MALAYALAM PLANTATIONS (INDIA) LTD. vs COMMISSIONER OF Income Tax.

PARIPOORNAN J. - The petitioner is a company. It is an assessee to Income Tax on the files of the 2nd respondent. In this original petition, the controversy is regarding waiver or reduction of interest u/s 215(4) of the Income Tax Act (in short "the Act") for the year 1977-78. By exhibit P-1 assessment order dated March 13, 1980, the Income Tax Officer levied interest u/s 217(1A) of the Act in the sum of Rs. 12,83,538. By exhibit P-2, dated May 15, 1980, the assessee stated that section 217(1A) is not attracted and in the alternative, also prayed that the assessment may be revised deleting the interest charged u/s 217(1A) of the Act in exercise of the powers under rule 40 of the Income Tax Rules, 1962. The assessee had taken exhibit P-1, order of assessment, in appeal. The Commissioner of Income Tax (Appeals) (in short "the Commissioner") modified exhibit P-1 assessment order, by his order dated January 14, 1981. The appellate order was given effect to by the Income Tax Officer, the 2nd respondent, by passing a consequential order, exhibit P-3, dated February 16, 1981, wherein he levied interest u/s 215 of the Act in the sum of Rs. 10,44,383. Exhibit P-2 petition filed by the assessee for waiver of interest was considered by the Income Tax Officer. He passed exhibit P-4 order, dated May 13, 1981. Therein, he referred to exhibit P-3 consequential order, passed by him dated February 16, 1981, the assessees petition for waiver of interest dated May 15, 1980) (exhibit P-2), and also the proceedings of the Inspecting Assistant Commissioner of Income Tax, dated May 8, 1981. He waived a sum of Rs. 3,80,460 under rule 40(1) and rule 40(5) of the Income Tax Rules and reduced the interest u/s 215 of the Act to Rs. 6,63,923. The petitioner-assessee filed a revision petition, exhibit P-5, before the Commissioner of Income Tax, Ernakulam, dated September 28, 1981. Exhibits P-6 and P-7 are further communications filed before the Commissioner in exhibit P-5 revision. By exhibit P-8 order, dated April 13, 1983 the Commissioner of Income Tax (1 st respondent) substantially affirmed exhibit P-4 order passed by the Income Tax Officer. But, on the basis of some marginal relief given in the revisional order, the Income Tax Officer was directed to rework the interest leviable u/s 215 of the Act on the basis of relief afforded in exhibit P-8. The revision was allowed in part. In this original petition, the challenge is against exhibit P-1 assessment order, exhibit P-3 (consequential order), exhibit P-4 (the order passed by the assessing authority) retaining the interest u/s 215 of the Act in the sum of Rs. 6,63,923 and exhibit P-8 order passed in revision by the first respondent substantially affirming exhibit P-4.

In support of the challenge against the orders passed by respondents Nos. 1 and 2, counsel for the petitioner, Mr. P. K. Kurien, raised many pleas. It was argued :

(1) In this case, section 217(1A) of the Income Tax Act is inapplicable. The levy of interest was u/s 217(1A). By a communication dated July 18, 1980, the Income Tax Officer informed the petitioner that the interest is levied u/s 215, though wrongly stated u/s 217(1A). This is unauthorised. The assessment order served on the assessee dated March 13, 1980, will show that the levy itself was u/s 217(1A)

(2) The petition filed by the assessee under rule 40 of the Income Tax Rules was not properly considered. Exhibit P-4 order passed by the Income Tax Officer and exhibit P-8 revisional order will show that the matter has been considered under rules 40 (1), 40 (4) and 40 (5) of the Rules. The Income Tax Officer waived the interest after the period of one year from the date of filing of the return of income. He has proceeded on the basis that the imposition of interest for one year is compulsive. This is illegal.

(3) In passing exhibit P-4, the Income Tax Officer has not looked into rule 40 (4) at all. No relief was given on that score. The reference to rule 40 (4) by the Commissioner in exhibit P-8 has not effectively meted out justice to the petitioner.

