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Gwalior Rayon Silk Manufacturing (Weaving) Co. Ltd. Vs. Income-tax Officer, a Ward, Indore - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtMadhya Pradesh High Court
Decided On
Case NumberMisc. Petn. No. 277 of 1966
Judge
Reported inAIR1969MP100; [1969]73ITR95(MP); 1969MPLJ61
ActsIncome Tax Act, 1961 - Sections 220(1), 220(2) and 220(3); Finance Act, 1965
AppellantGwalior Rayon Silk Manufacturing (Weaving) Co. Ltd.
Respondentincome-tax Officer, "a" Ward, Indore
Appellant AdvocateK.A. Chitaley and ;V.S. Dabir, Advs.
Respondent AdvocateM. Adhikari and ;P.S. Khirwadker, Advs.
DispositionPetition allowed
Cases ReferredVenkatachalam v. Bombay Dyeing and Mfg. Co. Ltd.
Excerpt:
.....that provision the liability of an assessee to pay interest at the rate prescribed therein arises if a notice of demand under section 156 has been served on the assessee and if he has failed to pay the amount specified in the notice of demand within the period limited under sub-section (1); the liability to pay interest is from the day commencing after the end of the period mentioned in sub-section (1). an assessee, who does not pay the amount of tax within the time limited under sub-section (1), is deemed to be in default, as is clear from sub-section (4) of section 220, and becomes liable to pay penalty under section 221 in addition to the amount of interest payable under section 220(2) of the act. it is well settled that the function of the court is to construe a provision and not..........january 1965 for the payment of tax amount by instalments with the condition of payment by the assessee-company of interest at the rate of five per cent was a 'settlement' under section 220(3) which could not be affected or altered in any way by the amendment made in section 220(2) of the act enhancing the rate of interest from four per cent to six per cent. the amendment made in section 220(2), it was said, was made operative specifically only from 1st april 1965, and, therefore, it could not affect anything done or any action taken by the income-tax officer under section 220(3) of the act or any demand raised by him prior to 1st april 1965.6. learned counsel further submitted that even if it be assumed that sub-sections (2) and (3) of section 220 were inter-connected, the amendment.....
Judgment:

Dixit, C.J.

1. This order will also govern the disposal of Miscellaneous Petitions Nos. 279 to 282, all of 1966.

2. The facts and circumstances in which these five applications under Article 226 of the Constitution have been filed by the Gwalior Rayon Silk .. (hereinafter referred to as the Company) are that the petitioner-company is engaged in the business of manufacturing rayon silk cloth. After the decision of the Supreme Court in Union of India v. Gwalior Rayon Silk Mfg. (Wvg) Co. Ltd. : [1964]53ITR466(SC) reversing the decision of this Court in Gwalior Rayon Silk Mfg. (Wvg) Co. v. Union of India : [1961]43ITR184(MP) rejecting the petitioner's claim for exemption from tax for twelve years from June, 1949 in respect of artificial silk rayon section and for twelve years from February 1954 in respect of staple fibre section of the company was rendered, provisional assessment of tax for the assessment years 1960-61 to 1964-65 was made and an amount of Rs. six and a half crores was found payable by the company and was demanded from it.

The company found itself unable to pay this large amount of tax in a lum sum, and, therefore, entered a into correspondence with the Income-tax Department for grant of instalments for payment of tax and submitted a scheme to the Department for the purpose. By 26th December 1964 the company had paid Rs. 3 crores. On this date, the company addressed the following letter to the Income-tax Officer, A Ward, Indore, praying for the facility of instalments for payment of the balance of the tax due-

'We beg to inform you that we have paid Rs. 3 crores since your last order was passed. Thus, according to us about Rs. 2.40 crores remain outstanding out of the demands already fixed. Besides, we expect a demand of about 1.20 crores within January, 1965, for provisional or self-assessment for 1964-65. Besides this, there may be demand for advance tax payment within March 1905, We will make the advance payment of tax over and above Rs. 3 crores that we have already paid, but in the peculiar circumstances of our case, our difficulty in making further payment within March 1965 should be appreciated. Thus, for a sum of Rs. 3.60 crores, we have to request you for instalments for three years as under:

Rs. 1,00crore Before 15th March 1966

Rs. 1,20 crores Before 15thMarch 1967

Rs. 1.40 crores Before 15thMarch 1968

Rs. 3.60 crores

We know that under the existing law, the interest chargeable on the unpaid dues is 4 %. It appears that because of this rate of interest, you have been reluctant to grant time. We, therefore, voluntarily offer to raise the rate of interest to 5% after 31st December 1964. The interest will be paid along with the instalments.

