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M.G. Brothers Vs. Commissioner of Income-tax - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtAndhra Pradesh High Court
Decided On
Case NumberReferred Case No. 232 of 1978
Judge
Reported in(1985)47CTR(AP)213; [1985]154ITR695(AP)
ActsIncome Tax Act, 1961 - Sections 43, 43(5), 139, 139(8), 246, 256(2), 261 and 273A
AppellantM.G. Brothers
RespondentCommissioner of Income-tax
Appellant AdvocateRama Rao, Adv. for ;J.V. Srinivasa Rao and ;M.J. Swamy, Advs.
Respondent AdvocateM.S.N. Murthy and ;A.V. Krishna Koundinya, Advs.
Excerpt:
direct taxation - speculative transactions - sections 43, 43 (5), 139, 139 (8), 246, 256 (2), 261 and 273a of income tax act, 1961 - appellant claimed deduction for forward contract in view of fact that loss from hedge transaction are exempted from tax as per circular by central board of direct taxes - income tax officer, assistant appellate commissioner and tribunal rejected claim of appellant - at instance of assessee reference made to high court - whether loss sustained by appellant in forward transaction is hedge contract within meaning of clause (a) of proviso to section 43 (5) - hedge contract is transaction for sale and purchase of raw material or merchandise in which assessee was dealing during course of business - from facts and circumstances transaction could not be proved as.....anjaneyulu, j. 1. the income-tax appellate tribunal referred the following two question of law for the opinion of this court under s. 256(1) of the i.t. act, 1961 : '(1) whether, on the facts and in the circumstances of the case, the tribunal was justified in holding that the loss sustained by the assessee in the forward transactions in cotton seed oil and neem oil was loss sustained in speculation business (2) whether, on the facts and in the circumstances of the case, the tribunal was justified in holding that there was no right of appeal against the levy of interest under section 215 of the income-tax act, 1961 ?' 2. the assessee, a partnership firm, carries on business in the manufacturer and sale of groundnut oil and its bye-products. for the income-tax assessment year 1973-74, the.....
Judgment:

Anjaneyulu, J.

1. The Income-tax Appellate Tribunal referred the following two question of law for the opinion of this court under s. 256(1) of the I.T. Act, 1961 :

'(1) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the loss sustained by the assessee in the forward transactions in cotton seed oil and neem oil was loss sustained in speculation business

(2) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that there was no right of appeal against the levy of interest under section 215 of the Income-tax Act, 1961 ?'

2. The assessee, a partnership firm, carries on business in the manufacturer and sale of groundnut oil and its bye-products. For the income-tax assessment year 1973-74, the assessee filed its return declaring income of Rs. 2,90,807. While declaring the income as above, the assessee claimed that it suffered a loss of Rs. 1,60,946 in respect of certain transaction which it entered into in cotton seed oil and neem oil. It is not disputed there this loss was suffered by passing paying difference pursuant to settlement to the contracts otherwise than by delivery of goods. The assessee did not dispute that these transaction fell within the meaning of the expression 'speculative transactions' under s. 43(5) of the I.T. Act, 1961 (for short 'the Act'), but claimed that the transactions in question fell within the scope of clause (a) of the proviso to sub-s.(5) of s. 43 and should not, therefore, but treated as 'speculative transactions'. The assessee accordingly claimed that the loss of Rs. 1,60,946 should be held to have been incurred during the course of its business and set off accordingly against the income under the head 'Business'. In other words, the assessee's claim was that the loss in transaction relating to cotton seed oil and neem oil pertained to contracts in respect of raw material or merchandise entered into by it in the course of its manufacturing or merchanting business to guard against loss through future price fluctuationse in respect of its contracts for actual a delivery of goods manufactured by it or merchandise sold by it. The contracts relating to cotton-seed oil and neem oil, which resulted in the above loss, are not in respect of the assessee's manufacturing operation in groundnut oil and, in that sense, the commodities of cotton seed oil and neem oil are unconnected with the manufacturing business. The assessee's case, however, is that the contracts were entered into by it in the course of its merchanting business and, therefore clause (a) of the proviso to sub-s.(5) of s. 43 is clearly applicable. It may be mentioned that the contracts excluded from the purview of 'speculative transactions' under s. 43(5) are what are popularly called 'hedge contracts'. The modus operandi of a hedging transaction is succinctly explained by a well-known economist, W. R. Natu, in his book 'Regulation of Forward Markets' at page 19 as under :

'The hedge contract is so called because it enable the persons dealing with the actual commodity to hedge themselves, i.e., to insure themselves against the adverse price fluctuations. A dealer or a merchant enters into a hedge contract when he sell or purchase a commodity in the forward market for delivery at a future date. His transactions in the forward market may correspond to a previous purchase or sale in the ready market or the may propose to cover it later by a corresponding transaction in the ready market, or he may offset it by a reverse transactions on the forward market itself.'

