Commissioner of Income Tax vs Shah Services

Ajit K. Sengupta, J.—In this reference u/s 256(2) of the income tax Act, 1961 (''the Act'') for the assessment year 1984-85, the following question of law has been referred to this Court:

Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that levying of interest under sections 139(8) and 217 of the income tax Act, 1961 was not legal in the instant case and in directing the Assessing Officer not to recover the interest charged u/s 139(8) of the income tax Act, 1961 ?

Shortly stated, the facts are that while completing the assessment of the assessee, a registered firm, for the assessment year 1984-85, the ITO in his order dated 21-5-1986 directed to ''charge interest as per law''. Accordingly, in the notice of demand sums of Rs. 11,160 and Rs. 2,923 were included as interest payable under sections 139(8) and 217 of the Act.

The assessee challenged the above charging of interest before the Commissioner (Appeals) but remained unsuccessful.

The assessee then brought the issue in second appeal before the Tribunal. The Tribunal following the decision in the cases of Mulakh Raj Bimal Kumar Vs. Income Tax Officer and Others, and of Monohar Gidwany v. CIT [1983] 139 ITR 498 (Cal.) accepted the claim of the assessee with the following remarks:

We have carefully considered the rival submissions and the case laws cited before us. We are unable to appreciate that the cases cited on behalf of the assessee were distinguishable on facts. As is evident from the assessment order, no directions to charge interest under specific provisions of the Act were made by the income tax Officer. No interest was charged in the notice of demand. This clearly shows that the income tax Officer failed to apply his mind regarding charging of interest and left this job to his subordinate staff. This is clearly not permissible under the law. For the above reasons, we hold that interest levy was not legal and the same could not be demanded as per the challan accompanying the assessment order. The income tax Officer is, accordingly, directed that interest charged under the above sections should not be recovered from the assessee.

At the outset we must mention that observation of the Tribunal in the paragraph quoted above that no interest was charged in the notice of demand is not correct. By consent of the parties, the notice of demand u/s 156 of the Act and also the assessment form have been placed before this Court which are treated as part of the records. The notice of demand shows that the interest has been calculated under sections 139(8) and 217. The questions are whether the direction of the ITO to charge interest as per the law is invalid and whether the interest as levied should be deleted.

Our attention has been drawn to a decision of this Court in the case of Commissioner of Income Tax Vs. New Swadeshi Mills of Ahmedabad Ltd., In that case, the question was whether the assessee was entitled to agitate in the quantum appeal the ground in respect of the order passed by the ITO levying interest u/s 215 of the Act ? It was found in that case that in the assessment order there was a direction ''charge interest, if leviable''. On these facts the Division Bench of this Court held that the ITO in his discretion can charge interest u/s 215 in an appropriate case but it must appear that the discretion was exercised in a proper manner and having regard to all the circumstances of the case. The Court said that it was not clear whether the ITO had charged interest at all in that case. The endorsement at the foot of the assessment order ''charge interest, if leviable'' indicated that the ITO was assigning the responsibility for levying of interest to somebody else. The AAC had not gone into the question whether interest was at all leviable on the facts of that case and whether the ITO had at all exercised his discretion in the matter. Accordingly, the Court in that case held that such an order was appealable and the Tribunal was right in remanding the matter to the AAC for fresh consideration.

The learned Advocate for the assessee has, however, relied on a decision of the Allahabad High Court in the case of Commissioner of Income Tax Vs. Himalaya Drug Co., In that case, the respondent-assessee, Himalaya Drug Co., Dehradun, was a partnership firm. For the assessment year 1970-71, it filed its return on 27-1-1971, that is, after a delay of 27 days. The ITO made the assessment and while preparing ITNS-150 a sum of Rs. 382 was charged as interest u/s 139(1) , taking the status of the assessee as that of a registered firm. Subsequently, the ITO found that interest had been wrongly charged treating the assessee as a registered firm. On the other hand, interest u/s 139 should have been charged treating the assessee as an unregistered firm which came to Rs. 17,708. In his opinion, it was a mistake apparent from the record and, hence, he took action u/s 154. Pursuant to the notice the assessee appeared before the ITO and contended that there was no mistake apparent from the record which could be rectified. The ITO did not agree and, by an order dated 27-12-1972, charged interest at Rs. 17,708 u/s 139(8)(a) .

On appeal, the AAC cancelled that order, the reason being that there was no order passed by the ITO in the first instance to show how the amount of Rs. 382 as interest had been calculated. If calculation had proceeded on the basis of the tax payable by a registered firm, then the amount of interest charged should have been Rs. 463 from which fact it could be inferred that the ITO had in his discretion reduced the amount of interest chargeable. Another reason given was that the previous approval of the IAC was required to be obtained since the amount of interest chargeable exceeded Rs. 1,000 on the tax payable by the assessee if treated as an unregistered firm. No such prior approval had been taken and, hence, it could not be said that there was any mistake apparent from the record. Lastly, in the opinion of the AAC, a decision on a debatable point of law or failure to apply the law to a set of facts which remained to be investigated cannot be corrected by an order u/s 154.

Being aggrieved, the department filed an appeal before the Tribunal. The Tribunal repelled the contention of the revenue that the tax calculation form known as ITNS-150 could be treated as an order charging interest which could be corrected u/s 154. As observed by the Tribunal: ''In our view this is a tax calculation form meant purely for departmental purposes and, hence, cannot be equated with an order of the income tax Officer, such as an assessment order or any other order, by which the assessee is made liable to pay a sum by way of interest, penalty, or tax''. The Tribunal has also taken the view that even the levy of interest at Rs. 382 on the basis of the tax payable by the assessee as a registered firm was not correct. The correct amount should have been Rs. 463 and from this fact it could be inferred that there was no ascertainable basis or an order for charging interest at Rs. 382. In the result, the department''s appeal was dismissed.