We hope that considering the financial position and commitments of the Company, you will kindly accommodate us by accepting our request and offer.' The Income-tax Officer accepted the terms and conditions of payment suggested by the Company, and by his letter dated the 16th January 1965 informed the company as under:

'Please refer to your petition dated the 26th December 1964 on the above subject.

The terms of payment offered in the petition referred to above is accepted, i.e. the taxes are allowed to be paid as under:

Rs. 1 Crore by 15th March 1966

Rs. 1.20 crores by 15th March 1967

Rs. 1.34,76,999 by 15th March 1968.

One of the terms is that the rate of interest on the unpaid dues will be 5% from 1-1-65 (it will be 4% upto 31-12-1964). The interest will be calculated from the dates the demand fell due.'

3. By a letter dated the 10th January 1966, the Income-tax Officer, referring to the last paragraph of his earlier letter dated the 16th January 1965, informed the petitioner that in view of the amendment made in Section 220(2) of the Income-tax Act, 1961, (hereinafter called the Act), raising, with effect from 1st April 1965, to six per cent the interest payable by an assessee under Sub-section (2) of Section 220, the rate of interest on unpaid balance of tax would have to be the revised rate of six per cent with effect from 1st April 1965. The petitioner protested against this variation of interest from five per cent to six per cent, and addressed a communication to the Central Board of Direct Taxes contending that the amendment made in Section 220(2) in regard to the rate of interest was not applicable to it and no variation could be made in the terms of payment of unpaid tax amount in instalments with interest at the rate of five per cent, which was accepted by the Income-tax Officer in exercise of his powers under Section 220(3) of the Act On 16th March 1966, the Under Secretary of the Central Board of Taxes addressed a letter to the petitioner rejecting the plea of the petitioner in regard to the inapplicability of the enhanced rate of interest under Section 220(2) of the Act. That letter said-

'. . .the amendment of Sub-section (2) of Section 220 raising the rate of interest on the unpaid balance from 4% to 5% by Section 55 of the Finance Act, 1965, prevails over the action taken under Sub-section (3) of that Section, in view of the opening words of Sub-section (3), viz. 'without prejudice to the provisions contained in Sub-section (2)'. Hence the rate of interest on the unpaid balance of tax will be 6% with effect from 1-4-1965.'

Thereafter the Income-tax Officer issued to the petitioner a notice of demand under Section 156 of the Act for each of the assessment years calculating interest at the rate of six per cent per annum on the unpaid balance of tax instead of at the rate of five per cent mentioned in the Income-tax Officer's letter dated the 16th January 1965. In each of these petitions, the prayer made by the company is that the notice of demand for the relevant year be quashed by the issue of a writ of certiorari and the respondent be restrained from demanding or recovering from it interest on the unpaid balance of tax 'at a rate higher than 5 per cent as agreed and decided upon in the past.'

4. Before stating the contentions advanced on behalf of the petitioner and the Department, it is necessary to refer to the relevant provisions of Section 220 of the Act. By the first sub-section of Section 220, it is provided that any amount, otherwise than by way of advance tax, specified as payable in a notice of demand under Section 156, shall be paid within thirty-five days of the service of notice at the place and to the person mentioned in the notice. Sub-section (2) of Section 220, in so far as it is material here, is as follows-

'(2) If the amount specified in any notice of demand under Section 156 is not paid within the period limited under Sub-section (1), the assessee shall be liable to pay simple interest at four per cent, per annum from the date commencing after the end of the period mentioned in Sub-section (1):

** ** ** ' By Section 53 of the Finance Act, 1965 (Act No. 10 of 1965), Section 220(2) of the Act was amended by substituting the words 'six per cent' for the words 'four per cent'. Section 1 (2) of the Finance Act, 1965, provided inter alia that section 53 of that Act shall be deemed to have come into force on 1st April 1965.

5. It was argued by Shri Chitale, learned counsel appearing for the company, that Section 220(2) of the Act was a provision in no way connected with Section 220(3); that it merely provided for payment of interest by an ansoscee who did not pay the amount specified in any notice of demand under Section 156 of the Act within the period limited under Sub-section (1) of Section 220; and that Section 220(3) gave to the Income-tax Officer the power to extend time for payment or allow payment by instalments subject to such conditions as the Income-tax Officer thought fit to impose in the circumstances of the case. It was said that it was because Sub-sections (2) and (3) dealt with different topics and operated in different fields that the Income-tax Officer gave to the petitioner the facility of payment of tax by instalments on the condition of interest at the rate of five per cent being paid on the unpaid dues from 1st January 1965, and the petitioner agreed to pay interest at the rate of five per cent,

According to the learned counsel, the arrangement embodied in the Income-tax Officer's letter dated the 16th January 1965 for the payment of tax amount by instalments with the condition of payment by the assessee-company of Interest at the rate of five per cent was a 'settlement' under Section 220(3) which could not be affected or altered in any way by the amendment made in Section 220(2) of the Act enhancing the rate of interest from four per cent to six per cent. The amendment made in Section 220(2), it was said, was made operative specifically only from 1st April 1965, and, therefore, it could not affect anything done or any action taken by the Income-tax Officer under Section 220(3) of the Act or any demand raised by him prior to 1st April 1965.