(4) Exhibit P-4 order passed by the 2nd respondent (income tax Officer) expressly refers to the proceedings of the Inspecting Assistant Commissioner dated May 8, 1981. That is item No. 3 in the reference to the proceedings on the basis of which the order was passed. The reference to the Inspecting Assistant Commissioner of Income Tax is in accord with rule 40 (5) of the Rules. The petitioner was not heard before the Inspecting Assistant Commissioner passed the proceedings dated May 8, 1981. The petitioner had no notice or knowledge about the proceedings of the Inspecting Assistant Commissioner dated May 8, 1981; nor was he asked to explain about the instructions given by the Inspecting Assistant Commissioner dated May 8, 1981, and afforded an opportunity to explain. It is not known how the Inspecting Assistant Commissioner has arrived at 30% reduction There is no basis for this. If the petitioner was afforded an opportunity by the Inspecting Assistant Commissioner before he rendered the proceedings dated May 8, 1981, or was at least informed about the proposal either by the Inspecting Assistant Commissioner or by the Income Tax Officer, he would have offered his explanation, which might have convinced that the entire interest levied by the Income Tax. Officer should have been waived. In the absence of notice or hearing by the Inspecting Assistant Commissioner before rendering the proceedings dated May 8, 1981, the petitioner was prejudiced. There is a failure of the principles of natural justice.

(5) The Commissioner of Income Tax has proceeded on the mistaken impression that the price of tea in March is Rs. 12.52. It was the average price of the year, and

(6) In the case of other producers of tea, the interest levied was completely waived in similar circumstances. There is no reason why it was not so done in the case of the petitioner.

The Revenue has controverted the above pleas. The Revenue filed a detailed counter-affidavit dated October 3, 1986. In particular, it is stated that the plea of the petitioner based on rule 40(5) cannot be considered since it did not move the Inspecting Assistant Commissioner to invoke rule 40(5) of the Income Tax Rules. It has also been stated that the 2nd respondent waived the interest under rules 40 (1) and 40(4) only. Whether the waiver of interest was called for under rule 40(5) of the Income Tax Rules does not arise for consideration, since the assessee did not move the Inspecting Assistant Commissioner under rule 40(5) of the Income Tax Rules. Reference to rule 40(5) is incorrect and incompetent. Advertence to rule 40(5) in the order is wrong and the Income Tax Officer has exercised his discretion only under rules 40(1) and 40(4). It should be stated that the specific averment of the petitioner that in the case of other producers of tea, interest levied was waived in full in similar circumstances, covered by ground G, was not denied in the counter-affidavit dated October 3, 1986.

The arguments on both sides covered a wide range. But, for the purposes of disposing of this original petition, it is not necessary for us to adjudicate on all the questions raised and argued before us. We shall consider only point No. (4) urged by the assessee to the effect that the Inspecting Assistant Commissioner in rendering the proceedings dated May 8, 1981 (referred to as item No. (3) in exhibit P-4) did not give notice to the assessee; nor did he hear the assessee before passing that order and so there is violation of the principles of natural justice. All other pleas raised before us by counsel for the assessee and counsel for the Revenue are left open.

Sections 215(1) and 215(4) of the Income Tax Act, 1961, are as follows :

"215. Interest payable by assessee. - Where, in any financial year, an assessee had paid advance tax u/s 212 on the basis of his own estimate, and the advance tax so paid is less than seventy-five per cent. of the assessed tax, simple interest at the rate of twelve per cent. per annum from the 1st day of April next following the said financial year up to the date of the regular assessment shall be payable by the assessee upon the amount by which the advance tax so paid falls short of the assessed tax ...

(4) In such cases and under such circumstances as may be prescribed, the Income Tax Officer may reduce or waive the interest payable by the assessee under this section."

Rule 40 of the Income Tax Rules, 1962, provides as follows :

"40. Waiver of interest. - The Income Tax Officer may reduce or waive the interest payable u/s 215 or section 217 in the cases and under the circumstances mentioned below, namely - .

(1) When the relevant assessment is completed more than one year after the submission of the return, the delay in assessment not being attributable to the assessee.

(2) Where a person is u/s 163 treated as an agent of another person and is assessed upon the latters income.

(3) Where the assessee has income from an unregistered firm assessed under the provisions of clause (b) of section 183.

(4) Where the previous year is the financial year or any year ending about the close of the financial year and large profits are made after the 1st March (or the 15th March in cases where the proviso to section 211 applies) in circumstances which could not be foreseen.

(5) Any case in which the Inspecting Assistant Commissioner considers that the circumstances are such that a reduction or waiver of the interest payable u/s 215 or section 217 is justified."

