Steelsworth (P.) Ltd. vs Commissioner of Income Tax

D.N. Baruah, J.—In this reference u/s 256(1) of the income tax Act, 1961 (''the Act''), the following question has been referred by the Tribunal, Gauhati for opinion of this Court : "Whether in the facts and circumstances of the case, the Tribunal had any material to hold that the assessee has under estimated the advance tax payable and thereby reduced the amount payable in instalments for the year relevant to the assessment year 1975-76 ?"

The assessee completed the assessment for the year 1975-76 and the Assessing Officer passed an order u/s 216 of the Act. According to him, the assessee filed an estimate of advance tax on 5-9-1974 u/s 212(1) of the Act showing the advance tax payable at Rs. 9,34,500. Thereafter, on 13-3-1975, a revised estimate was filed u/s 212(2) indicating the advance tax payable by the assessee at Rs. 23,20,500. The Assessing Officer observed that the assessee reduced the amount payable in the earlier estimate and, therefore, the Assessing Officer ordered for payment of interest u/s 216 by the assessee on the basis of calculation given in the order itself. The interest was computed at Rs. 38,433. The assessee took up the matter before the Commissioner (Appeals) and the Commissioner (Appeals) held that the assessee was vigilant that his estimate of advance tax should commensurate with the expectation of income and tax thereon. The Commissioner (Appeals), after considering all the aspects of the matter, came to the conclusion that the assessee could not be accused of deliberately underestimating his advance income and deliberately paying underestimated advance tax, therefore, the assessee could not be directed to pay interest u/s 216. 2. The revenue preferred an appeal before the Tribunal against the order passed by the Commissioner (Appeals). The assessee did not file any cross appeal. The appeal was heard along with other appeals filed by the revenue in respect of assessment of other years. The Tribunal passed a consolidated order on 20-5-1988. The Tribunal came to the conclusion that the assessee knew that the advance tax payable for the year was more than that payable during the earlier assessment year, inasmuch as, by the end of December 1973 the sale had gone up to Rs. 1,47,79,902 whereas, the sale up to December 1974 was only Rs. 1,58,99,329 and, therefore, there was a difference of about Rs. 10 lakhs for which no revised estimate was filed in December 1974. Accordingly, the Tribunal did not agree with the conclusion arrived at by the Commissioner (Appeals). It was of the opinion that the assessee had underestimated the advance tax payable and thereby reduced the amount payable in instalments. The order of the Commissioner (Appeals), was, therefore, revised by restoring the order passed by the Assessing Officer. Thereafter, the assessee filed a Miscellaneous Application [MP No. 5 (Gau.) of 1988, dated 22-8-1988] stating, inter alia, that certain submissions of the assessee were not recorded in the judgment of the Appellate Tribunal which, according to the assessee, constituted an apparent mistake. The assessee, therefore, prayed for necessary order. However, the Appellate Tribunal while disposing of the said Misc. Application on 22-2-1989, observed that there was no mistake apparent from the record and rejected the application. Though the assessee filed an application u/s 254(1) of the Act to refer three questions, later on the assessee prayed for amendment and submitted revised questions. The Tribunal, however, referred only one question as referred to above for opinion of this Court.

Heard Mr. R. Goenka, the learned counsel appearing for the assessee and Dr. A.K. Saraf, special counsel appearing for the revenue.

Mr. Goenka submitted that there was nothing on record to show that the assessee underestimated the income and thereby reduced the advance tax payable by the assessee. Moreover, as per the calculation of advance tax, the assessee estimated the advance tax and paid the first instalment in time, i.e., in September 1974. The assessee''s estimate of advance income at Rs. 15 lakhs was on the basis of the corresponding figure for the immediately preceding assessment year 1974-75. Therefore, when the first estimate was filed, the assessee could not be accused of either underestimating his advance income or the advance tax paid, therefore, the assessee was not liable to pay interest u/s 216 as charged by the Assessing Officer. Mr. Goenka further submitted that as per section 216 in order to charge interest for underestimation of advance tax payable by him the ITO must find out underestimation on regular assessment and such finding, was a condition precedent. In the absence of such finding the ITO was not competent to charge interest. Charging interest was not automatic and it was discretionary. While making such submission Mr. Goenka tried to distinguish the scope and procedure of charging interest under sections 215 and 216. Besides, the order of the Assessing Officer did not indicate his finding for charging interest.