6. Learned counsel further submitted that even if it be assumed that Sub-sections (2) and (3) of Section 220 were inter-connected, the amendment of Section 220(2) raising the rate of interest from four per cent to six per cent from 1st April 1965 did not have any retrospective effect so as to make that rate applicable in those cases where the period limited under Sub-section (1) of Section 220 for- payment of the amount specified in any notice of demand ended before 1st April 1965, and that there was nothing in Section 220(2) or in the Finance Act, 1965, to indicate that the amendment made by Section 53 of the Finance Act, 1965, in Section 220(2) had such a retrospective effect. Thus, according to the learned counsel, an assessee, to whom a notice under section 156 had been served and who does not pay the amount specified in the notice of demand within the period limited under Sub-section (1), is liable to pay interest at the rate of four per cent only from the day commencing after the end of the period mentioned in Sub-section (1), if the period ended before 1st April 1965. It was pointed out that as in the cases before us the period within which the petitioner was required to pay the amount of tax under the notices of demand issued to it under Section 156 expired before 1st April 1965, the assessee-company was liable to pay interest only at the rate of four per cent notwithstanding the amendment made in Section 220(2); but the assessee agreed to pay interest at the rate of five per cent according to the arrangement set out in the Income-tax Officer's letter dated the 16th January 1965.

It was emphasized by the learned counsel that payment of interest by the assessee-company at the rate of five per cent did not in any way prejudice the provisions contained in Sub-section (2) under which interest was payable at the rate of four per cent before 1st April 1965; that Section 220(2), as it stood before 1st April 1965, continued to apply to the petitioner even after the amendment; and that in relation to the petitioner-company the expression 'without prejudice to the provisions contained in Sub-section (2)', occurring in Sub-section (3), meant 'without prejudice to the unamended provisions contained in subsection (2)' and that being so, there was no violation of Sub-section (2) if according to the arrangement set out in the Income-tax Officer's letter dated the 16th January 1965 the assessee paid interest at the rate of five per cent

7. In answer. Shri Adhikari, learned counsel appearing for the respondent-Department, said that even if under the arrangement stated in the letter dated the 16th January 1965 of the Income-tax Officer the petitioner-company was granted the facility of paying the unpaid tax amount due from it by instalments on the condition of paying five per cent interest from 1st January 1965, and even if the condition of payment of interest at the rate of five per cent from 1st January 1965 was suggested by the petitioner itself, still the applicant was liable to pay interest at the rate of six per cent from 1st April 1965 after the amendment of Sub-section (2) of Section 220 raising the rate of interest from 4 per cent to 6 per cent. It was said that there was nothing sacrosanct about the scheme embodied in the letter dated the 16th January 1965 of the Income-tax Officer in regard to the payment of the tax amount due from the petitioner; that the said scheme could be varied or affected by any amendment made in Sub-section (2) inasmuch as the scheme was without prejudice to the provisions contained in Sub-section (2); and that the Finance Act, 1965, which was passed in May 1965, itself gave retrospective effect to the enhanced rate of interest by making it operative from 1st April 1965, and in demanding from the petitioner interest at the rate of six per cent the Department was not giving a greater retrospective effect to the amendment than that expressly stated in Section 1 (2) of the Finance Act, 1965. To support his contention, learned counsel relied on Venkatachalam v. Bombay Dyeing and Mfg. Co. Ltd. : [1958]34ITR143(SC) .

8. In our judgment the plea of the petitioner that it cannot be called upon to pay interest at the rate of six per cent from 1st April 1965 on the tax amount which it was required to pay by instalments under the arrangement embodied in the Income-tax Officer's letter dated the 16th January 1965, must be accepted. The language of Sub-section (2) of Section 220 is plain enough to show that under that provision the liability of an assessee to pay interest at the rate prescribed therein arises if a notice of demand under section 156 has been served on the assessee and if he has failed to pay the amount specified in the notice of demand within the period limited under Sub-section (1); the liability to pay interest is from the day commencing after the end of the period mentioned in Sub-section (1).