In this case, we are concerned with section 215(4) read with rule 40 of the Income Tax Rules, to dispose of the argument regarding absence of notice of hearing by the Inspecting Assistant Commissioner. Counsel for the Revenue stressed that rule 40 (5) travels far beyond section 215(4) of the Income Tax Act, that the statute has given discretion only to the Income Tax Officer to waive or reduce the interest and in so far as rule 40 (5) envisages that it is open to the Inspecting Assistant Commissioner to consider whether reduction or waiver of the interest payable u/s 215 is justified, is really unauthorised. So, in this case, the waiver or reduction of interest as per exhibit P-4 and exhibit P-8 orders should be deemed to be only u/s 215(4) read with rule 40 (1) to (4) of the Income Tax Rules. The consideration of the matter under rule 40 (5) of the Income Tax Rules was uncalled for and should not be taken as having been considered at all. This plea should fail for more reasons than one. It was argued that rule 40 (5) is ultra vires since it travels beyond section 215(4) Of the Act. Firstly, the petitioner has not challenged the vires of rule 40(5) Of the Income Tax Rules. In this case, we have to proceed on the basis that in filing the petition, exhibit P-2, under rule 40 of the Income Tax Rules, the petitioner invoked all the sub-rules - sub-rules (1) to (5) of rule 40. The Officer also proceeded on that basis and referred the matter to the Inspecting Assistant Commissioner of Income Tax. We perused the files made available to us by counsel for the Revenue. The Officer has referred the matter to the Inspecting Assistant Commissioner with his recommendations. The Inspecting Assistant Commissioner considered the matter and has given his own decision dated May 8, 1981. Subsequently, the Income Tax Officer passed exhibit P-4 proceedings. Therein, the proceedings of the Inspecting Assistant Commissioner are referred to as item No. (3). The Officer has also stated that a sum of Rs. 3,80,460 was waived under rule 40(1) read with rule 40(5) of the Income Tax Rules. In exhibit P-8 revisional order passed by the Commissioner of Income Tax, he has referred to the waiver of interest under rule 40(5) of the Rules in paragraphs 7 and 11. So, it is idle to contend that in passing exhibits P-4 and P-8 orders, rule 40 (5) was not invoked at all. This is against the recitals contained in exhibits P-4 and P-8 orders, as also the relevant files which positively show that the Income Tax Officer referred the matter to the Inspecting Assistant Commissioner, who rendered his decision on the basis of which exhibit P-4 proceeding was passed. Secondly, it is not open to the Revenue to contend that rule 40 (5) of the Income Tax Rules is ultra vires or unauthorised. (See Assistant Commissioner of Commercial Taxes (Asst.) Dharwar and Others Vs. Dharmendra Trading Company and Others, .) The plea of the Revenue that it is not open to the petitioner to rely on rule 40 (5) of the Income Tax Rules or that the matter should be adjudicated without reference to rule 40 (5) of the Income Tax Rules, cannot be accepted in the circumstances.

Exhibit P-4 order, passed by the Income Tax Officer, as also exhibit P-8, revisional order passed by the Commissioner of Income Tax, proceeded only on the basis that the power vested in the Inspecting Assistant Commissioner under rule 40 (5) of the Income Tax Rules was also exercised. In exercising the powers under rule 40 of the Income Tax Rules, the Income Tax Officer is exercising a quasi-judicial function. A judicial exercise of discretion is necessary to find out what interest should be charged or whether any interest at all should be charged and what is the extent to which reduction or waiver of interest is called for. It depends upon the facts and circumstances of each case. The Income Tax Officer is exercising a quasi-judicial function in that behalf. So also, in cases where the Inspecting Assistant Commissioner of Income Tax "considers" the matter under rule 40(5) of the Rules, he is performing a quasi-judicial function. The order passed by the Income Tax Officer under rule 40 should be a speaking order. It should contain reasons. So also, the proceedings of the Inspecting Assistant Commissioner, in exercising the powers under rule 40 (5) of the Rules, should be a speaking order. It should contain reasons. The power so conferred on the Income Tax Officer and the Inspecting Assistant Commissioner to reduce or waive the interest conferred by the statute is one coupled with a duty and in any event, it should be exercised fairly and reasonably. It is so vested in the said Officers for the purpose of being used for the benefit of persons who are specifically pointed out and who are, subject to the fulfilment of the conditions, entitled to call for its exercise, in order to mitigate the hardship resulting from the operation of section 215(1) of the Act. It is no doubt a discretionary statutory power. But it will have to be exercised in cases where the persons, for whose benefit it is conferred, call for its exercise, provided the conditions for the exercise thereof are fulfilled. The decision of the Gujarat High Court in Patel Engineering Co. Ltd. Vs. C.B. Rathi and Another, is instructive on this point and has our full concurrence-See also Commissioner of Income Tax Vs. Cochin-Malabar Estates Ltd., .

