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income-tax Officer Vs. Alappat Brothers - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Cochin
Decided On
Judge
Reported in(1982)1ITD569(Coch.)
Appellantincome-tax Officer
RespondentAlappat Brothers
Excerpt:
.....the departmental representative that the ito has initiated penalty proceedings for the purpose of levying penalty under section 273(a) which would amount to a finding that there has been an under-estimate of the advance tax payable by the assessee. we are unable to agree with this proposition also. under section 273(a) penalty can be levied, if the ito is satisfied that the assessee has furnished under section 212 an estimate of advance tax payable by him which he knew or had reason to believe to be untrue. now, the estimate that is referred to in section 273(a) would be the final estimate filed by the assessee during the year. in working out the penalty under section 273(a), the quantum is determined with reference to the assessed tax and the advance tax actually paid during the.....
Judgment:
1. This appeal by the revenue is against the order of the Commissioner (Appeals) for the assessment year 1978-79, whereby he cancelled the interest of Rs. 3,7 6 levied under Section 216 of the Income-tax Act, 1961 ("the Act") by the ITO. The ITO has in the assessment order indicated the levy by the words "Add : Interest under Section 216 Rs. 3,726". He also initiated penalty proceedings under Section 273(a).

There is no dispute that the assessee has filed an estimate of his income on 14-9-1977 at the figure of Rs. 5,00,000. On this basis, he estimated the advance tax liability at Rs. 1,21,900. There was a revision of this estimate under Section 212 in March, 1978, the income being estimated at Rs. 9,50,000 and the advance tax liability at the figure of Rs. 2,46,100. The ITO seems to have levied the interest under Section 216, taking into account these facts, namely, that the advance tax is estimated at a lower figure in the first instance in September 1977 and subsequently revised at a higher figure leading to the shortfall in the first two instalments as compared to the March instalment. The assessee filed an appeal before the first appellate authority, which happened to be in this case the Commissioner (Appeals). In this appeal, the assessee had urged that the ITO was wrong in charging interest under Section 216, that there was nothing on record to show that the ITO before directing the assessee to pay interest under Section 216, had applied his mind to the facts and circumstances of the case and had found as required under that section that the assessee-firm had underestimated the advance tax payable by it and thereby reduced the amount payable. It was claimed in the grounds of appeal that because of this the levy of interest under Section 216 was null and void.

2. The Commissioner (Appeals) considered this claim (which he considered to be an objection of a fundamental nature) in detail. He also took into account the decision of the Calcutta High Court in the case of Hindustan Sanitaryware & Industries Ltd. v. CIT [1978] 114 ITR 85. The Commissioner (Appeals) required the ITO to give his comments about the applicability of the ratio of the decision of the Calcutta High Court and also on the factual position whether the ITO, while charging interest under Section 216, in the assessment order, can be said to have applied his mind to the facts in this case before invoking the provisions of Section 216. The ITO had reported to the Commissioner (Appeals) that the decision of the Calcutta High Court was not directly on this question and that it was not expressly held that a formal order or a record indicative of application of mind was necessary to support the levy of interest under Section 216. According to the ITO, the Calcutta High Court had merely held that the order of the Tribunal remanding the case to the lower authorities was not justified in the light of the finding of the Tribunal that the order of levy was bad in law. He also reported on the factual position as follows : It will not be possible for the Income-tax Officer to leave notes evidencing the fact that the Income-tax Officer has applied his mind before levying the statutory interest stipulated in the Income-tax Act, as should be done in the case of levy of penalties under various sections.

The Commissioner (Appeals) did not agree with the view of the ITO regarding the ratio of the decision of the Calcutta High Court. He considered that Section 216 required a finding to be made by the ITO that the advance tax payable by the assessee was under-estimated, that there must be a clear positive finding to this effect by the ITO, that it cannot be said that there was such a positive finding and, the levy of interest under Section 216 was bad in law.