3. If a forward contract satisfies the requirement of clause (a) of the proviso to sub-s.(5) of s. 43 of the Act, then the transactions covered by that contract shall not be deemed to be speculative transactions. The consequence would be that any profit or loss arising on such hedge contract will be held to be profit or loss arising in the normal cause of the assessee's business and will be dealt with as such. In the present case, if the contracts entered into by the assessee in relation to cotton seed oil and seem oil could be held to be hedging transaction satisfying the requirement of clause (a) of the proviso to sub-s. (5) of s. 43 above referred to, the assessee's claim for setting off that loss against its income from business is perfectly tenable. The ITO declined to accept the assessee's claim that the contracts entered into by the assessee relating to cotton seed oil and neem oil were hedge contracts. The ITO held that the assessee does not manufacture and sell either cotton seed oil or neem oil. The ITO also held that the contracts in question are not in respect of merchandise entered into or dealt with by the assessee in the course of its merchanting business. The ITO categorically found that the assessee never carried on any business in the commodities of cotton seed oil and neem oil, whether as a manufacturer or as a merchant. In those circumstances, the ITO held that the ingredients of clause (a) of the proviso to sub-s. (5) of s. 43 were not satisfied. In that view, the ITO held that the loss arose in respect of transaction which are clearly 'speculative transactions' within the meaning of s. 43(5) of the Act are not saved by clause (a) of the proviso to sub-s. (5) of s. 43; consequently, the ITO rejected the assessee's claim for setting off the above referred loss against the assessee income from business.

4. The assessee filed an appeal before the AAC of Income-tax urging that 'the Income-tax Officer was not justified in disallowing the hedging loss of Rs. 1,60,946'. Before the AAC, the assessee relied on a circular issued by the Central Board of Direct Taxes bearing No. 23 (XXXIV-4) D of 1960, dated September 12, 1960, and contended that he is entitled to claim the above loss as relating to hedge contracts within the terms of the Board's circular. In this circular, the Central Board of Direct Taxes gave two clarification concerning hedge contracts and it will be appropriate to quote these clarifications :

'(1) The Income-tax Officers should not treat loss arising in forward sales entered into with a view to guard gains the risk to raw materials or merchandise in stocks falling in value, as speculation losses. It is however, to be noted that hedging sales can be taken to be genuine only to the extent the total stocks of raw materials or merchandise in hand and if the forwards sales exceed the ready stock, the loss arising from the excess transactions should be treated as loss arising from speculative transactions and not from genuine hedging transactions.

(2) The Income-tax Officers should not treat genuine hedging transactions in connected commodities as speculative transactions, though the transactions may not be in identically the same commodity. Thus, hedging transactions, in one type of cotton against another type of cotton, in one variety of oil seed against another and type of grain against another, should not be treated as speculative transactions, provided the other conditions of Explanation 2 to section 24 of the Indian Income-tax Act, 1922, are satisfied.'

5. In short, the assessee, contention was that the transactions in cotton seed or and neem oil were entered into with a view to guard against loss though future price fluctuations in respect of a raw materials and finished goods relating to manufacturing business and the transactions in cotton seed oil and neem oil were 'connected commodities' and, therefore, the transactions in question must be treated as hedging transaction satisfying the criteria laid down in the Board's circular. The AAC declined to accept the assessee's contention. In the first place, the AAC held that cotton seed oil and neem oil are not commodities connected to groundnut oil and its bye-products, which the assessee manufacturer and sells. The AAC further observed that, although, as per the Board, circular, transactions in the connected commodities in the forward market can be allowed as hedging loss, if sufficient stocks exist, sufficient stocks of groundnut oil to not exist in the case of the assessee. The AAC further held that cotton seed oil and neem oil could not be considered as connected commodities. In the above view, the AAC held that the loss arising out of the transactions could not be considered as loss arising on hedging transactions. He, accordingly, rejected the assessee's contention.

