the appeal against the assessment. In 1953, however, the Act introduced a provision enabling the department, in suit able cases, to waive or reduce the interest. A similar provision for waiver or reduction at the discretion of the ITO but subject to the fulfilment of certain conditions, was also introduced in regard to the interest for delay in filing of the return. Now this new element naturally gave scope for grounds of appeal by an assessee challenging the levy of interest on its quantum or otherwise and also pleading that on the facts of the case, he fulfils the requirements of the rules for reduction or waiver of the interest. It is as a result of this that the question regarding appealability of interest has become very important and has come up so frequently for consideration before the courts.

We shall briefly refer to the various decisions on this issue, but, for reasons to be later stated, we do not think it is necessary to go into detail regarding the basis of these decisions. A word, however, before referring to these decisions. Most of them refer to the interest charged, either under the advance tax provisions or for delay in filing the return, as "penal'''' interest. As pointed out by Balakrishna Ayyar, J. in N. Vs. N. NAGAPPA CHETTIAR AND OTHERS v. Income Tax OFFICER, PUDUKOTTAI., , it is not known how this phrase got into the dialect of income tax law. There is no element of penalty in it and it is just interest for non-payment of an amount at the prescribed time.

A large number of cases have arisen before the Allahabad High Court starting with the case of Deo Sharma Vs. Commr. of Income Tax, U.P., Lucknow, . It may be mentioned here that this was an appeal against a separate order charging interest. It was held by a short order that section 30 of the 1922 Act gave no right of appeal against such an order. Subsequently, the Allahabad High Court has considered the same issue in the decisions reported in Seth Banarsi Das Gupta Vs. Commissioner of Income Tax (Central) and Another, , Vidyapat Singhania Vs. Commissioner of Income Tax, , Ram Chand and Sons Sugar Mills (P.) Ltd. Vs. Commissioner of Income Tax, , Addl. Commissioner of Income Tax Vs. Allahabad Milling Co., and Mewa Lal Vs. Commissioner of Income Tax, . All these decisions have been considered and the matter thrashed out fully in the recent Full Bench decision reported in CIT v. Geeta Ram Kali Ram [1980] 3 Taxman 124. The purport of this Full Bench decision is that the first part of section 246(c) does not enable an assessee to raise a ground in the assessment appeal relating to the question of penal interest.

The Gujarat High Court has considered the issue in the case of Commissioner of Income Tax, Gujarat Vs. Sharma Construction Co., which has been explained in the more recent decision in Bhikhoobhai N. Shah Vs. Commissioner of Income Tax, Gujarat-V, . This Court also held that no appeal lies against an order levying penal interest either u/s 139 or 215 or 217 if in the appeal the assessee merely challanges the quantum of penal interest or failure on the part of the ITO to waive or reduce penal interest. If, however, the assessee denies his liability to penal interest at all either on the ground that he was not liable to pay advance tax at all in the case of levy of penal interest u/s 215 or section 217, or he contends that the conditions for the exercise of the power to levy interest u/s 139 did not exist in his case, it would be open to him to challenge the order levying the penal interest because in such an eventuality he would be challenging his liability to be assessed and would be denying his liability to be assessed at all to penal interest.

The Bombay High Court had first dealt with the question in CIT v. Jagdish Prasad Ram Nath (supra) which appears to have been a case of appeal against an order charging interest and not an assessment order. Chagla, CJ., held that the appeal could not lie but pointed out that the assessee could obtain adequate relief in the assessment appeal against. These observations of the learned judge have been differently interpreted in different decisions. Subsequently, that Court rendered two decisions in Keshardeo Shrinivas Morarka Vs. Commissioner of Income Tax (Central), Bombay, and Mathuradas B. Mohta Vs. Commissioner of Income Tax, Poona, which were apparently inconsistent with each other. While the former decision held that no appeal would lie against the levy of penal interest if it was correctly computed, the latter decision took the view that interest was part of the tax and that an appeal against the levy of interest could be maintained under the head "denial of liability to be assessed". The conflict between the two decisions was resolved in Commissioner of Income Tax, Bombay City-I Vs. Daimler Benz A.G., . Here again it was held that there would be a right of appeal only in respect of matters implicit in resorting to the provision charging interest but not in regard to the computation, reduction or waiver thereof. A more recent decision of the Bombay High Court in Commissioner of Income Tax, Bombay City-1 Vs. Gannon Dunkerley and Co. Ltd., also reiterates the same view.

The Andhra Pradesh High Court in Boddu Seetharamaswamy Vs. Commissioner of Income Tax, Madras, followed the view of the Allahabad High Court. The Gauhati High Court in K.B. Stores Vs. Commissioner of Income Tax, took the view that an order levying interest u/s 139(8) was not appealable because section 246(c) provided for an appeal only against orders under sections 201 and 216.

