Commissioner of Income Tax vs Narmada Ginning and Pressing Factory (No. 1)

A.K. Patnaik, C.J.—This is an appeal u/s 260A of the 1 Income Tax Act, 1961.

On 28-2-2007, the court while admitting the appeal, formulated under Sub-section (3) of Section 260A of the Income Tax Act, 1961, (hereinafter referred to as "the Act") the following two substantial questions of law:

(1) Whether, on the facts and in the circumstances of the case, the learned Income Tax Appellate Tribunal was justified in deleting the addition of Rs. 7,08,184 which had been rightly sustained by the Commissioner (Appeals) as benefit gained by the assessee within the meaning of Section 28(iv) of the Income Tax Act, 1961 ?

(2) Whether, on the facts and circumstances of the case, the learned Income Tax Appellate Tribunal was justified in holding that while giving appeal effect, the assessing officer could not charged interest u/s 220(2) from the due date of original assessment/demand notice ?

Sub-section (4) of Section 260A of the Act provides that the appeal shall be heard only on the question so formulated, and the respondents shall, at the hearing of the appeal, be allowed to argue that the case does not involve such question.

Mr. Sumit Nema, learned Counsel appearing for the respondent, submitted that a reading of the impugned order would show that the amount of Rs. 7,08,184 was added to the income of the respondent by the assessing officer because in some slip of papers which were recovered from the respondent in the search, Rs. 7,08,184 was shown as interest payable by M/s. Siddharth Soya Products Pvt. Ltd. towards the delayed payment of amount of price of goods purchased by the said firm from the respondent. The Tribunal has found that the assessing officer has not verified from M/s. Siddharth Soya Products Pvt. Ltd. whether such payment was to be made by M/s. Siddharth Soya Products Pvt. Ltd. to the respondent towards interest. He submitted that the Tribunal has also found that M/s. Siddharth Soya Products Pvt. Ltd. has furnished a certificate that there was no term or condition for charging of interest in the agreement for purchase and sale of the goods and no payment was, in fact, made on account of interest. He submitted that the Tribunal on the materials before it, came to the conclusion that no income has actually accrued to the respondent and hence the amount could not be added as income of the respondent only on the basis of the slips of paper found during the search. He cited the decision of the Supreme Court in Godhra Electricity Co. Ltd., Ahmedabad Vs. Commissioner of Income Tax, Gujarat-II, Ahmedabad, for the proposition that unless the income actually accmes to the assessee, such income cannot be added in the hands of the assessee only on the basis of book entry. He submitted that in any case, the findings of the Tribunal on this question are based on facts and no question of law as such arose for decision.

The findings; of the Tribunal on this question are in paragraph 6 of the impugned order of the Tribunal, which are quoted herein below:

On consideration of the above facts and rival submissions, we are of the view that the addition is unjustified in the matter. The assessee in the paper book has filed copies of the seized papers in which mere calculation of interest is shown. The explanation of the assessee was called for and the assessee submitted a certificate from M/s. Siddharth Soya Products Ltd., in which it was clarified that no interest was paid to the assessees by this company and that there was no terms and conditions for charging of the interest. These facts were considered by the Commissioner (Appeals) earlier and the matter was restored to the file of the assessing officer to ascertain the element of payment in near future of settlement of the claim. The assessing officer did not verify any fact from M/s. Siddharth Soya Products Ltd. and repeated the addition without any basis. It is well-settled that in the set-aside proceedings, the powers of the assessing officer are very limited and the assessing officer was to confine to the direction of the appellate authorities. The assessing officer, therefore, should have verified the payment of interest from the concerned parties. Therefore, it stands concluded that the assessing officer did not verify the element of payment from M/s. Siddharth Soya Products Ltd. and thus, has not complied with the direction of the Commissioner (Appeals). The concerned party has very specifically mentioned in their certificate that there were no terms and conditions for charging of interest and no payment was made on account of interest. These facts are sufficient to hold that there was no payment of interest from the side of M/s. Siddharth Soya Products Ltd. Therefore, on such seized papers, nothing is clarified if any payment is made by the aforesaid party. Therefore, the authorities below were not justified in making addition against the assessee. On the same set of facts, the additions have been made in the case of M/s. Ashirwad Ginning Factory and M/s. Ganpatlal Pannalal. The Commissioner (Appeals) on the basis of the certificate of the concerned parties explaining that no interest has been charged deleted the additions. The revenue preferred appeals before the Tribunal and the Appellate Tribunal, vide separate orders dismissed the appeals of the revenue in IT(SS) A Nos. 56/Ind/04 and 57/Ind/04. Copies are filed in the paper book. The above facts clearly proved that the assessing officer was not justified in making the addition. We, accordingly, set aside the orders of the authorities below and delete the addition. This ground of appeal of the assessee is accordingly allowed.