6. The assessee carried the matter in second appeal to the Income-tax Appellate Tribunal; sufficient it to say that the Tribunal affirmed the decision of the lower authorities and held that the loss incurred by the assessee in transactions relating to cotton seed oil and neem oil were transactions of a speculative nature and could not be considered to be hedging contracts in terms of clause (a) of the proviso to sub-s. (5) of s. 43. In coming to the above conclusion, the Tribunal found that there were no existing contracts to guard against any possible loss on account of future price fluctuations and the contracts in cotton seed oil and neem oil were totally independent. The Tribunal also held that the Board's circular is inapplicable to the facts of the assessee's case because forward contracts in cotton seed oil and neem oil could not be treated as hedging contracts unless the assessee is a manufacturer or dealer in those commodities. The Tribunal held the view that the commodities in respect of which forward contract is entered into have to be either raw material or merchandise required for the assessee's manufacturing or marchanting business and, in that sense, the assessee must be either a manufacturer or a dealer in respect of those commodities. The Tribunal gave a categorical finding that 'the assessee not, at all a manufacturer or dealer in respect of those commodities (cotton seed oil and neem oil)'. The Tribunal also held that cotton and oil and need oil could not be considered as connected commodities with reference to groundnut oil and groundnut seeds in which the assessee price on business. For the aforesaid reasons, the Tribunal upheld the AAC's order on the point and dismissed the assessee appeal. The assessee on applied for and secured a reference to this court on this point, which question No. 1 mentioned in paragraph 1 supra.

7. We must at the outset observe that the record does not furnish any factual data concerning the transactions in question. It is not know whether the transactions in cotton seed oil and neem oil are contracts of purchase or contracts of sale. There is no information on what dates these contracts were entered into and whether these contracts were entered into the guard against loss through future price fluctuations in respect of the assessee's contracts for actual delivery of merchandise sold by it. There are no particulars on record as to the extent of the stocks of raw materials and manufactured goods which the assessee had on each day when each contract was entered into in order to examine whether the forward transactions were entered into to guard against the risk of raw materials or merchandise in stocks falling in value. Apart from the oral assertion by the assessee that the transactions were in the nature of hedging transactions and were entered into to guard against loss through future price fluctuations, there is absolutely no material to support the claim. Without ascertaining the necessary factual details and the basis for the claim made by the assessee, the authorities below including the Tribunal treated the question as one of law and deal with it as such. We must express our disapproval of this procedure. The Tribunal is the ultimate fact-finding authority and at least, at the stage of the Tribunal, an endeavour should be have been made to ascertain as to what are the factual details relating to the claim and why the assessee claimed that these contracts were entered into to guard against loss through future pride fluctuations. It is unfortunate that this has not been done. We tried our best to elicit necessary information for the purpose of appreciating the basis for the assessee's claim; but learned counsel representing the assessee as well as the learned standing counsel for the Revenue expressed their liability to furnish any information, as there was absolutely no details on record. We would have in the circumstances above mentioned remitted the matter back for a careful scrutiny of facts; but we are not doing so because we are satisfied that the assessee's claim prima facie untenable.