The Calcutta High Court in Commissioner of Income Tax Vs. Lalit Prasad Rohini Kumar, has taken a wider view. It has agreed with the decisions of the Bombay High Court (supra) and Karnataka High Court (irfra). However, while holding that an appeal would lie where the very leviability of interest is challenged on the ground for example, that some income is not liable to be assessed at all or such other ground, that Court has held, relying on Commissioner of Income Tax, U.P.,Lucknow Vs. Kanpur Coal Syndicate, , that once the liability to be charged interest is validly challenged, the AAC would have the same powers as the ITO and could, in an appropriate case, give directions about the quantum of interest charged and also about reduction or waiver thereof.

In National Products Vs. Commissioner of Income Tax, Mysore, , the Karnataka High Court interpreted the expression "denying his liability to be assessed" used in section 246(c) somewhat liberally. It held that where penal interest has been levied u/s 215, the assessee may altogether deny his liability to pay such interest on the ground that he was not liable to pay advance tax at all or that the amount of advance tax determined by the ITO as payable ought to be reduced. Similarly, where penal interest has been levied u/s 139, the assessee may deny his liability to pay such interest on the ground that the return was not belated or that the penal provision was not attracted at all to his case. In either case, the assessee denies his liability wholly or partially to be assessed to interest. It was held that the scope of the appeal against the order of assessment levying interest is limited; the assessee can be allowed only to urge that he is not liable wholly or partially to be assessed to interest. He cannot question the interest assessed if he does not deny his liability to be assessed to such interest.

The decisions of the Madras High Court are reported as South India Flour Mills (P.) Ltd. v. CBDT [19681 70 ITR 863 and Rajyam Pictures Vs. Addl. Commissioner of Income Tax, . In the former case, it was decided that there was no appeal against an order levying interest u/s 18A(6) of the 1922 Act but that a revision to the Commissioner u/s 33A(2) of the 1922 Act was available. However, in the latter case, it was pointed out that though no appeal would lie against the imposition of penal interest alone, the levy of penal interest could also be challenged in an appeal filed against the assessment. Actually, on the facts, it was found that the assessee had not questioned imposition of tax and that only the matter sought to be agitated against in the appeal was imposition of penal interest. It was, therefore, held that the appeal was incompetent and the question was answered in favour of the revenue.

It would, thus, appear from the review of the above decisions that the consensus of the opinion of the various High Courts is in favour of a limited right of appeal on the question of interest. They appear to hold that if what the assessee is seeking is a reduction in the quantum of interest that would be a matter which could not be agitated in appeal but that if the assessee challenges some of the conditions precedent for the levy of interest, such grounds could be taken in appeal preferred against the assessment. All these decisions have been rested on the first part of section 246(c).

After a careful consideration of these various decisions and on a perusal of section 246, we think that the question at issue can be decided on a consideration not of the first limb of clause (c) of section 246 but of the second limb of this clause. Section 246 starts by saying that any assessee aggrieved by any of the orders mentioned therein of an ITO may appeal to the AAC against such order. Clause (c) refers to two of such orders; one is: an order against the assessee, where the assessee denies his liability to be assessed under this Act. All the decisions have concentrated on this part of the above clause. Understandably, there has been no unanimity as to how far a right of appeal against interest can be fitted into the narrow phraseology and it does seem difficult to say that, under this part of the clause, an assessee could appeal against the quantum of interest or plead his case for reduction or waiver of its quantum. The clause also contemplates an appeal from another type of order, i.e., any order of assessment u/s 143(3) 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 status under which he is assessed. We find that the true scope of this part of the clause has not been considered by any of the decisions. Even where a passing reference is made to this part of the clause, it has been assumed that the only grounds which would be raised in appeal against an order of assessment are objections regarding (a) the amount of income assessed, (b) the amount of tax determined, (c) the amount of loss computed, or (d) the status of assessment. It has been assumed that since an objection to the levy of interest does not fall within these four categories, it is not covered by this part of the clause. We think that this interpretation proceeds on a narrow and unjustified impression regarding the scope of this clause. What this part of the clause provides is for an appeal by the assessee to the AAC against any order of assessment. The qualifying words setting out the four categories are only to indicate the conditions precedent for the filing of an appeal. The object is that a purely academic appeal should be avoided. That is why the clause says that a person can appeal against an order of assessment only where he has a real grievance there against, such grievance being in relation to income, tax, loss or status. But we think that when the clause says that an appeal can be preferred against an order of assessment where the assessee is aggrieved by determination in respect of these four matters, it does not also mean that the grounds for consideration in such an appeal can only be in regard to these four matters. To say that an appeal cannot be preferred unless the assessee objects to the income, tax, loss or status, does not mean that even where he has such a grievance and he prefers an appeal because of such grievance, the scope of the appeal is limited to these four subject matters. We say this because what the clause envisages, where one of the four grievances exists, is an appeal against the order of assessment. In other words, once these grievances are there, what is before the AAC for consideration is the order of assessment. We are unable to see any words in this clause which limit the scope of the arguments of the petitioner or the grounds which he can take before the AAC only to these four matters. We shall only give a few illustrations. Suppose, an assessment is made u/s 143(3) and the assessee has, in addition to various objections regarding the quantum, also raised a point in regard to a claim of bad debt that though the ITO may have been right in disallowing the debt in the particular year, his finding that it had become bad several years ago is incorrect and that, if at all, it had become bad only in the immediately preceding assessment year. Or, again, suppose the assessee objects to a finding given by the ITO that a cash credit was assessable not in the previous year, but in the same particular earlier year. Similarly, there could be a case where the ITO computes a loss but refused the right to the assessee to carry it forward and set it off in future years. These would be all grounds not covered by the enumerated grievances of section 246(c). But since the appeal is against the order of assessment, can it be said that the assessee is not within his rights in raising the above grounds? Again, let us assume that while completing the assessment u/s 143(3) the ITO makes an addition and in the course of the assessment order he makes certain observations in regard to the particular head of addition which might directly land the assessee into penalty or a prosecution, can it be said that, where a valid appeal is presented against the assessment order, it will not be open to the assessee to challenge and seek expunction of the observations merely because they may have no direct impact on income, tax, loss or status. We think not. To us it appears that what section 246 authorises is an appeal from the order of assessment; such an appeal no doubt cannot be filed unless one of the four specified items of grievances exists, but where these grievances are there and a valid appeal is preferred, the scope of the appeal is co-extensive with the scope of the assessment order. It is open to the assessee to contest before the AAC each of the findings, observations and directions of the ITO contained in the assessment order. When the Act confers a right of appeal against an order of assessment, we are unable to see on what principle the scope of that appeal could be restricted only to the four items mentioned in clause (c) which are intended merely to ensure that the appeal preferred against the order of assessment is not purely academic or frivolous.

