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Whether tax under section 221 of the IT Act takes within its ambit the interest component?
Section 221 of the Income Tax Act, 1961 (hereinafter referred to as “the Act”), prescribes penalty according to its provisions when an assessee is in default or is deemed to be in default in making a payment of tax.
Recently, in CIT, Mumbai vs. Oryx Finance and Investment Pvt. Ltd. [ITA No. 1 of 2015, decided on 1 July 2017], one of the question raised before Bombay High Court was whether on facts and in the circumstances of the case and in law, the ITAT is justified in deleting the penalty levied under section 221(1) of the Act in respect of arrears of interest under sections 234A, 234B & 234C of the Act, without appreciating that, as held by Hon’ble Supreme Court in the case of CIT vs. Anjum M.H. Ghaswala [(2001) 252 ITR 1] and in the case of Karanvir Singh Gosssal vs. CIT [349 ITR 692 SC], interest under section234A, 234B & 234C is mandatory in nature and therefore by the ratio of the above cited decisions interest is an integral part of tax.
The Income Tax Return of the Respondent Assessee was processed under section 143(1) of the Act, and demand was raised for Rs. 1,64,90,573, also, penalty of Rs. 1,19,30,677 was imposed by the AO under section 221(1) of the Act for default by assessee in the payment of demand. Against which, the assessee filed Appeal before the Commissioner of Income Tax (Appeals) 17, Mumbai [for short “CIT(A)”]. The CIT(A) under its order dated 15/03/2010 deleted the penalty imposed by the AO holding that interest component has to be excluded while levying penalty under section 221(1) and since the penalty levied exceeded the tax component, it set aside the order levying penalty. Aggrieved thereby the Department filed a appeal before the Income Tax Appellate Tribunal, Mumbai [for short “ITAT”]. The ITAT held that while levying penalty under section 221(1) of the Act interest component is not to be considered and remitted the matter to the AO with the direction to quantify the amount of penalty in accordance with provisions of section 221(1) of the Act.
On an appeal before Bombay High Court, the learned counsel of the assessee- company relied on the judgment of the Hon’ble Apex Court in a case of Harshad Shantilal Mehta vs. Custodian [(1998) 231 ITR 871] and another judgment of the Division Bench of Bombay High Court in the case of CIT vs. P.B. Hathiramani [(1994) 207 ITR 483].
The learned Judges of the Bombay High Court observed that the case of CIT vs. Anjum M.H. Ghaswala (supra) relied by the learned counsel for the Revenue would be of no assistance to him, as it only dealt with the aspect that interest under sections 234(A), 234(B) and 234(C) of the Act is mandatory. The issue in the case dealt with was in a different context. The learned Judges after taking into account the facts & circumstances of the case, legal provisions in respect of the question raised, rival submissions, relying on the case laws submitted by counsel of the assessee- company held that the provisions of section 221 of the Act conjointly with the definition of “tax” as detailed under section 2(43) of the Act, the irresistible conclusion that can be drawn is that the phraseology “tax in arrears” as envisaged in section 221 of the Act would not take within its realm the interest component. It would be abundantly clear that the AO can impose penalty for default in making the payment of tax, but the same shall not exceed the amount of tax in arrears. Tax in arrears would not include the interest payable under section 220(2) of the Act.