Commissioner of Income Tax vs Rayalaseema Mills Limited

Syed Shah Mohammed Quadri, J.—The Division Bench of this court, which dealt with this reference case u/s 256(1) of the Income Tax Act, 1961 (for short "the Act"), at the instance of the Revenue, not agreeing with the judgment of this court in Addl. Commissioner of Income Tax Vs. Vazir Sultan Tobacco Company Ltd., , referred this case to the Full Bench.

The respondent-company is the assessee. In the previous year ending with December 31, 1979, relevant to the assessment year 1980-81, the assessee paid advance tax of Rs. 23,65,000 in three instalments; the first instalment of Rs. 1,00,000 was paid on June 16, 1979; the second instalment of Rs. 11,32,500 was paid on September 14, 1979, and the third instalment of an equal amount was paid on December 15, 1979. Before the Income Tax Officer, the assessee represented that in view of the brought forward losses the assessee estimated its income at Rs. 5,00,000 for the assessment year 1980-81 and accordingly paid the advance tax instalment of Rs. 1,00,000. However, having noticed the marked difference between the cost of materials and the price of finished products in that year the assessee realised that substantial income was likely, so it estimated the income at Rs. 40,00,000 and filed a revised return on September 13, 1979. Along with the returns for the said assessment year, declaring the income of Rs. 30,06,487 the assessee claimed brought forward losses of Rs. 1,28,095; for the assessment year 1979-80 there was an unadjusted brought forward loss of Rs. 60,045 which was to be adjusted against the income for the assessment year 1980-81. On the ground of underestimation of advance tax at the time of payment of the first instalment of tax the Income Tax Officer charged interest of Rs. 33,972 u/s 216 of the Act. On appeal the Commissioner of Income Tax (Appeals) held that the assessee''s conduct appeared to be straightforward and it could not be accused of deliberately underestimating the advance tax payable for the first instalment and following the judgment of our High Court in Addl. Commissioner of Income Tax Vs. Vazir Sultan Tobacco Company Ltd., allowed the appeal, setting aside the levy of interest under appeal, by his order dated August 4, 1983. Against that order the Revenue filed an appeal before the Income Tax Appellate Tribunal, which was heard along with the appeal filed by the assessee on a different point. By a common order dated June 26, 1984, the Tribunal confirmed the order of the Commissioner of Income Tax (Appeals) and dismissed the appeal of the Revenue. The Tribunal referred the following question to this court as arising from the said order, at the instance of the Revenue :

"Whether, on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal is justified in deleting the interest u/s 216 charged at Rs. 33,972 ?"

Mr. S.R. Ashok, learned standing counsel for the Income Tax Department, submits that though the point is covered by the judgment of the Division Bench of this court in Addl. Commissioner of Income Tax Vs. Vazir Sultan Tobacco Company Ltd., , the Calcutta and the Bombay High Courts have taken a different view. He contends that section 216 deals with underestimation of income and that the question of animus of the assessee is not relevant; if as a fact there is an underestimation of income that will attract the provisions of section 216 of the Act.

Mr. Sridharan, learned counsel for the assessee, submits that both the Appellate Commissioner as well as the Tribunal found that estimation of income was justified having regard to the circumstances of the case, therefore, interest u/s 216 cannot be levied; it is further contended that it is only when the underestimation of tax is to evade payment of tax that the interest may be imposed but not otherwise.

To appreciate the contentions of learned counsel, we shall read section 216 of the Act, as it stood in the relevant assessment year :

"216. Where, on making the regular assessment, the Income Tax Officer finds that any assessee has -

(a) u/s 209A or section 212 underestimated the advance tax payable by him and thereby reduced the amount payable in either of the first two instalments; or

(b) u/s 213 wrongly deferred the payment of advance tax on a part of his income,

he may direct that the assessee shall pay simple interest at twelve per cent. per annum -

(i) in the case referred to in clause (a), for the period during which the payment was deficient, on the difference between the amount paid in each such instalment and the amount which should have been paid, having regard to the aggregate advance tax actually paid during the year; and

(ii) in the case referred to in clause (b), for the period during which the payment of advance tax was so deferred.