It will be clear from the aforesaid findings of the Tribunal in the 6 impugned order that on the materials available on record, the Tribunal came to the conclusion that the assessing officer was not justified in making the addition of Rs. 7,08,184 as income of the respondent on account of the interest payable or paid by M/s. Siddharth Soya Products Pvt. Ltd. The aforesaid conclusion of the Tribunal being a pure question of fact on the materials available before the Tribunal, no substantial question of law arose for decision. The first question formulated by the order dated 28-2-2007, is thus, not a question of law and cannot be raised in appeal u/s 260A of the Act,

On the second substantial question of law raised in this appeal, Mr. Arya, learned senior counsel appearing for the petitioner, submitted that a reading of the impugned order would show that the Tribunal has taken a view that the order of the assessing officer stands merged with the order of the Appellate Tribunal and as such, the original demand notice would not survive because of merger of the assessment order in the appellate order and that the assessing officer cannot demand interest from the date of the original demand notice. He submitted that this view taken by the Tribunal is not at all correct and that the language of Sub-section (2) of Section 220 of the Act makes it clear that the assessee is liable to pay simple interest at the rate specified therein for every month or part of a month comprised in the period commencing from the day immediately following the end of the period mentioned in Sub-section (1) of Section 220 and ending with the day on which the amount is paid. Hence, the assessing officer was entitled to demand interest from the end of the period mentioned in Sub-section (1) of Section 220 till the day the amount is paid.

Mr. Nema, on the other hand, referred to the proviso to Sub-section 8 (2) of Section 220 of the Act and submitted that where as a result of an appellate order, the amount on which interest was payable under this section is reduced, the interest shall be reduced accordingly and the excess interest paid, if any, shall be refunded. He submitted that the Tribunal appears to have given effect to this proviso to Sub-section (2) of Section 220 of the Act.

Sub-section (2) of Section 220 of the Act along with the first proviso are quoted herein below:

Section 220(2) If the amount specified in any notice of demand u/s 156 is not paid within the period limited under Sub-section (1), the assessee shall be liable to pay simple interest at one per cent, for every month or part of a month comprised in the period commencing from the day immediately following the end of the period mentioned in Sub-section (1) and ending with the day on which the amount is paid:

Provided that, where as a result of an order u/s 154, or Section 155, or Section 250 or Section 254, or Section 269, or Section 262, or Section 264, or an order of the Settlement Commission under Sub-section (4) of Section 245D the amount on which interest was payable under this section had been reduced, the interest shall be reduced accordingly and the excess interest paid, if any, shall be refunded.

It will be clear from the language used in Sub-section (2) of Section 220 of the Act that the interest is payable by the assessee for every month or part of a month comprised in the period commencing from the day immediately following the end of the period mentioned in Sub-section (1) of Section 220 and ending with the day on which the amount is paid. The first proviso to Sub-section (2) of Section 220 of the Act provides that where as a result of an appellate order, the amount on which interest was payable under this section is reduced, the interest shall be reduced accordingly. Thus, the effect of the first proviso to Sub-section (2) of Section 220 of the Act is only that the amount on which interest is payable under Sub-section (2) of Section 220 will get reduced, as per the appellate order. The first proviso to Sub-section (2) of Section 220 of the Act does not have any effect on the period for which the interest is payable under Sub-section (2) of Section 220 of the Act.

The Tribunal, therefore, was not correct in coming to the conclusion that the assessing officer cannot demand interest from the date of original demand notice. The assessing officer, in our considered opinion, can demand interest from the date of original demand notice but not on the amount originally assessed but on the amount as reduced by the appellate order. The second question of law is answered accordingly in favour of the department and the appeal is partly allowed.