8. Learned counsel for the assessee, Sri Srirama Rao, cited several decisions bearing on the point. He endeavoured to focus our attention on certain aspects in respect of which there is a divergence of opinion among the courts. It is contended by him that in order to come with in clause (a) of the proviso to sub-s. (5) of s. 43, a forward transaction could be both of purchase as well as of sale. He submitted that the view taken by some High Courts that only transactions of purchase come within the purview of the above-referred proviso is not correct. Learned counsel also urged that hedging transactions need not necessarily succeed the contracts of sale for actual delivery of goods. It is stated that hedging transactions could also precede the contracts of sale for actual delivery of goods. Learned counsel assailed the view taken by some High Courts that hedging transactions should be necessity succeed the contracts of sale for actual delivery of goods. Learned counsel also contended that there need not be in existence a contract for actual delivery of goods manufactured by the assessee or merchandise sold by him in order to entered into a hedging transactions. According to the learned counsel, forward transactions can be entered into with a view to guard against the risk of raw materials or merchandise in stocks falling in value. It is not necessary to dealt with the above aspects as they are not relevant for the purpose of this reference. The matter falls to be decided on a short ground about which there is near unanimity in the view of the courts. In order that a forward transactions falls within clause (a) of the proviso to sub-s. (5) of s. 43, in our opinion, one essential requirement has to be satisfied. The raw material or merchandise, in which the forward transactions have been entered into by the assessee, must have a direct connection with the goods manufactured or the merchandise sold. If the so-called heading transactions entered into related to commodities totally unconnected with the goods which the assessee is either manufacturing or is dealing as a merchant, then such transactions fall outside the scope of clause (a) of the proviso. Reference may be made to the decision of this court in Juvvi Subbaramaiah and Co. v. CIT : [1964]51ITR742(AP) wherein this court held, inter alia, that, in order to guard himself, the assessee must have entered into a contract in respect of raw material or merchandise in the course of his manufacturing or merchanting business. In Omkarmal Agarwal v. CIT : [1968]67ITR329(AP) the assessee was carrying on business in buying raw cotton, ginning it, and converting it into lint with the aid of machinery, and selling lint and cotton seed. The assessee entered into 14 forward contracts for the delivery of lint at a future date, and those contracts were settled otherwise than by delivery of the goods. There were no contracts in respect of raw materials or merchandise. Even so, the assessee claimed that the transactions were not speculative transactions as, according to him, they were hedging transactions to guard against possible loss from another set of transactions. Repelling the above continuation, it was held by this court that, in the absence of contracts in respect of raw materials or merchandise, the forward contracts entered into for the delivery of lint could not be considered to be hedging transactions. Reference may also be made to the judgment of the Delhi High Court in Delhi Flour Mills Co. Ltd. v. CIT : [1974]95ITR151(Delhi) . After referring to the judgment of this court in Omkarmal Agarwal v. CIT : [1968]67ITR329(AP) and also the decision of the Gujarat High Court in Chimanlal Chhotalal v. CIT : [1968]69ITR129(Guj) the Delhi High Court expressed agreement with the views expressed that the raw material, in respect of which the assessee enters into forward transaction actions, must be the same raw material which is used by him in his manufacturing business. In that case, it was held that the forward transactions entered into respect of 'matra' (a substitute of gram made by the assessee) did not fall with in the scope of the proviso (a) to Explanation 2 to s. 24(1) of the Indian I.T. Act, 1922, as the assessee's business was in grinding wheat for manufacturing atta and wheat products. Reference may also be made to the decision of the Gujarat High Court in Chimanlal Chhotalal v. CIT : [1968]69ITR129(Guj) referred to the judgment of the Delhi High Court abovementioned. The Gujarat High Court held the same view, that in order that, a transactions comes within the meaning of a hedging transaction, it must be in respect of the same commodities in which the assessee is dealing either as manufacture or as a merchant. It is true that the judgment of the Gujarat High Court above referred to has been overruled by a subsequent Full Bench judgment of the Gujarat High Court in Pankaj Oil Mills v. CIT : [1978]115ITR824(Guj) but that was on a different aspect altogether. The Full Bench expressed its dissent from the view taken by the Gujarat High Court in Chimanlal Chhotalal v. CIT : [1968]69ITR129(Guj) that hedging cotracts should only be contracts of purchase and not contract of sale. The Full Bench held that hedging contracts could either be contracts for purchase or contracts for sale and the view that they should only be contracts for purchase was found to be incorrect. It is only to this limited extent that the Full Bench overruled the earlier decision of the Gujarat High Court in Chimanlal Chhotalal v. CIT : [1968]69ITR129(Guj) . The Full Bench did not, however, quarrel with the view expressed by the Gujarat High Court in the abovementioned decision that hedging contracts referred to in clause (a) of the proviso to sub s. (5) of s. 43 should related to the same nature of commodities as the assessee is dealing in, either as a manufacturer or as a merchant. It, therefore, follows that, unless it is shown that the hedge contracts entered into by an assessee are contracts, whether for purchase or for sale, in respect of raw materials or merchandise which the assessee is dealing in during the course of his business, they are not excluded from the purview of 'speculative transactions' under s. 43(5) of the Act. Releasing this inconvertible position of law merging from the provisions contained in clause (a) of the proviso to sub-s. (5) of s. 43, Sri. Srirama Rao, learned counsel for the assessee, fell back on the circular issued by the Central Board of Direct Taxes to which have already made a references in paragraph 3 supra. Learned counsel urged that, although the hedge contracts entered into by the assessee may not strictly fall within the terms of clause (a) of the proviso to s. 43(5), they are still saved by the circular of the Central Board of Direct Taxes and the ITO is bound to give effect to the said circular and allow the loss suffered by the assessee in the course of the hedge contracts. Learned counsel fairly concedes that these hedge contracts were not entered into by the assessee in order to guard itself against loss through future price fluctuations in respect of any other contracts for actual delivery of goods manufactured or merchandise sold. It is urged that the hedge contracts were entered into with a view to guard against the risk to raw materials or merchandise in stocks falling in value. It is stated that the assessee was having adequate stocks of groundnut seeds, groundnut kernel and groundnut oil in its ready stock on the various dates when the forward contracts in cotton seed oil and neem oil were entered into and the forward transactions did not exceed the ready stock. Learned counsel, therefore, contends that the assessee is entitled to claim the loss as relating to hedge contracts within the terms of clarification No. 1 of the circular. It is also pointed out that the cotton seed oil and neem oil, in respect of which hedge contracts were entered into, constitute 'connected commodities' as explained by the Central Board of Direct Taxes in clarification No. 2 of the above mentioned circular. According to the learned counsel, they are connected commodities, because the assessee is dealing in groundnut oil, cotton seeks oil and neem oil belonging to the same of family of oils and, consequently, the loss arising in respect of forwards contracts in cotton seeds oil and neem oil should have been allowed pursuant to the Board's clarification. Learned counsel invited our attention to the decision of the Bombay High Court in Kirtilal Jaisinglal & Co. v. CIT : [1980]121ITR279(Bom) . The Bombay High Court relied on the circular above referred to and held that a part of the a losses incurred by the assessee in that case was in respect of transactions which could be related to stocks on hand and should, therefore, be allowed to be deducted in computing the assessee's income. Learned counsel also relied on the Full Bench judgment of the Gujarat High Court in Pankaj Oil Mills v. CIT : [1978]115ITR824(Guj) . In that case also, the Gujarat High Court referred to the circular of the Central Board of Direct Taxes and held that hedge contracts could be entered into to cover the risk of the value of the raw materials and finished products remaining in hand falling in the value at a future date. We are unable to accept the contention of the learned counsel for the assessee that, in terms of the circular of the Central Board of Direct Taxes, on which reliance is placed, the assessee is entitled to claim the loss. In the first place, the circular of the Central Board of Direct Taxes is qualified to the effect that hedging sales can be taken to be genuine only to the extent of the total stocks of raw material or merchandise in hand and if the forward sales exceed the ready stock, the loss arising from the excess transaction should be tre