The matter can also be looked at from another angle. In a case where an assessee is aggrieved by the order of assessment in one of the four ways set out in clause (c) and prefers an appeal to the AAC, it is well settled that the powers of the AAC are not restricted to the grounds taken by the assessee in appeal before him. It has now been settled by several decisions starting with Narrondas Manordass, Bombay Vs. Commissioner of Income Tax, Central, Bombay, and including the decisions of the Supreme Court in The Commissioner of Income Tax Vs. Mcmillan and Co., , The Commissioner of Income Tax Vs. Shapoorji Pallonji Mistry, , CIT v. Kanpur Coal Syndicate (supra) and Commissioner of Income Tax, Calcutta Vs. Rai Bahadur Hardutroy Motilal Chamaria, , that in disposing of an appeal before him, the AAC can travel over the entire range of the assessment order. He can bring in for assessment sources which have been considered or processed by the ITO even though the ITO might have failed to bring them to tax. In other words, the powers of the AAC in disposing of an appeal are very wide and plenary, wider even than those of the Tribunal. It is open to him to consider every aspect of the assessment order and give appropriate relief or directions. In this view again, there is, in our opinion, no restriction that can be placed on the powers of the AAC to deal with the question of interest. For example, suppose an ITO in a particular case has charged less interest than should have been charged under the section having applied, let us say, a smaller rate, by mistake or taken a shorter period into account due to some oversight. There can be no doubt that the AAC is at complete liberty to consider these matters and to enhance the interest suitably when the matter goes up in appeal before him. This being so, it would not be correct, in our opinion, to restrict the grounds which could be raised by an assessee before the AAC particularly when the statutory language does not warrant any such restriction. If the AAC has powers to consider and increase the quantum of interest, there is no reason why it should be open to an assessee to bring to the notice of the AAC that parts of the assessment order which have resulted in the charging of interest and pointing out that it is wrong for one reason or the other.

We entirely agree that a right of appeal is a creature of statute and there can be no right of appeal unless it is conferred by the statute. But the language of a provision conferring the right of appeal should be liberally construed. That apart, for the reasons discussed above, we think that the language of the second part of section 246(c) is wide enough to lend itself to a reasonsable and plausible construction which permits the agitation of the issue of interest in a valid and competent appeal from the order of assessment, though an appeal may not lie against a separate order levying interest and nothing more. As pointed out already in the present case, the assessee had presented before the AAC an appeal raising several contentions in regard to the disallowances and additions made in the assessment. There was, therefore, a valid and competent appeal before the AAC. In our opinion, in such an appeal, it was open to the assessee to raise the question of the leviability of interest as well as its quantum. For the above reasons, we are of opinion that the Tribunal took the correct view in the matter. We, therefore, answer the question which is referred to us in the affirmative and in favour of the assessee. In the circumstances of the case, however, we make no order as to costs.