1. This is a reference on a case stated under s. 256(1) of the I.T. Act, 1961 (referred to hereinafter as 'the said Act').
2. The question that arises before us for our determination is as follows :
'Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the penal interest was not waived by the Income-tax Officer for the assessment year 1963-64 ?'
3. The facts giving rise to this reference are as follows :
In the relevant assessment year 1963-64, in the assessment order served by the ITO on the assessee in respect of the said assessment year, there was no mention at all of the levy of penal interest. However, in the notice of demand penal interest was included. It is common ground that the basis on which penal interest could have been levied in this case was that the assessee failed to file an estimate of his income and pay tax on self-assessment on the basis of such assessment as required under s. 212(3) of the said Act. The assessee then filed an application for a rectification of the notice of demand under s. 154 of the said Act on the ground that as the assessment order for the said assessment year did not make any mention of penal interest, whereas the assessment order in respect of the assessment year 1964-65 did make a specific mention of penal interest, the ITO must be deemed to have waived the levy of penal interest and hence the notice of demand was bad in so far as it related to penal interest. That rectification application was rejected by the ITO and both the AAC as well as the Income-tax Appellate Tribunal upheld the rejection of that application, on appeals preferred by the assessee. The order of the Tribunal passed in the appeal preferred by the assessee shows that in the assessment order for the said assessment year there was no mention of penal interest but there was a mention of such interest in the assessment form sent along with the said assessment order. The order further shows that the only contention advanced by the counsel for the assessee before the Tribunal was that as there was no mention of penal interest in the order of assessment for the assessment year 1963-64, the ITO must be deemed to have waived penal interest. It is from this decision of the Tribunal the aforesaid question has been referred to us.
4. Before dealing with argument of Mr. Mhaispurkar, we may briefly refer to the relevant portion of the said s. 217 of the said Act which deals with levy of interest which is popularly known as penal interest. It is common ground that the only part of s. 217 with which we are concerned, is sub-s. (1) thereof. The said sub-s. (1) of s. 217 runs thus :
'(1) Where, on making the regular assessment, the Income-tax Officer finds that any such person as is referred to in sub-section (3) of section 212 has not sent the estimate referred to therein, simple interest at the rate of twelve per cent. per annum from the 1st day of April next following the financial year in which the advance tax was payable in accordance with the said sub-section up to the date of the regular assessment shall be payable by the assessee upon the amount equal to the assessed tax as defined in sub-section (5) of section 215.'
5. Sub-s. (3) of s. 212, briefly speaking, that any person who has not previously been assessed by way of regular assessment under the said Act or under the Indian I.T. Act, 1922 (XI of 1922), shall in each financial year, before the date on which the last installment of advance tax is due in his case under sub-s. (1) of s. 211, if his current income is likely to exceed the amount specified in sub-s. (2) of s. 208, send to the ITO an estimate of the current income and the advance tax payable by him on the current income calculated in the manner laid down in s. 209. It must be noticed here that there is no dispute that the assessee in the present case was liable to file an estimate of his current income and to pay advance tax thereon and that he failed to do so.
6. Mr. Mhaispurkar, learned counsel for the assessee, put forward three submissions before us : the first submission is that the charging of penal interest under s. 217 of the said Act, although mandatory, is not mechanical and the ITO has to give a finding about the levy of such interest. In the absence of such a finding, he will be deemed to have waived the penal interest notwithstanding his including the same in the assessment form or the notice of demand. The second submission is that an order under s. 217 of the said Act is a quasi-judicial order and hence before any liability under that section is imposed a proper order has to passed giving effect to the provisions of s. 217 giving an opportunity to the assessee to show cause. The third submission is that an order under s. 217 of the said Act can be made only after a regular assessment under s. 143 or s. 144 of the said Act and that the levying of penal interest is not a part of regular assessment. We may straightaway point out that as far as the second and third submissions are concerned, the same are clearly beyond the scope of the question referred to us and hence it is not necessary to go into the validity of those submissions at all. The only question referred to us is, whether the ITO waived the levy of penal interest in the circumstances of the case. In fact, that was the only argument advanced before the Tribunal by the learned counsel for the assessee and hence no other question can even arise on the order of the Tribunal. As the second and third submissions, in our view, are clearly beyond the scope of the question referred to us, we do not propose to go into the merits thereof. It is possible that there may be merit in some of those submissions but we are not concerned with the same.
7. As far as the first submission of Mr. Mhaispurkar is concerned, we are afraid that we find it utterly impossible to accept the same. We fail to see how merely by reason of the non-mention of penal interest in the order of assessment, it can be assumed that the ITO waived the levy of penal interest. There is nothing in the order at all to show that the ITO had applied his mind to the question of penal interest, or found that any conditions existed by reason of which penal interest should be waived. On the other hand, a plain reading of sub-s. (1) of s. 217 of the said Act, would clearly show that where the conditions laid down therein are satisfied, penal interest at the rate of twelve per cent. per annum has to be levied. It is true that r. 40 of the I.T. Rules, 1962, provides for a reduction or waiver of interest leviable under s. 215 or s. 217 in the circumstances set out in that rule. There is, however, nothing the in the assessment order which would suggest that the assessee had applied for the penal interest being waived or reduced or submitted that there was any circumstances in the case which could come within the scope of r. 40. In fact, even before the Tribunal it was never contended by the assessee that by reason of any of the circumstances set out in r. 40 the levy of penal interest against the assessee should have been waived. In these circumstances, we utterly fail to see that it could said that merely because the ITO failed to mention penal interest in the assessment order he had waived the same.
8. In this regard, we find that the view which we are taking finds complete support from the decision of a Division Bench of the Karnataka High Court in CIT v. Executors of the Estate of Late H. H. Rajkuverba Dowager Maharani Saheb of Gondal : 115ITR301(KAR) . It has been held there by the Karnataka high Court that since an order under s. 217 does not form part of an order of assessment, the mere omission on the part of the ITO to refer to the penal interest payable thereunder in the order of assessment cannot lead to the inference that the ITO had waived the interest payable without giving any reason for doing so. To some extent, this view is also supported by the decision of a Division Bench of the Calcutta High Court in CIT v. Lalit Prasad Rahini Kumar : 117ITR603(Cal) , where it has been, inter alia, held that s. 215(4) of the said Act and r. 40 of the said Rules authorise the ITO to reduce or waive interest payable by any assessee in such cases and under such circumstances as may be prescribed. The ITO has to exercise his discretion and such discretion imposes a duty on the ITO to consider whether circumstances in the record warrant any waiver or reduction. This would again indicate that merely by the non-mention of penal interest in the order of the assessment it cannot be said that such penal interest was waived, in the absence of the ITO relying upon such circumstances by reason of which he could waive the levy of penal interest.
9. As far as the second and third submissions are concerned, they are totally beyond the scope of the question referred to us as aforesaid and we do not propose to discuss them at all.
10. In the result, the question referred to us in answered in the affirmative and in favour of the Revenue. The assessee to pay to the Commissioner of Income-tax, Poona, the costs of the reference.
11. Before parting with the matter, we may mention that Mr. Mhaispurkar requested that we should clarify that our decision does not preclude the right of the assessee to apply for reduction or waiver of interest under r. 40 of the I.T. Rules. We do not see why it is necessary to give any such clarification at all. There is nothing which we have said in the judgment which would preclude such a right. Whether the assessee has such a right or not is not for us to say.