9. ated as loss arising from speculative transaction and not from genuine hedging transaction. In the present case, there is no finding that the assessee had enough stock of raw materials or merchandise in hand on each occasion, when the forward contract was entered into. It does not appear that the assessee endeavoured to file any particular before the authorities below to support its claim on the above basis. There is no indication that this aspect of the matter has been looked into by the authorities below and army finding was arrived at and that, on each of the dates when the assessee entered into forward transactions in cotton seed oil and neem oil, there was adequate stock of raw material or merchandise in hand and the hedge contracts did not exceed the ready stock. In the absence of a clear finding on this aspect, it is difficult to accept the contention that clarification No. 1 given by the Central Board of Direct Taxes is automatically applicable. Learned counsel, Sri Srirama Rao, contended that the authorities below never disputed the availability of adequate stocks of raw material and merchandise in the hands of the assessee and, therefore, this court ought to proceed on the basis that, on the each occasion when a forward contract in cotton seed oil and neem oil was entered into by the assessee, there were enough stocks in hand of raw materials and merchandise. We are afraid, we cannot accept this submission. The clarification given by the Central Board of Direct Taxes runs counter to the clear provisions of law as enunciated by this court in Juvvi Subbaramaiah & Co. v. CIT : [1964]51ITR742(AP) and Omkarmal Agarwal v. CIT : [1968]67ITR329(AP) the Gujarat High Court in Chimmanlal Chhottalal v. CIT : [1968]69ITR129(Guj) and the Allahabad High Court in Raghunath Das Prahlad Das. v. CIT : [1976]104ITR95(All) . The assessee is pleading for a relief based on a beneficent circular issued by the Central Board of Direct Taxes. Without going into the question whether such benefit, which is contrary to the provisions of law, could be extended or not, it must be said that the assessee should demonstrate that he satisfied requirement of the circular. In the present case, there is no material on record to show that the assessee fulfilled the requirement of the circular. This apart, there is also a formindable difficulty in applying the circular because the forward contracts in cotton seed oil and neem oil are not in the same line of business being carried open by the assessee. The assessee categorically accepted that he is neither a manufacturer of cotton seed oil and neem oil nor did he ever deal in the purchase and sale as a merchant in cotton seed oil and neem oil. These two commodities are, therefore, totally different from the commodities the assessee has been dealing in. We have already pointed out above the courts have taken a uniform view that unless the hedge contracts relate to commodities relating to the business carried on by the assessee either as a manufacturer or as a dealer they are not covered by clause (a) of the proviso to s. 43(5). What exactly is the scope of 'connected commodity' referred to in clarification No. 2 of the circular above referred to is not clear. This court will not enter into an interpretation of the expression 'connected commodities' occurring the clarification No. 2 of the circular. In any event, we are not satisfied that cotton seed oil and neem oil can be described as connected commodities which the assessee has been manufacturing. In that view of the matter also, the circular issued by the Central Board of Direct Taxes will have no application. We are satisfied that the forward contracts entered into by the assessee in cotton seed oil and neem oil are not covered by clause (a) of the proviso to s. 43(5) of the Act and must, therefore, be considered as 'speculative transactions' within the meaning of s. 43(5) of the Act. The tribunal was, therefore, justified in coming to the conclusion that the loss arising the respect of such forward contracts cannot be set off against the assessee's income from the business in the manufacture and sale of groundnut oil. For these reasons, our answer to the first question is in the affirmative, i.e., in favour of the Revenue and against the assessee.