3. It is urged, on behalf of the department, that Section 216 is mandatory. It is contended that the word "may" appearing in Section 216 in the operative portion should be construed as "shall" and, therefore, the provision should be treated as mandatory. It is also contended that all that is required for the levy of interest under Section 216 is that the ITO should find or see from the records that there has been an under-estimate by the assessee in respect of the first two instalments which warranted the levy of interest under Section 216 on the deferred portion of the instalments. The finding that is required is merely the recognition of the fact of under-estimate made in respect of the first two instalments. This finding is obvious from the records and, therefore, there is no need for the ITO to give a finding in writing to this effect. It is pointed out that even otherwise it must be considered that the ITO has given a finding to the effect that he has stated that penalty proceedings under Section 273(a) of the Act can only be on the ground that there was an underestimate by the assessee.

Since this finding is there, the levy of interest under Section 216 should be considered to have been validly made, ft is pointed out that the Commissioner (Appeals) has not given a finding that Section 216 cannot be brought into play in the circumstances of the case.

3A. On behalf of the assessee, it is contended that Section 216 requires a finding to be given by the ITO before he proceeds to levy intererst under Section 216. This finding is unavoidable and mandatory.

It is also contended that the levy of interest under Section 216 is not mandatory but it is only discretionary. Reliance is placed in this regard on the observations of the Madras High Court in CIT v. City Palayacot Co. [1980] 122 ITR 430. It is also pointed out that interest under Section 216 is charged for the deferment of the advance tax payment by the assessee filing an under-estimate in respect of either of the first two instalments. Section 273(a), on the other hand, imposes a penalty which is leviable in respect of an under-estimate of the advance tax generally and not particularly with reference to comparison of the estimates made for the same assessment year at different times. The direction to issue a penalty notice under Section 273(c) cannot therefore, be equated to a finding that there has been under-estimate of the advance tax with particular reference to the levy of interest under Section 216. Reliance is also placed on the decision of the Andhra Pradesh High Court in Addl. CIT v. Vazir Sultan Tobacco Co. Ltd. [1980] 122 ITR 251, wherein it has been held that no interest under Section 216 can be levied where the under-estimate of advance tax is due to an under-estimate of the income. It is pointed out that in this case the under-estimate of the advance tax was due to the under-estimate of the income and, therefore, Section 216 interest in any case cannot be levied.

4. Section 216 provides for the levy of interest on the assessee in the case of an under-estimate. This is to be considered by the ITO on making the regular assessment. It is provided that at that time if the ITO finds that an assessee has under-estimated the advance tax payable by him and thereby reduced the amount payable in either of the first two instalments, the ITO may direct that the assessee shall pay simple interest at 12 per cent per annum, for the period during which the payment was deficient. The amount on which the interest is to be paid is the difference between the amount paid in each of the first two instalments and the amount which should have been paid having regard to the aggregate advance tax actually paid during the year. It would appear that for the purpose of levying the interest under Section 216 the reference point is the amount of advance tax actually paid by the assessee during the year. Such amount that has been paid by the assessee during the year should have been paid equally in three instalments. If it is not so paid, then there could be a levy of interest under Section 216. In the operative portion of this section it is laid down that the ITO "may direct" that the assessee shall pay this interest under Section 216. It is also provided in the opening part of this section that the ITO may direct the levy of interest if he "finds" that the assessee has under-estimated the advance tax under the relevant sub-sections of Section 212.

5. It has been contended on behalf of the revenue that ' the provision is brought into play once it is seen that the payments of advance tax in the first two instalments are less than one-third of the total advance tax paid by the assessee during the year. It is contended that all that is required for applying this provision is to find out by an arithmetical calculation that the first two instalments or either of them are deficient when compared to the total advance tax payable by the assessee and, therefore, the finding of the ITO as required under this section is merely a question of observing this arithmetical deficiency in the first two instalments. The other contention put forward is that the levy of interest under Section 216 is mandatory once such deficiency is noticed by the ITO. According to the revenue the word "may" appearing in the operative portion of this provision should be read as "shall".

6. We are unable to agree with either of these contentions. It has been held by the Calcutta High Court in Hindustan Sanitarvware & Industries Ltd. (supra) that a finding by the ITO is necessary for bringing into play this provision. It is true that it has not been held in that decision that a finding in terms that there has been an under-estimate of the advance tax payable leading to the reduction of the amounts payable in either of the first two instalments is necessary, but it has been observed that the order of the ITO read as a whole should clearly indicate that a finding of this nature can be inferred from that order.

Admittedly, there has been no finding in terms that Section 216 is applicable to the facts of this case for the assessment year in question. It cannot also be said that there is anything in the assessment order which would indicate the inferring of such a finding.