Explanation. - For the purposes of this section, any instalment due before the expiry of six months from the commencement of the previous year in respect of which it is to be paid shall be deemed to have become due fifteen days after the expiry of the said six months."

A plain reading of the provision, extracted above, shows that it empowers the Income Tax Officer to direct the assessee to pay simple interest at 12 per cent, per annum if on making regular assessment he finds that the assessee has underestimated the advance tax payable by him under sections 209A and 212 of the Act and thereby reduced the amount payable in either of the first two instalments or has wrongly deferred the payment of advance tax on a part of his income u/s 213 of the Act. The period for which the interest is payable is given in sub-clauses (i) and (ii) of clause (b). The Explanation points out when the income shall be deemed to have become due. We are not concerned here with clause (b) and the Explanation. Section 209A was inserted by the Finance Act, 1978, with effect from June 1, 1978, and was omitted by the Direct Tax Laws (Amendment) Act, 1987, with effect from April 1, 1988. It dealt with computation and payment of advance tax by the assessee. Section 212, which has since been omitted by the Direct Tax Laws (Amendment) Act, 1987, with effect from April 1, 1988, provided for estimate of income by the assessee.

The liability to pay interest u/s 216 arises on underestimating the advance tax and reducing the amount payable in either of the first two instalments or wrongly deferring the payment of advance tax on part of the income.

A close reading of sections 209A, 210, 212 and 216 of the Act makes it clear that the scheme of payment of advance tax is based on the principle "pay as you earn"; therefore, the tax is payable in the year in which the income is earned and not in the year in which the income is assessed.

In other words, tax is payable in the accounting year relevant to the assessment year, but not in the assessment year which is the general principle of Income Tax. Section 209A, referred to above, contemplates computation and payment of advance tax by the assessee in each financial year on or before the dates on which the instalments of advance tax are due as per section 211 of the Act. The principle underlying section 210 is where a person has been previously assessed by way of regular assessment under the Act and the Income Tax Officer by order in writing requires him to pay the advance tax determined in accordance with the provisions of sections 207 - 209 of the Act, the assessee has to pay the advance tax in terms of the order in instalments on the dates mentioned in section 211. Sub-sections (1) and (3A) of section 212 incorporate exceptions to the above rule and apply when an assessee who is required to pay advance tax by an order u/s 210 of the Act, estimates before the due date for payment of the last instalment of advance tax that his current income is likely to be less than or exceed the income on which the advance tax is payable by him, pursuant to such order, or for any other reason that the advance tax payable by him would be less than or exceed the amount which he is required to pay (as the case may be) then in the first situation, he is given an option and in the second situation he is obliged to send to the Income Tax Officer an estimate of (a) the current income, and (b) the estimate of the advance tax payable by him on the current income calculated in the manner laid down u/s 209 of the Act and has to pay such amount of advance tax according to his estimate in equal instalments on the dates applicable to him u/s 211 as have not expired or in one sum if only the last of such dates has not expired. Sub-section (2) of section 212 enables an assessee to send a revised estimate of advance tax payable by him on or before any one of the dates specified in section 211 and adjust any excess or deficiency in respect of any instalment already paid in a subsequent instalment or instalments. Though section 212 contemplates the filing of an estimate of current income and an estimate of the advance tax payable on such income yet the liability to pay interest u/s 216 arises for underestimation of the advance tax and reducing the amount payable in either of the first two instalments. Underestimation of advance tax may be due to underestimation of income or may be due to wrong calculation or any other cause, but for purposes of section 216, it is not the cause that results in underestimation of advance tax that is relevant but it is the fact of underestimation of advance tax that is relevant and that alone creates liability for payment of interest.