10. We shall now consider the second question referred to us which related to the levy of interest under s. 215 of the Act. In the assessment order passed for the year 1973-74, the ITO charged interest on Rs. 14,539 under s. 215 of the Act. The order does not indicate why this interest was charged. The assessee filed an appeal against the charge of interest on the ground that the 'Income-tax Officer was not justified in charging the interest'. The AAC upheld the levy of interest on the ground that the advance tax paid by the assessee under his on estimate was less than 75% of the assessed tax. The AAC, however, directed the ITO to recompute the interest taking into the account the relief granted in appeal in the computation of income. Against the order of the AAC, the assessee filed an appeal to the Income-tax Appellate Tribunal. The Tribunal took the view that the assessee has not right on appeal against the charge of interest under s. 215 of the Act. The Tribunal referred to the decision of this court in Boddu Seetharamaswamy v. CIT : [1955]28ITR156(AP) and also to an unreported decision of this court in R.C. Nos. 74, 75, and 76 of 1969, dated November 8, 1971 (CIT v. Bankatlal Gopikishan - See Appendix infra p.713). The Tribunal observed that it is bound by the above referred decision of this court and, accordingly, held that the assessee appeal on this point is not maintainable. That was how the second question was referred to this court by the Tribunal on the assessee's application. Learned counsel for the assessee does not dispute that the above, referred decisions of this court support the view that an assessee had not right of appeal against the charge of interest under s. 215 of the Act by the ITO. It is, however, urged that these decisions require reconsideration in view of the decision of other High Courts taking a contrary view. Learned counsel has referred to a large number of decision bearing on this point. It is pointed that some High Court have taken the view that the charge of interest falls within the ambit of 'assessment' for purposes of the I.T. Act and, therefore, the assessee can always deny has liability to be assessed under the Act and file an appeal under s. 246(c) of the Act. It is said that where an assessee denies totally has liability to be charge any interest under s. 215, he has a right to file an appeal against the charge of interest. Another line of decision was to the effect that while the assessee has no right of appeal against the charge of interest, it is open to him to take every contention, which, if accepted, must result in the ITO holding that there was no liability to pay the interest. In other words, the view was that it is open to an assessee to contend in appeal against an order of assessment that he is not liable to pay any advance tax at all and, therefore, there was no liability to pay interest. It was however, held in these cases that an assessee cannot merely appeal against the quantum of interest levied. Yet, another line decision was that it is open to an assessee even contend against the quantum of interest levied. As against the above decision, court have also taken the view that an assessee has no right to file an appeal against the charge of interest under s. 215 and, consequently, the assessee cannot repudiate liability to pay interest under s. 215 in an appeal filed. These are the varying view of the varying view of the High Court and it is not necessary either to set out these cases in detail or to enter into an elaborate discussion leading to the different shades of opinion expressed by the different High Courts, we have given our most anxious consideration to the matter to see if a case is made out for reconsideration of the decision of this court in Boddu Seetharamaswamy v. CIT : [1955]28ITR156(AP) and the unreported judgment of this court in R.C. Nos. 74, 75, and 76 of 1969, dated November 8, 1971 (CIT v. Bankatlal Gopikishan - See Appendix infra, p. 713). We are not satisfied that a case for reconsideration is made out. It need not be emphasise that a right of appeal is the creature of a statute. Such a right cannot be conferred by analogy or implication. Section 246 of the Act sets out various orders against which an assessee can file an appeal. We may refer to clause (c) of s. 246, which was the subject-matter of consideration by several courts. Under this clause, the assessee may appeal to the AAC against the an order passed by the ITO where 'the assessee denies his liability to be assessed under this Act'. It is contended that the expression 'denies his liability to be assessed' is comprehensive enough to cover a case where the assessee totally denies his liability to pay interest under s. 215. We are unable to accept this submission. The denial of liability referred to in clause (c) of s. 246 is not a liability under any particular provision of the Act, but under the Act as a whole. This is clear from the expression 'under this Act'. In our opinion, this covers a case where the assessee denies his liability to assessment on the ground that the provision of the Act do not apply to him for any reason whatsoever. This does not cover a case where an assessee merely denies his liability to assessment under any particular provision of the Act. The denial must be total and such denial must related to the Act as such. Reference may be made to the decision of the Gujarat High Court in Mandal Ginning and Pressing Co. Ltd. v. CIT : [1973]90ITR332(Guj) . Bhagwati C.J. (as he then was of that court), held that the word 'assessed' in the context is used in a comprehensive sense to mean 'subjected to the whole procedure for ascertaining and imposing liability on the taxpayer' and that the meaning of the expression 'any assessee.. denies his liability to be assessed under this Act' is that the assessee contends that he is not liable to be assessed under any provision of the Act or in other words, he is not liable to be subject to any part of the procedure laid down in the Act for imposing liability to tax. Reference may also be made to the decision of a Full Bench of the Allahabad High Court in CIT v. Geetha Ram Kali Ram : [1980]121ITR708(All) . The Full Bench held that the crucial phrases are : 'denies his liability to be assessed' and 'under this Act'. No particular section or provision of the Act has been mentioned. The court, therefore, held that the use of the phrase 'under this Act' should not mean under any individual section or provision of this Act. In the context of clause (c) of s. 246, the word 'assessed' cannot mean computation of income or determination of tax, because such things are already provided for in the latter part of the same clause. Obviously, the expression 'assessed' is used in comprehensive sense to mean subjected to the whole procedure for ascertaining and imposing liability on the taxpayer; and the liability is under the Act and not under any particular provision or individual section of the Act. The Full Bench, therefore, held that the denial should be against being subjected to the whole procedure for ascertaining and imposing liability on the taxpayer. A denial against being subject to a part of the process of ascertaining and imposing liability is not within its ambit. It is not necessary to multiply authorities on this point, because, in our opinion, the plain construction of the crucial phrases in s. 246(c) of the Act regarding the dental of liability to be assessed under the Act do not envisaged a case where the assessee merely denies his liability to pay interest under s. 215 of the Act. In our opinion, therefore, s. 246(c) does not confer a right of appeal on the assessee if he merely denies his liability to pay interest, whether such a denial is total or partial.