Dr. Saraf, on the other hand, supported the decision of the Tribunal and that of the Assessing Officer. According to him, section 216 did not contemplate that the order of charging interest should invariably indicate the finding of the Assessing Officer. The facts and circumstances and materials on record would show that the assessee deliberately under-estimated the income and thereby reduced the income tax.

Before considering the rival contentions of the learned counsels for the parties, it will be expedient for us to look to some of the relevant provisions of the Act. Section 207 of the Act envisages provisions for payment of advance tax. Under the said section the advance tax shall be payable in advance in accordance with the provisions of sections 208 to 219 of the Act in respect of the total income of the assessee which would be chargeable to tax for the assessment year immediately following that financial year. Advance tax shall be payable by the assessee in the financial year in the manner indicated in section 209. Advance tax on the current income, calculated in the manner prescribed u/s 209 shall be payable by all the assessees who are liable to pay the advance tax in three instalments during each financial year. Due date of payment has been specified u/s 211. u/s 216 where the ITO after making the regular assessment finds that the assessee has underestimated the advance tax payable by him and thereby reduced the amount payable in either of the first two instalments or wrongly deferred the payment of advance tax on a part of his income, he may direct that the assessee shall pay simple interest at 15 per cent per annum, in case where the assessee has under- estimated the advance tax, for the period during which the payment was deficient.

The learned counsel for the assessee placed reliance on a decision in Addl. CIT v. Vazir Sultan Tobacco Co. Ltd. [1980] 122 ITR 251 (AP). In the said case, the assessee, a public limited company, was directed by the ITO to pay advance tax in four instalments. The assessee, however, went on filing revised estimate from time to time and paid instalments of advance tax. Ultimately, the assessee filed the return showing increased amount of income. The ITO invoking the power u/s 216 charged the interest. The High Court held that if the estimate of advance tax payable by the assessee was not due to underestimation of income on the part of the assessee then only the provisions of section 216 for payment of interest can be invoked. Section 216 is attracted and interest is payable by the assessee only if the advance tax happens to be underestimated deliberately. The High Court further held that if the estimate of advance tax payable by the assessee was not due to underestimation of income on the part of the assessee then only the provision of section 216 for payment of interest can be invoked. Section 216 requires that the ITO must find at the time of regular assessment that the assessee has under sub-section (1) or sub-section (2) or sub-section (3) or sub-section (3A) of section 212 under-estimated the advance tax payable by him and thereby reduced the amount payable in either of the first two instalments.

In CIT v. Elgin Mills Co. Ltd. [1980] 123 ITR 712/ 3 Taxman 529, the Allahabad High Court dealt with similar point. In the said case, the Allahabad High Court held thus :

"... in our opinion, the charging of interest u/s 216 is not automatic as contended by the counsel for the revenue. It is discretionary and for the exercise of discretion the ITO is required to examine the matter from the view-point as to whether the estimate filed by the assessee was in fact an underestimate. Of course, insofar as sections 215 and 217 are concerned, the charging of interest thereunder is automatic."