We notice here the contention of Mr. Sridharan, that the very concept of underestimation involves a deliberate act on the part of the person underestimating, therefore, unless there is deliberate action by the assessee in underestimating the advance tax either for the reason of underestimation of income or otherwise resulting in underestimation of advance tax, the provisions of section 216 will not be attracted. In our view, this contention is without any substance. It appears to us that the concept of deliberate or wilful action of the assessee in underestimating advance tax is alien to the provisions of section 216. However, in our opinion, the question of underestimation of advance tax, has to be determined, having regard to the circumstances existing on the date of payment of either of the first two instalments of advance tax; if the estimation was justified on the date of payment of any of the first two instalments, it cannot be treated as underestimation for purposes of attracting the provisions of section 216. There may be various imponderables giving sudden rise to profits from the business such as an abrupt rise in the prices of petrol in the middle of the year, after payment of the first instalment of advance tax, which could not have been thought of at the time of sending the estimate of advance tax at the initial stage, which may necessitate the filing of a revised estimate of advance tax and paying a higher amount in the second or the third instalment, as the case may be. Indeed to meet some such situations sub-section (2) of section 212 is enacted to adjust any excess or deficiency in respect of any instalment already paid in a subsequent instalment or in subsequent instalments. Whether there are circumstances justifying estimation of advance tax resulting in reduction of the amount of advance tax payable by the assessee or there has been underestimation of advance tax is a question of fact and has to be determined by the fact-finding authorities including the Tribunal.

A Division Bench of our High Court, in Addl. Commissioner of Income Tax Vs. Vazir Sultan Tobacco Company Ltd., considered the scope of section 216 of the Act. In that case the assessee, a public limited company, was required to pay advance tax in four equal instalments by order passed u/s 210 of the Act. The assessee, however, filed estimates of income from time to time and paid the instalments of advance tax on that basis. Finding that the advance tax paid was less than the actual tax payable, the Income Tax Officer added interest. The Appellate Assistant Commissioner, on appeal, held that the assessee had been careful enough to file from time to time the successive estimates disclosing progressively higher figures of income and that the mere fact that the instalments of tax were paid late, did not attract the levy of interest unless it was shown that the late payment was with the sole intention of deferring payments to a later date. The Income Tax Appellate Tribunal dismissed the appeal of the Revenue against the said order of the Appellate Assistant Commissioner, holding that interest u/s 216 was leviable only in a case where the advance tax payable was underestimated and not where the income was underestimated thereby reducing the amounts payable by way of instalments irrespective of whether such action was deliberate or otherwise and affirmed the order of the Appellate Assistant Commissioner. On a reference, the Division Bench having compared the provisions of the Indian Income Tax Act, 1922, with the provisions of the Income Tax Act, 1961, held that if the underestimation of the advance tax payable by the assessee was not due to underestimation of income by the assessee the provisions of section 216 directing payment of interest could be invoked; the Bench observed that if the advance tax happened to be underestimated by reason of the fact that the current income had been underestimated as compared to the actual income ascertained at the end of the year, then the provisions of section 216 were not attracted because, in terms, the Legislature had not provided for the consequences of underestimation of income. Further, the Bench noticed that without recording a finding as required u/s 216, the Income Tax Officer proceeded to charge interest u/s 216 and that the finding contemplated by that section was a condition precedent to the charging of the interest under sub-section (1) of section 216 but that condition was not complied with in that case.

The Division Bench having compared section 18A(2) of the Act of 1922 with section 212 of the Act of 1961, pointed out that both speak of a revised estimate of advance tax and that section 18A(2) spoke only of an estimate of advance tax and section 212 of the Act of 1961 spoke of estimates of (i) current income, and (ii) advance tax and it is on that basis it held that section 216 dealt with underestimation of the advance tax by the assessee and for the consequences of underestimation of advance tax payable by the assessee and that the Legislature had not provided for the consequences of underestimation of current income by the assessee at the time of his sending the estimate of income u/s 212 of the Act of 1961. According to the Division Bench, Parliament had departed from the language of section 18A(2) of the Act of 1922 while enacting section 212 of the Act of 1961, therefore, the difference in language had to be understood as providing for payment of interest u/s 216 only in case of underestimation of advance tax for underestimation of one out of the two estimates, viz., (i) estimate of income, and (ii) estimate of advance tax which the assessee is required to file u/s 212 of the Act. As such section 216 would be attracted if the estimate of advance tax payable by the assessee was not due to underestimation of income on that part of the assessee, like wrong calculation or proceeding on wrong footing with regard to estimation of advance tax.

