1211. Levy of interest under sub-section (2) when original assessment is set aside/cancelled
1. Doubts have been raised as to the quantum of interest chargeable under section 220(2) when the original assessment order passed by the Income-tax Officer is—
(a) cancelled by him under section 146;
(b) set aside/cancelled by an appellate/revisional authority and such appellate/revisional order has become final ; or
(c) set aside by one appellate authority but, on further appeal, the order setting aside the assessment is varied by the second appellate authority and the demand gets finally determined.
2. These issues were comprehensively examined in consultation with the Ministry of Law and the Board has been advised :
1. Where an assessment order is cancelled under section 146 or cancelled/set aside by an appellate/revisional authority and the cancellation/setting aside becomes final (i.e., it is not varied as a result of further appeals/revisions), no interest under section 220(2) can be charged pursuant to the original demand notice. The necessary corollary of this position will be that even when the assessment is reframed, interest can be charged only after the expiry of 35 days from the date of service of demand notice pursuant to such fresh assessment order.
2. Where the assessment made originally by the Income-tax Officer is either varied or even set aside by one appellate authority but on further appeal, the original order of the Income-tax Officer is restored either in part or wholly, the interest payable under section 220(2) will be computed with reference to the due date reckoned from the original demand notice and with reference to the tax finally determined. The fact that during an intervening period, there was no tax payable by the assessee under any operative order would make no difference to this position.
3. The foregoing legal position will apply mutatis mutandis to the proceedings under other direct taxes also.
Circular : No. 334 [F. No. 400/3/81-ITCC], dated 3-4-1982.
JUDICIAL ANALYSIS
EXPLAINED IN – In Vikrant Tyres v. First ITO [1993] 202 ITR 454 (Kar.), the above circular was explained with the following observations :
“. . . The circular of the Board may not be binding on the assessee and the interpetation of the provision of law cannot depend upon the meaning given by the Board in all cases. The circular has been issued to facilitate the due administration of the Act by the authorities under the Act. The effect of section 220(2) has been duly clarified by the Board while issuing the circular.” (p. 464)
EXPLAINED IN – The Kerala High Court in ITO v. A.V. Thomas & Co. [1983] 160 ITR 816 held that this circular is not decisive of the issue explained therein and that interest is not payable under section 220(2) as there has been no non-compliance with the demand made under section 156.
EXPLAINED IN – The above circular was referred to in Madhav Aluminium Conductors (P.) Ltd. v. ITO [1986] 15 ITD 671 (Mad.), with the following observations :
“As regards the arguments that under CBDT’s Circular No. 334, dated 3-4-1982 levy of interest under section 220(2) was permissible when the original assessment is set aside, we can do no better than citing the decision of the Kerala High Court in CIT v. Malayala Manorama & Co. Ltd. [1983] 143 ITR 29 which expressed the following about the said circular:
“. . . ‘The court will have to put its own construction upon the provisions of the Act regardless of the practice of the department and the directions for the guidance of the officials . . . ’(p. 29)” (pp. 674-675)
REFERRED TO IN – Citing reference to paragraph 2(ii) of the above circular, it was observed in M. N. Jadhav v. Fourth ITO [1986] 161 ITR 275 (Kar.) that “Without any doubt, this circular correctly expounds the legal position which I have independently reached.” (p. 278).
EXPLAINED IN – Pitambardas v. Union of India [1998] 99 Taxman 408 (MP)/Mrs. R. Mani Goyal v. CIT [1996] 217 ITR 641 (All.) : The Circular issued by the CBDT in this regard appears to be well-founded.
CITED IN – The aforesaid observations were also cited and relied upon in Hindustan Computers Ltd. v. DCIT [1995] 55 ITD 153 (Delhi – Trib.). The Tribunal observed, by following the aforesaid judgment of the Karnataka High Court as well as the judgment of the Kerala High Court in Mohammed Essa Moosa Sait v. GTO [1987] 167 ITR 338, that “the facts contemplated by the circular are squarely present in the instant case and which became manifest by reference to the relevant dates and events set out in the beginning of the order.” (p. 157)