This Court in Commissioner of Income Tax Vs. Namdang Tea Co. India Ltd., held that section 216 does not make it mandatory for the Assessing Officer to charge interest in all cases of underestimation of advance tax. The scheme of the provision is quite different from the scheme in section 215 where the liability for interest is mandatory. However, u/s 216, it is within the discretion of the assessing authority to charge interest. The Assessing Officer may charge interest if the underestimation of advance tax was of such a nature and under such circumstances that it has to be regarded as devoid of bona fides. This Court in the said decision further observed thus :

"We will assume for the purpose of the present discussion that there was an underestimation in determining the advance tax payable. Section 216 does not make it mandatory for the Assessing Officer to charge interest in all cases of underestimation. The scheme of the provision is quite different from the scheme in section 215 where the liability for interest is mandatory. u/s 216, it is within the discretion of the assessing authority to charge or not to charge interest. He may charge interest if the underestimation was of such a nature and under such circumstances that it has to be regarded as devoid of bona fides. The Assessing Officer, in the instant case, did not apply his mind to this aspect; he appears to have charged interest without being conscious of the fact that the power to charge interest is discretionary. He appears to have thought that he was bound to charge interest. He has committed a serious error of law."

From the decision cited above, it will appear that the scope of charging interest u/s 216 is quite different from that of section 215. u/s 216, it is the discretion of the Assessing Officer to charge interest if it is found that the assessee underestimated the income, unlike in section 215 where the Assessing Officer is bound to charge interest. u/s 216, it is the duty of the Assessing Officer to find out whether underestimation of the income for payment of tax was deliberate or not. If it is not deliberate then charging of interest cannot be said to be just and proper.

In the instant case, for the year 1975-76 as on 5-9-1974, the sale effected to a sum of Rs. 93,82,692 and odd, therefore, the assessee knew that the advance income payable for the assessment year 1975-76 was more than what was paid during the earlier assessment year 1974-75. It is also seen that by the end of December 1973, the sale was Rs. 1,47,79,902 whereas the sale up to December 1974 was Rs. 1,58,00,000. There was a difference of about Rs. 10 lakhs, for which no revised estimate was filed in December 1974 by the assessee. It was the duty of the assessee when it came to its notice or knowledge that the sale had gone up in December 1974 by about Rs. 10 lakhs to submit a revised estimate to that effect. It cannot be said that the assessee did not know the increase of sale by the end of December 1974. However, the assessee remained silent without taking any step for filing revised estimate. Therefore, we are of the opinion that the assessee underestimated the advance tax deliberately with full knowledge that the sale had gone up to the extent of Rs. 10 lakhs. From the facts stated above, conclusion can be arrived at that the assessee had underestimated advance tax payable thereby reduced the amount payable in instalments for the assessment year 1975-76. Accordingly, the question is answered in the affirmative, i.e., in favour of the revenue and against the assessee.

S.L. Saraf, J.

I have gone through the judgment delivered by my brother Baruah, J. Since I respectfully disagree with the same, I give my decision as follows :

In the instant case for the year 1975-76, as on 5-9-1974, the sale effected was for a total sum of Rs. 93,82,692 compared to Rs. 78,00,579 for the period ended in August 1973. The assessee estimated on 5-9-1974 his total income at Rs. 15 lakhs on which taxable amount payable was Rs. 9,34, 500. The above amount of tax of Rs. 9,34,500 was divided into 3 instalments and the first instalment was paid in time in September 1974. As such, the assessee filed the correct estimate till September 1974 and the assessee could not be accused of concealing his income by either underestimating his income or the advance tax payable. At the end of December 1973, the sale was at Rs. 1,47,79,902 whereas sale up to December, 1974 was at Rs. 1,58,99,329. There was difference of about 10 lakhs. No revised estimate was filed in December 1974 for the assessment year 1975-76. Then came the month of March 1975 and the assessee estimated his sale up to Rs. 2.80 lakhs, as against 2,29,54,000 for the corresponding period of the last year. The assessee revised his estimate of income at Rs. 37 lakhs and on which advance tax came to Rs. 23,29,500 and since the assessee had paid Rs. 9,34,500 the assessee paid the balance advance tax of Rs. 13,86,000. On the above fact it could not be stated that the assessee had deliberately underestimated its advance income or was paying underestimated advance tax. Section 216 reads as follows :

"Interest payable by assessee in case of underestimate, etc. - Where on making the regular assessment, the income tax Officer finds that any assessee has-

(a) (Under section 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, (fifteen 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."