An assessee, who does not pay the amount of tax within the time limited under Sub-section (1), is deemed to be in default, as is clear from Sub-section (4) of Section 220, and becomes liable to pay penalty under Section 221 in addition to the amount of interest payable under Section 220(2) of the Act. Originally, interest payable under Section 220(2) was at the rate of four per cent per annum from the day commencing after the end of the period limited under Sub-section (1) within which the assessee was required to pay the amount specified in the notice of demand under Section 156. The effect of Section 1 (2) of the Finance Act 1965, is that the amendment to Section 220(2), effected by Section 53 of the Finance Act raising the rate of interest from four per cent to six per cent, must be deemed to have been Included in the principal Act as from 1st April 1965.

Now, interest under Section 220(2) is payable 'from the day commencing after the end of the period mentioned in Sub-section (1)'. It follows, therefore, that the amendment made in Section 220(2) raising the rate of interest to six per cent would apply only in those cases where 'the day commencing after the end of the period mentioned in Sub-section (1)' is a day on or after the 1st April 1965. The amendment cannot be applied in those cases where 'the day commencing after the end of the period mentioned in Sub-section (1)' is a day before the 1st April 1965.

If the amendment were to be made applicable even to those cases where the period limited under Sub-section (1) for payment of the amount specified in the notice of demand ended before 1st April 1965, that would in effect mean giving the amendment retrospective effect from a date earlier than that prescribed by Section 1 (2) of the Finance Act, 1965, It must be noted that the liability of an assessee to pay interest under Section 220(2) of the Act is at that prescribed rate which is in force on the day commencing after the end of the period mentioned in Sub-section (1). This liability cannot be affected by imposing the burden of an enhancement in the rate of interest in the absence of anything in Section 1 (2) and Section 53 of the Finance Act 1965 to show that the amendment made in Section 220(2) expressly or by necessary implication would apply even in those cases where 'the day commencing after the end of the period mentioned in Sub-section (1)' falls before 1st April 1965. Having regard to the significance of the expression 'the day commencing after the end of the period mentioned in Sub-section (1)', as also to the fact that Section 1 (2) of the Finance Act, 1965, itself expressly made the amendment in Section 220(2) effective only from 1st, April 1965, there can be no justification whatsoever to apply the enhanced rate of interest of six per cent to cases where the 'day commencing after the end of the period mentioned in Sub-section (1)' fell before 1st April 1965.

9. The amendment made In Section 220(2) increasing the rate of interest to six per cent cannot be so construed as to permit in cases where 'the day commencing after the end of the period mentioned in Sub-section (1)' was a day before 1st April 1965 charging of interest at the rate of four per cent upto 1st April 1965, and thereafter at the rate of six per cent. So to do would be to ignore totally the effect of Sub-section (2), namely, that the liability to pay interest is at that prescribed rate which is in force 'on the day commencing after the end of the period mentioned in Sub-section (1)' and to rewrite Sub-section (2) so as to delete the words 'from the day commencing' occurring in Sub-section (2) and provide that 'the assessee shall be liable to pay simple interest at the rate of four per cent per annum after the end of the period mentioned in Sub-section (1),' thus making it permissible to charge Interest at the enhanced rate from 1st April 1965 as a result of the amendment of Section 220(2) of the Act. It is well settled that the function of the Court is to construe a provision and not to rewrite or legislate. The contention of the learned counsel for the Department that even though the period for payment of the amount specified in the notices of demand issued to the petitioner under section 156 of the Act ended before 1st April 1965, yet the petitioner-company was liable to pay interest at the rate of six per cent per annum from 1st April 1965 under the amended Section 220(2) of the Act, cannot therefore be accepted.

10. Coming to Sub-section (3) of Section 220, under which the Income-tax Officer granted to the petitioner the facility of paying the tax amount by instalments on the condition of the petitioner paying interest at the rate of five per cent per annum, that sub-section is in the following terms-

'Without prejudice to the provisions contained in Sub-section (2), on an application made by the assessee before the expiry of the due date under Sub-section (1), the Income-tax Officer may extend the time for payment or allow payment by instalments, subject to such conditions as he may think fit to impose in the circumstances of the case.'

