Supreme Court on Section 220 Interest Waiver

Appellant had been carrying on money-lending business and trading in shares and securities. On or about 4.9.1994, a raid was conducted in his residential premises by the authorities and shares worth market value of Rs. 61.38 lakhs and a demand draft worth Rs. 10 lakhs in the name of PAN Clothing Company Limited were seized. By a letter dated 15.12.1994, a declaration was made by the appellant in terms of sub-Section (4) of Section 132 of the Act, and he opted to pay taxes from out of the seized shares and securities stating that the shares be expeditiously disposed of and the sale proceeds be appropriated towards taxes.

The said request of the appellant was not acceded to. However, the fact that such an offer had been made by the appellant is not denied or disputed. It is furthermore not disputed that the Income Tax Department demanded and recovered a sum of Rs.40 lakhs in between the period January and March 1995.

The appellant filed an application in terms of sub- Section (1) of Section 245C before the Settlement Commission on 2.1.1996 whereupon an order was passed by the Settlement Commission on 2.12.1999.

The demand draft drawn in the name of PAN Clothing Company Limited worth Rs. 10 lakhs which was seized during the course of search was encashed by the Income Tax Department in July 2000 after the same was got revalidated.

By an order dated 8.3.2002, the Income Tax Officer, levied interest for a sum of Rs. 31,41,106/- under Section 220 (2) of the Act for the assessment years 1990-91 to 1995-96.

Appellant filed an application for waiver of interest on diverse dates i.e. 3.4.2002, 14.5.2002 and 16.9.2002. The same was rejected by the Commissioner of Income Tax opining that the appellant did not satisfy all the three conditions which were required for allowing a waiver petition. It was, however, accepted that the appellant cooperated with the Department. So far as the request of the appellant to sell the shares and securities is concerned, it was opined that the levy of interest did not cause any genuine hardship to him and the default in payment of the amount of tax on which interest has been paid or was payable under Section 220(2A) was due to circumstances beyond his control. It was furthermore opined that the dues as against the appellant could be crystallized only after passing of the order of the Settlement Commission 2.12.1999.

On writ, the High Court observed,

“The hardship claimed by the petitioner is on account of lack of resources either moveable or immoveable. Even after the conclusion of this Court that the finding of the 1st respondent regarding the property at Begumpet is justified, the fact remains that the petitioner had assets by way of units in the Unit Trust of India by the date of the Settlement Commission determined his liability of tax. The fact that a distress sale conducted by the Unit Trust fetched a lower rate in our view does not make any difference for the consideration of the application of the petitioner for the waiver of interest. The UTI did not follow according to the Division Bench of this Court the requisite procedure in resorting to distress sale.

That is a different matter. But, nothing prevented the petitioner from encashing the said units and pay the tax liability in time. The submission of the learned counsel for the petitioner that such a premature sale of the units would result in a financial loss to the petitioner is irrelevant in the context of the application for waiver of interest. If the petitioner is already found liable and due to pay tax under the Income Tax Act, the petitioner cannot choose the time for encashing the assets he had to get the post price for the asset and still complain that the levy of interest would cause undue hardship to him. Apart from that by virtue of the Division Bench judgment of this Court, the UTI is already directed to make good the loss suffered by the petitioner by virtue of the distress sale undertaken by the UTI.”

The matter is before the Supreme Court.

The Apex Court observed that,

Section 220(2A) of the Act contains a non-obstante clause. It confers a jurisdiction upon the Chief Commissioner or Commissioner to reduce or waive the amount of interest paid or payable by an assessee thereunder, if he is satisfied that:

(i) Payment of such amount has caused or would cause genuine hardship to the assessee;

(ii) Default in the payment of amount on which interest has been paid or was payable under the said sub-section was due to circumstances beyond the control of the assessee; And

(iii) Assessee has co-operated in any inquiry relating to the assessment or any proceeding for the recovery of any amount due from him.

The Supreme Court observed that:

1. For interpretation of the provision, the principle of purposive construction should be resorted to.

2. Levy of interest although is statutory in nature, inter alia for re-compensating the revenue from loss suffered by non-deposit of tax by the assessee within the time specified therefor.

3. The said principle should also be applied for the purpose of determining as to whether any hardship had been caused or not.

4. A genuine hardship would, inter alia, mean a genuine difficulty. That per se would not lead to a conclusion that a person having large assets would never be in difficulty as he can sell those assets and pay the amount of interest levied.

5. The ingredients of genuine hardship must be determined keeping in view the dictionary meaning thereof and the legal conspectus attending thereto.

6. For the said purpose, another well-known principle, namely, a person cannot take advantage of his own wrong, may also have to be borne in mind.

The Supreme Court noted that this principle has not been applied by the courts below in this case.

The Supreme Court further observed that a statutory authority despite receipt of such a request could not have kept mum. It should have taken some action. It should have responded to the prayer of the appellant.

However, another principle should also be borne in mind, namely, that a statutory authority must act within the four corners of the statute. Indisputably, the Commissioner has the discretion not to accede to the request of the assessee, but that discretion must be judiciously exercised. He has to arrive at a satisfaction that the three conditions laid down therein have been fulfilled before passing an order waiving interest.

Compulsion to pay any unjust dues per se would cause hardship. But a question, however, would further arise as to whether the default in payment of the amount was due to circumstances beyond the control of the assessee.

Unfortunately, this aspect of the matter has not been considered by the Commissioner and the High Court in its proper perspective. The Department had taken the plea that unless the amount of tax due was ascertainable, the securities could not have been sold and the demand draft could not have been encashed. The same logic would apply to the case of the assessee in regard to levy of interest also. It is one thing to say that the levy of interest on the ground of non-payment of correct amount of tax by itself can be a ground for non-acceding to the request of the assessee as the levy is a statutory one but it is another thing to say that the said factor shall not be taken into consideration at all for the purpose of exercise of the discretionary jurisdiction on the part of the Commissioner. Appellant volunteered that the securities be sold. Why the said request of the appellant could not be acceded to has not been explained. It was a voluntary act on the part of the appellant.

As the offer was voluntary, the authorities of the Department subject to any statutory interdict could have considered the request of the appellant. It was probably in the interest of the revenue itself to realize its dues. Whether this could be done in law or not has not been gone into.

So the matter is remanded to the Commissioner for fresh consideration.