The provisions of the said section postulate that the ITO while making a regular assessment must come to a finding that the assessee has deliberately underestimated his income and deliberately paid lesser advance income tax. The applicability of provision of payment of interest in section 216 unlike sections 215 and 217 is not automatically attracted. The ITO in the course of making an assessment must consider whether the assessee has deliberately failed to make proper estimation of its income or advance tax payable thereon. The ITO should exercise its discretion and consciously come to a finding whether the assessee be directed to pay interest on advance tax payable after affording an opportunity to the assessee. While making a regular assessment, the ITO has not made any finding as to the underestimation of the advance tax payable by the assessee. From the records it appears that an order was passed by the ITO u/s 216, routinely and mechanically stating that interest u/s 216 is found payable by the assessee as if the same is automatically payable. In this connection, I like to draw attention to the circular issued by the Board of Direct Taxes F. No. 400/58/78-ITCC, dated 29-2-1980.

"9.15. Whether ITO should go into mens rea before charging interest under the section. - The order u/s 216 being appealable, should be a speaking order. Before charging interest u/s 216, the income tax Officer should, therefore, go into the men rea of the assessee and reach a proper conclusion after hearing him on the circumstances under which he committed such default. It is only on such a finding that underestimation/wrongful deferment has been made by the assessee, that the income tax Officer can levy interest u/s 216. Since the finding rests on the income tax Officer''s appreciation of the facts, the reasons supporting his conclusions should be recorded in the assessment order itself so that an appellate authority can judge whether the income tax Officer''s finding is justified on the facts of the case."

Further, I refer to two decisions. One of Gauhati High Court and the other of Calcutta High Court. In Namdang Tea Co. India Ltd.''s case (supra), it is observed as follows :-

"... Section 216 does not make it mandatory the Assessing Officer to charge interest in all cases of underestimation. - The scheme of the provision is quite different from the scheme in section 215 where the liability for interest is mandatory. u/s 216, it is within the discretion of the assessing authority to charge or not to charge interest. He may charge interest if the underestimation was of such a nature and under such circumstances that it was to be regarded as devoid of bona fides. The Assessing Officer, in the instant case, did not apply his mind to this aspect, he appears to have charged interest without being conscious of the fact that the power to charge interest is discretionary. He appears to have thought that he was bound to charge interest. He has committed a serious error of law.

The Calcutta High Court in CIT v. Willard India Ltd. [1995] 202 ITR 423/ 71 Taxman 219 has interpreted the provisions as under : "Interest u/s 216 is chargeable when an assessee files a wrong estimate of advance tax. A speaking order should be passed while charging interest u/s 216 of the income tax Act, 1961."

"... The question whether there was any justification for the estimate or whether it was in fact an under statement has to be examined by the income tax Officer objectively with reference to the time and the materials available when the estimate was filed by the assessee. The mind of the income tax Officer cannot be ascertained unless he has come to a finding that there has been under estimate of advance tax....

" A non-speaking order u/s 216 is invalid and is liable to be quashed...."

The decisions referred to above make it abundantly clear that u/s 216, the applicability of payment of interest is not mandatory or automatic. u/s 216, the ITO on consideration of materials and after giving an opportunity to the assessee of hearing is to hold that the assessee deliberately avoided making a proper estimation of its income and advance tax payable thereof. In the instant case, we find that the ITO has not exercised his discretion judicially nor has applied his mind and has failed to disclose any material to hold that the assessee had consciously underestimated his income and advance tax payable thereon during the course of making assessment. As such, the said order u/s 216 was not in compliance with the provisions of section 216. In the premises, the question referred to is answered in the negative and in favour of the assessee and against the revenue.