It will be seen that under this provision the Income-tax Officer has the power to extend time for payment or allow payment by instalments. While doing so, he may impose such conditions as he may think fit in the circumstances of the case. The extension of time for payment or the grant of facility of payment by instalments or the conditions imposed are, however, without prejudice to the provisions contained in Sub-section (2). The effect and meaning of the expression 'without prejudice to the provisions contained in Sub-section (2)' with which Sub-section (3) opens, is that the extension of time for payment or grant of the facility of payment by instalments cannot in any way absolve the assessee from the liability to pay simple interest as provided by Sub-section (2) from the day commencing after the end of the period mentioned in Sub-section (1). Therefore, in a case where while granting an assessee the facility of payment of tax amount by instalments or extending the time for payment the Income-tax Officer does not impose any condition in regard to payment of interest, the assessee would yet be liable to pay interest according to Sub-section (2).

Leaving aside the question whether the conditions which can be imposed by the Income-tax Officer under Sub-section (3) can include a condition with regard to payment of interest at a particular rate when an express provision has been made by Sub-section (2), and assuming that a condition with regard to payment of interest can be imposed under Sub-section (3), it is clear that the Income-tax Officer cannot extend time for payment or allow payment by instalments subject to the conditions of the assessee paying interest at a rate lower than that provided by Sub-section (2). Such a condition would be in violation of Sub-section (2) and cannot be imposed having regard to the expression 'without prejudice to the provisions contained in Sub-section (2)' occurring in Sub-section (3),

If, on the other hand, the Income-tax Officer extends time for payment or allows payment by instalments on the condition of the assessee paying interest at a rate higher than that provided by Sub-section (2), then such a condition as regards interest would not be to the prejudice of the 'provisions contained in Sub-section (2)'. Here, when the facility of payment of the tax amount by instalments was granted to the petitioner by the Income-tax Officer by his letter dated the 16th January 1965, the assessee was asked to pay interest at the rate of five per cent per annum and the petitioner agreed to do so. On 16th January 1965 simple interest at the rate of four per cent per annum was payable by the assessee from the day commencing after the end of the period mentioned in Sub-section (1).

The payment of interest by the asses-see-company at the rate of five per cent, therefore, in no way prejudiced the provisions contained in. Sub-section (2). It is fallacious to say that if the assessee-company continues to pay interest at the rate of five per cent after the amendment effected in Sub-section (2) of Section 220 by enhancing the rate of interest to six per cent, that would be inconsistent with Sub-section (2) and would prejudice the provisions contained in Sub-section (2). The fallacy lies in assuming that the amended Sub-section (2) applies to the assessee-company and it is liable to pay interest at the rate of six per cent from 1st April 1965. As we have endeavoured to point out earlier, the liability of the assessee-company for payment of interest under Sub-section (2) from the day commencing after the end of the period mentioned in Sub-section (1) is at the rate of four per cent per annum inasmuch as the day commencing after the end of the period mentioned in Sub-section (1) fell before 1st April 1965, and the amended Sub-section (2) has no applicability.

The words, namely, 'the provisions contained in Sub-section (2)' used in Sub-section (3) plainly mean the provisions with regard to payment of interest at a particular rate applicable to the assessee on the day commencing after the end of the period mentioned in Sub-section (1). If, therefore, the assessee-company was liable to pay simple interest at four per cent per annum from the day commencing after the end of the period mentioned in Sub-section (1) inasmuch as the period specified in the notices of demand issued to it for payment of tax ended before 1st April 1965 and the amended Sub-section (2) cannot be applied to the assessee, then it follows that the payment of interest by the assessee at the agreed rate of five per cent per annum is not to the prejudice of the provisions contained in Sub-section (2). In our judgment, the assessee-company is not liable to pay interest at the rate of six per cent from 1st April 1965 and that being so, the notices of demand issued to it for payment of tax amount computed on the basis of payment of interest at the rate of six per cent must be quashed.

11. In this view of the matter, it is not necessary to consider the argument put forward on behalf of the petitioner that the arrangement with regard to payment of tax amount by instalments with interest at the rate of five per cent was a 'settlement' between the petitioner and the Department, which could not be disturbed by the amendment made in Sub-section (2) of Section 220 of the Act.

12. For the foregoing reasons, allthese petitions are allowed and thenotices of demand issued to the petitionerunder Section 156 of the Act based on interestcomputed at the rate of six per centper annum on the unpaid amount of taxin each case are quashed. The respondentis restrained from demanding or recovering interest from the petitioner onthe unpaid balance of tax at a ratehigher than five per cent per annum according to the condition imposed by theIncome-tax Officer while granting to thepetitioner the facility of payment of taxamount by instalments as stated in hisletter dated the 16th January 1965 to thepetitioner. The petitioner-company shallhave costs of these applications. Counsel's fee in each case is fixed at Rupees200/-. The outstanding amount of security deposit shall be refunded in eachcase to the petitioner.


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