11. There is clear guidance in s. 246(c) itself that the Legislature did not intend to confer a right of appeal against an order levying interest under the s. 215 of the Act. It may be mentioned that interest is chargeable under ss. 139(8), 215, 216 and 217 under different circumstances. Section 246(m) of the Act provides a right of appeal against the an a order levying interest under s. 216 of the Act. It is thus clear that the Legislature is fully aware that, in regard to the levy of interest under the different provisions, a right of appeal should be conferred only in the matter of interest levied under s. 216 excluding such right of appeal (in the matter of levy of interest) under other provisions. Section 246 enumerates specifically the orders of the ITO under different provisions of law which can be appealed against. It is not that the Legislature intended to confer any right of appeal, generally speaking against all the order of the ITO. Care has been taken to identify each of the orders passed by the ITO against which an assessee can file an appeal. If the Legislature though it fit to confer a right of appeal on an assessee against an order levying interest under s. 216, it follows that the Legislature did not intend to confer such a right in respect of interest charged under other provisions. We can as find an explanation as to why the Legislature did not consider it fit to provide an appeal against an order levying interest under the provisions other than s. 216. So far as s. 216 is concerned, it ideals with levy of interest where an assessee files an underestimate of advance tax payable. Whether an estimate of advance tax filed by an assessee is an underestimate or not could not be the subject of a debate and a decision can be arrived at only by a process of reasoning. It is for this reason perhaps that a specific right of appeal is conferred against an order levying interest under s. 216, where the allegation is that the estimate of advance tax filed by the assessee is an under estimate. The interest leviable under ss. 139(8), 215 and 217 of the Act does not involve matter of debate to be settled by a process of reasoning. The interest is leviable on the assessee committing the one or other of the defaults specified in those provisions. While the Legislature obviously though that is is unnecessary to provide a right of appeal, care was taken to ensure that the assessee, against whom interest is levied, is not left without a remedy. Rule 40 of the I.T. Rules, 1962, confers a right on the assessee to a seek waiver or reduction of interest levied under ss. 215 and 217. The interest can either be waived or reduced by the ITO himself or by the IAC of Income-tax as specifically provided in r. 40. Similarly, an assessee has a right under r. 117A to ask for waiver or reduction of interest levied under s. 139. The interest can be waived by the ITO or the IAC of Income-tax as a specifically provided in r. 117A. Apart from these provisions, the assessee has also a right to approach the CIT for waiver or reduction of interest under s. 273A of the Act. After all this, the assessee could perhaps question the levy of interest in a proceedings under art. 226 of the Constitution, if the levy is illegal. These are the various remedies open to an assessee to challenged the levy of interest under ss. 139(8), 215 and 217 of the Act. It cannot, therefore, be said that an assessee is left without remedies against the charge of interest by the ITO and, therefore, the denial of a right to appeal against the order of the ITO levying interest caused hardship to the assessee. It should be mentioned that the quantum of interest levied is subject to the income that may be finally determined on appeal. If the assessee succeeds in getting his income reduced on appeal, the quantum of interest levied automatically gets reduced. The decisions of this court in Boddu Seetharamaswamy v. CIT : [1955]28ITR156(AP) and the unreported judgment of this court in R.C. Nos. 74, 75, and 76 of 1969, dated November 8, 1971 (CIT v. Bankatlal Gopikishan - See Appendix infra, p. 713) do not stand exclusively against the view enunciated by the other High Courts. We may point out that the same view was followed by a Full Bench of the Allahabad High Court in CIT v. Geeta Ram Kali Ram : [1980]121ITR708(All) and also by the Gauhati High Court in K. B. Store as v. CIT . Having independently examined the provisions of law, we are fortified in our view that an assessee has no right of appeal against an order of the ITO levying interest under s. 215 of the Act and, therefore, the decision of this court in Boddu Seetharamaswamy v. CIT : [1955]28ITR156(AP) and the unreported judgment of this court in R.C. Nos. 74, 75, and 76 of 1969, dated November 8, 1971 (CIT v. Bankatlal Gopikishan - See Appendix infra, p. 713) do not require reconsideration.