We are of the view that it is open to an assessee to move the Inspecting Assistant Commissioner of Income Tax praying for relief under rule 40 (5) but in the context of section 215(4) and rule 40, it is not obligatory for him to do so. The Income Tax Officer, who is enjoined to exercise the "discretion" under rule 40, can refer the matter to the Inspecting Assistant Commissioner to consider the matter from the angle or perspective of rule 40 (5) and obtain appropriate orders from him on that score and then pass the final orders. In this case, the Income Tax Officer himself has moved the Inspecting Assistant Commissioner to consider the matter from the standpoint of rule 40 (5) and so the plea that the petitioner did not move the Inspecting Assistant Commissioner is of no consequence. Even an administrative order or decision in matters involving civil consequences has to be made consistently with the rules of natural justice ( State of Orissa Vs. Dr. (Miss) Binapani Dei and Others, ). The rule has been made applicable to administrative enquiries also. Every authority quasi-judicial or administrative or executive -should act fairly, reasonably and in a just manner, i.e., in accordance with the principles of natural justice, when the result of the exercise of the power is likely to affect any person or visit him with civil consequences. (See A.K. Kraipak and Others Vs. Union of India (UOI) and Others, and Swadeshi Cotton Mills v. Union of India [1981] 51 Comp Cas 210 (SC)). It should be remembered that "doing what is right may still result in unfairness, if it is done in the wrong way" as observed by Lawton L. J. in Maxwells case [1974] 1 QB 523 and so, notice and hearing are essential before an adverse order is passed against a person So, a person, who is likely to be affected by a decision rendered either by the Income Tax Officer or by the Inspecting Assistant Commissioner, should be afforded an opportunity before rendering a decision. If it is not so done, it will be violative of the principles of natural justice and is unfair There is no suggestion in the section or in the Rules to deny the right of an affected person to be heard and so section 215(4) of the Act and rule 40 of the Rules should be interpreted as implying the preservation of such a right (See Baldev Singh and Others Vs. State of Himachal Pradesh and Others, and State of Haryana Vs. Ram Kishan and Others, ). Admittedly, in this case, before the Inspecting Assistant Commissioner rendered his proceedings dated May 8 1981, referred to in exhibit P-4 as item No. 3, the petitioner-assessee was not given any notice or an opportunity to be heard. We hold that such a decision rendered by the Inspecting Assistant Commissioner, dated May 8, 1981, is unfair and void. It is violative of the principles of natural justice The order passed by the Income Tax Officer, exhibit P-4, relying on the aforesaid decision of the Inspecting Assistant Commissioner, dated May 1981, is equally infirm. The petitioner urged this ground in exhibit P-8 memorandum of revision filed before the Commissioner of Income Tax a ground No. 4. The Commissioner of Income Tax, in passing exhibit P-8 order, has not considered this aspect pointedly. Exhibit P-8 revisional order, affirming exhibit P-4, is also tainted in view of the fundamental infirmity of absence of notice and hearing by the Inspecting Assistant Commissioner before rendering his decision dated May 8, 1981, which was also the basis of exhibit P-4 order. The failure to afford an opportunity to the petitioner by the Inspecting Assistant Commissioner is a fundamental infirmity. Without affording such an opportunity, the Income Tax Office has no jurisdiction to render the final order, exhibit P-4. The defect cannot be cured by the mere fact that it was affirmed, or varied in part, by exhibit P-8 revisional order. The decisions of this court in PONKUNNAM TRADERS Vs. ADDITIONAL Income Tax OFFICER, KOTTAYAM, AND ANOTHER., affirmed by the Division Bench in Additional Income Tax Officer Vs. Ponkunnam Traders, and the recent decision of this court in Ananthakrishnan v. Oriental Fire and General Insurance Co. Ltd. [1988] 2 KLT 159 go to show that the illegality in the proceedings of the Inspecting Assistant Commissioner, which formed the basis of exhibit P-4 order, cannot be cured or obliterated either by exhibit P-8 revisional order or otherwise. It should be also noticed that though the absence of notice and hearing by the Inspecting Assistant Commissioner was pointedly raised before the Commissioner of Income Tax, the said matter was not adjudicated by him in rendering exhibit P-8 order. In this view of the matter, we hold that exhibit P-4 order, passed by the Income Tax Officer and the revisional order passed in revision therefrom, exhibit P-8 order passed by the Commissioner of Income Tax, are illegal and they are hereby quashed. The Income Tax Officer will pass fresh orders in the matter in accordance with law and in the light of the observations contained in this judgment. The original petition is allowed.

We again state that all the other contentions urged by the petitioner counsel impugning exhibits P-1, P-3, P-4 and P-8 orders are left open. The original petition is allowed with the above directions.