We are unable to persuade ourselves to agree with the said reasoning. Though it is true that underestimation of advance tax may be the effect of a variety of causes, yet no real distinction can be drawn among the various causes of the underestimation of advance tax for purposes of levy of interest which is payable on the underestimation of advance tax, for whatever reason. We have already indicated above that section 216 imposes interest not with reference to any causes which might have resulted in underestimation of advance tax but on the effect, viz., underestimation of advance tax. Therefore, it follows that if the underestimation of advance tax is due to underestimation of income or due to any other reason, the provisions of section 216 would be attracted.

In Commissioner of Income Tax Vs. Elgin Mills Co. Ltd., , the Division Bench of the Allahabad High Court observed that the word "underestimation" signified an estimate which was below the truth or which was at too low a rate and that both for making an estimate and an underestimate an application of mind was required on the part of the maker and if at the time when the estimate was filed there was proper basis and justification shown for it then it could not be said that it was an underestimate. The question before the Allahabad High Court was whether the Tribunal was right in levying interest u/s 216 for the assessment years 1967-68 and 1968-69. In view of the findings of the Appellate Assistant Commissioner and the Tribunal that the estimates filed by the assessee in the years in question were bona fide and based on the books and the account as made up, up to the month of April, the Bench opined that section 216 could not be applied to the first two instalments in any one of the years under consideration.

In Pasupati Das and Sons Pvt. Ltd. Vs. Commissioner of Income Tax, , the Income Tax Officer passed an order u/s 210 requiring the assessee to pay advance tax for the assessment year 1977-78. Having exercised the option u/s 212, the assessee submitted an estimate of current income to the Income Tax Officer feeling that the current income would be lesser than the income on which the advance tax was payable by him and accordingly paid the first two instalments; but before paying the third instalment he filed a revised estimate of his current income u/s 212 of the Act and on that basis paid the final instalment of advance tax. The Income Tax Officer found the reason for underestimation of tax justifiable and did not charge interest u/s 216, but the Commissioner issued notice u/s 263, revised the order of assessment finding that the assessee''s main business was transacted in November and December each year and that by December 15, 1976, the assessee should have been in a position to know its income correctly and held that by not filing the proper estimate before December 15, 1976, and postponing the payment of the correct amount of instalment, the provisions of section 216 of the Act were attracted and accordingly directed the Income Tax Officer to charge interest. On appeal, the Tribunal upheld the order of the Commissioner. On a reference to the Calcutta High Court it was held that on the facts it would have been open to the authorities to come to a finding that the assessee had underestimated the advance tax payable by it so far as the second instalment was concerned but that finding had not been recorded either by the Commissioner or by the Tribunal. Having regard to the small amount of interest involved the High Court declined to answer the question. However, dissenting from the view taken by our High Court in Addl. Commissioner of Income Tax Vs. Vazir Sultan Tobacco Company Ltd., , the Bench held that if advance tax was underestimated by reason of underestimation of the assessee''s current income as compared to the final income actually ascertained at the end of the year, the provisions of section 216 of the Act would be attracted.

In Oudh Sugar Mills Ltd Vs. Commissioner of Income Tax, , the Division Bench of the Bombay High Court considered the question of applicability of section 216 of the Act. It was observed that the estimation of advance tax u/s 212 was dependent on the estimation of current income, so it was not possible to separate the two artificially and that section 216 did not limit the estimation of advance tax to underestimation for reasons other than underestimation of current income. The Bombay High Court opined that for deciding whether there was any underestimate of advance tax u/s 216, underestimation of current income could not be excluded and in that it has differed from the view taken by our High Court.

We are in respectful agreement with the view expressed by the Allahabad High Court, Bombay High Court and the Calcutta High Court on the interpretation of section 216 of the Act.

Reverting to the facts of this case, the Appellate Assistant Commissioner as well as the Tribunal have recorded the finding that the estimation of income and the advance tax as on the date of payment of the first instalment was justified. In view of what we have expressed above, we hold that the provisions of section 216 are not attracted to this case. We, therefore, answer the question in the affirmative, i.e., in favour of the assessee and against the Revenue.

The reference is accordingly answered,

An oral application is made u/s 261 of the Income Tax Act, 1961, on behalf of the Revenue to certify that the judgment of this court is fit for appeal to the Supreme Court. Since we have not found any conflict in the views of different High Courts and echoed the consensus of judicial opinion, we do not think that it is a fit case for such a certificate.

The application is rejected.