12. Learned counsel drew our attention to a decision of this court in Income-tax Case No. 112 of 1976, dated November 10, 1976 (CIT v. Roopkaran - See Appendix infra, p. 717). That was a case arising under s. 256(2) of the Act and one of the question referred was regarding the maintainability of an appeal against the levy of the interest under s. 139. Dealing with this question this is what was stated by this court (p. 718) infra :

'As regards question 3, since the question of charging of interest was part of the appeal relating to capital gains, it cannot be said that the appeal was filed only on the question of interest under s. 139. Hence, the appeal was certainly maintainable as laid down by the several decision of the different High Court.'

13. Learned counsel drew inspiration from the above observations and raised the plea that even this court half held the an order levying interest order s. 139 can be appealed against. We are unable to agree. In the first place the matter arose on an application under s. 256(2), which did not involve serious consideration. There is no discussion on the subject. We do not find any reason for decision arrived at. Attention of the learned judges was not invited to the earlier decisions of this court in Boddu Seetharamaswamy v. CIT : [1955]28ITR156(AP) and in R.C. Nos. 74, 75, and 76 of the 1969, dated November 8, 1971 (CIT v. Bankatlal Gopikishan - See Appendix infra, p. 713). We are, therefore, unable to a accept the contention of the learned counsel that the above observations constituted a decision on the point.

14. Before the parting with this matter, we must refer to one aspect which is disturbing. The ITO seems to have charged the interest in the assessment order without staking any reasons whatsoever. He seems to have treated the charge of interest as matter of automatic consequence and that an assessee has no say in these matters before interest is actually charged. It would also appear that the ITO considered the charge of interest as part of the assessment, although the power to levy interest is conferred altogether under different provisions not dealing with the determination of total income and computation of tax. We have already referred earlier that the assessee has a right to ask for waiver or reduction of interest leviable under s. 215, under the rule 40 of the I.T. Rules, and the interest leviable under s. 139, under rule 117A of the I.T. Rules. It, therefore, follows that, before the charge of the interest, the ITO should given an opportunity to the assessee to show cause why interest should not be levied. Before the actually charging the interest, the ITO should consider the representations made by the assessee and if justification exists either for waiver or for reduction of interest, he should do so even before the passing a formal order. It would not be proper for the ITO to levy interest as a matter of course driving an assessee to file representations for waiver or for reduction of interest, as this would result in avoidable hardship to the assessee in the matter of payment of interest before his representations for waiver or for reduction of interest are considered. The charge of interest in a routine fashion in the assessment order is also open to attack by the an assessee on the ground that the ITO did not apply his mind and that the interest was charged without the ITO deriving satisfaction that justification exists for charge of such interest. We must, therefore, administer caution that, before charge of interest either under s. 215, 216, 217, or 139 of the Act, the ITO should given an opportunity to the assessee to show cause why interest should not be charged, consider the assessee's representation in the matter and then pass an formal order, if circumstances require the charging of such interest. It is desirable that the levy of interest under the provisions of abovementioned is made by separate orders issued by the ITO constituting identifiable proceedings under the Act, so that the assessee, may, in the case of levy of interest under s. 216, file an appeal against the order levying interest, if necessary, and against order levying interest, seek appropriate remedies for waiver or deduction of interest if necessary. In the present case, we find that the interest under s. 216 was charged without indicating any reasons whatsoever and without obviously giving an opportunity to the assessee. Since, however, this question is not referred to us, we are not going into the matter. Confining ourselves to the question referred for our opinion, we answer the question in the affirmative, i.e., in favour of the Revenue and against the assessee.

15. In the result, we answer both the question referred to us in the affirmative, i.e., in favour of the Revenue and against the assessee. In the circumstances of the case, we direct the parties to bear their own costs.

16. Learned counsel for the assessee makes an oral application for leave to appeal to the Supreme Court. We do not think that this is a fit case for leave to appeal to the Supreme Court under s. 261 of the I.T. Act. We reject the oral application for leave.


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