The Allahabad High Court there held as follows:

It was submitted before us by the learned standing counsel that ITNS-150 is a part of the assessment order, and, therefore, if there was any apparent mistake therein it could be rectified u/s 154, and, secondly, that charging of interest u/s 139(8) (a) is automatic. We do not find any merit in either of these two submissions. ITNS-150 is certainly not a part of the assessment order. It is only meant for a calculation of the tax payable by an assessee. Section 154(1) (a) empowers the ITO to amend any order of assessment or of refund or any other order passed by him with a view to rectifying any mistake apparent from the record. The section has a limited application. The main limitation is that it is only a mistake apparent from the record which can be rectified. Secondly, in the case of an ITO it should be a mistake in an order of assessment or an order of refund or any other order passed by him. As noted above, ITNS-150 is not an order passed by the ITO. It only contains calculation of the tax and other dues payable. The ITO, therefore, was not competent to rectify ITNS-150 by resort to section 154(1) (a) .

Coming to the other contention, it would be seen that the charging of interest u/s 139(8) (a) is not automatic. Under this provision where the return under sub-section (1) or sub-section (2) or sub-section (4) for an assessment year is furnished after the specified date or is not furnished then, whether or not the ITO has extended the date for furnishing the return under sub-section (1) or sub-section (2) , the assessee shall be liable to pay simple interest at twelve per cent per annum. There is a proviso to this sub-section which says that the ITO may, in such cases and in such circumstances as may be prescribed, reduce or waive the interest payable by any assessee under this sub-section. In other words, the ITO is expected to apply his mind to the facts and circumstances of the case and if the assessee is able to satisfy him, he may reduce or waive the interest payable under this sub-section. In the present case, the ITO had not passed any order charging interest under this provision... (p. 371)

In our view, this case has no application to the facts of this case inasmuch as in this case there was a direction to levy interest in accordance with law but in the case before the Allahabad High Court it was only calculated in the assessment form. It was not even mentioned in the demand notice but in the case before us not only there was a direction to levy interest but the interest was also calculated and shown in the demand notice and the amount shown in the demand notice was included in such interest.

Our attention has also been drawn to a decision of this Court in the case of Commissioner of Income Tax Vs. Hindusthan Sanitary Ware and Industries Ltd., At the very outset it is to be mentioned that in that case reference was applied for by both the revenue and the assessee. The questions of law were also identical but the Tribunal instead of combining the two applications in a common reference made two several references with the result that the reference made at the instance of the assessee came up for decision before the Reference Bench of this Court as early as 1976. Reference was disposed of in 1978, whereas the present reference at the revenue''s instance was made by the Tribunal in 1979. We had to overcome the intriguing situation by following the earlier judgment of 1978, because on the same issue arising from the assessee''s case for identical assessment year there cannot be two different answers. The imperative requirement of maintaining uniformity in the peculiar circumstances left us no option to decide the issue independently. Therefore, there was no scope for adjudging the whole matter otherwise than in the light of the ratio decidendi in the earlier judgment.

Moreover, in that case the ITO charged interest u/s 216 of the Act without giving any reasons. The decision was that the authority who passes an order in discharge of a quasi-judicial function by exercise of discretion must record his reasons in support of the order he made. The requirement of a speaking order cannot be dispensed with even when the authority has been vested with the discretionary powers. The requirement is imperative because there the question of levy of interest arose u/s 216 which is appealable unlike the present case where interest has been levied u/s 139(8) as well as section 217. Therefore, the officer levying it has to render the reasons for which he considered such interest leviable. In absence of the reasons being spelt out the assessee''s right to appeal gets defeated as he will not have the opportunity to assail the levy in appeal where he is aggrieved. Therefore, on both counts, that decision does not advance the assessee''s case.

In the instant case, the ITO directed charging of interest as per the law which showed that he did not make up his mind whether interest is at all chargeable and if chargeable, under what provisions of the law. It was a case of total non-application of mind and unauthorised delegation of the quasi-judicial function to his subordinate not possessing the statutory authority to decide on chargeability of such interest. Here neither the facts nor the state of law were gone into by the officer who left it to the subordinate for determination. Thus, in the instant case, there was failure on the part of the officer to determine the proper law and decide the applicability of such law to the facts of the case. Therefore, the Tribunal ought to have remanded the matter to the ITO asking him to exercise his powers himself. This was the view taken in the case of New Swadeshi Milk of Ahmedabad (supra) .

Looking at the question in a broader perspective we are of the view that the omission which the officer committed was nothing but an irregularity that needed to be set right by the appellate authority and the proper course to remove such irregularity is to send the matter back to the ITO.

It is now well-settled that where an irregularity supervenes, such irregularity is curable and should be, in taxation in particular, cured. A distinction has to be maintained by the appellate authorities between an error within the jurisdiction and error of jurisdiction. It is the latter class of error that renders an order into a nullity but not the former one. Where a statutory authority rightly assumes jurisdiction, but commits an irregularity in its exercise, the appellate authorities should correct it. That is the principle the Supreme Court has laid down in GUDUTHUR BROS. Vs. Income Tax OFFICER, SPECIAL CIRCLE, BANGALORE., and Kapurchand Shrimal Vs. Commissioner of Income Tax, Andhra Pradesh, Hyderabad,

For the reasons aforesaid, we answer the question in this reference in the negative and in favour of the revenue but the matter will be gone into afresh by the Assessing Officer as to whether the interest was leviable under sections 139(8) and 217. There will be no order as to costs.

Chowdhury, J.

I agree.