It has been pointed out by the departmental representative that the ITO has initiated penalty proceedings for the purpose of levying penalty under Section 273(a) which would amount to a finding that there has been an under-estimate of the advance tax payable by the assessee. We are unable to agree with this proposition also. Under Section 273(a) penalty can be levied, if the ITO is satisfied that the assessee has furnished under Section 212 an estimate of advance tax payable by him which he knew or had reason to believe to be untrue. Now, the estimate that is referred to in Section 273(a) would be the final estimate filed by the assessee during the year. In working out the penalty under Section 273(a), the quantum is determined with reference to the assessed tax and the advance tax actually paid during the financial year. This would have the effect of confining the attention of the ITO for the purpose of Section 273(a) to the last estimate that is filed.

In the instant case, the assessee has filed an estimate on 14-9-1977 with a total income of Rs. 5,00,000 and an advance tax liability of Rs. 1,21,900. He filed a revised estimate on 14-3-1978 on a total income of Rs. 9.5 lakhs with an advance tax liability of Rs. 2,46,100. The assessment itself has been completed on a total income of Rs. 13,67,460. It is clear from this that the initiation of the penalty proceedings under Section 273(a) is only with reference to the estimate filed on 14-3-1978 of an income of Rs. 9.5 lakhs and the completed assessment on a total income of Rs. 13,67,460. It cannot be said on the facts of this case that the ITO by initiating the penalty proceedings under Section 273(a) had come to a conclusion that an estimate of total income of Rs. 5,00,000 made on 14-9-1977 was an under-estimate. On facts, we are unable to agree that the ITO, by initiating the penalty proceedings under Section 273(a) had come to a finding that there was an under-estimate on 14-9-1977 leading to the levy of interest under Section 216.

7. We are also not able to agree that the levy of interest under Section 216 is mandatory. As explained earlier, the contention of the department is that once the arithmetical position is clear to the ITO, the levy of interest is mandatory. The crucial word that is used in this context is "may". The word "may" can sometimes be taken to mean "shall", but in the context of this provision, we are of the opinion that it cannot be taken to mean "shall", vesting this provision with a mandatory nature. Under Section 246 an appeal is provided against the order of the ITO levying penalty under Section 216. If the provision is mandatory there may not be any reason for providing an appeal against the order levying interest. Under Section 273(a) penalty can be levied only if it is found that the estimate filed by the assessee was knowingly a false estimate. Penalty cannot be levied if there are valid and supporting reasons for estimating the income at a particular figure. Such considerations would, in our opinion, also apply in respect of the levy of interest and it is such considerations that have to be taken into account by the ITO while levying the interest under Section 216 and by the appellate authority in appeal against an order levying such interest. It has been observed by the Madras High Court in City Palayacot Co. (supra) that the levy of interest under Section 216 is discretionary as contrasted with the levy of interest under Sections 215 and 217. In view of this, it is not possible to accept the position made out by the department that Section 216 is mandatory in nature.

8. It has been argued, on behalf of the asseseee, that no interest under Section 216 is leviable on the facts of this case as the under-estimate of the advance tax paid by the assessee was due to an under-estimate of the income of the assessee. It has been held by the Andhra Pradesh High Court in Vazir Sultan Tobacco Co. Ltd. (supra) that if the under-estimated advance tax is consequent to the under-estimate of the income by the assessee, interest under Section 216 cannot be charged. On the facts of. the case here, this decision also would apply as it has not been shown by the department that the under-estimate of the advance tax by the assessee here is due to any reason other than or consequential to the under-estimate of the income by the assessee.

9. However, we do not propose to give a finding on this aspect, namely, the merits of the levy of interest under Section 216. The facts of this case are similar to the facts of the case in Hindustan Sanitaryware & Industries Ltd. (supra). The ITO has not given a finding that Section 216 is applicable. The assessee, in its appeal before the Commissioner (Appeals) has urged only one point, namely, that the ITO had not applied his mind to the facts and circumstances of the case and found that the assessee-firm had under-estimated the advance tax payable by it and thereby reduced the amount payable in either of the first two instalments and, therefore, the levy of interest under Section 216 was not valid. The Commissioner (Appeals) has taken this contention only on record and has come to a finding that the levy of interest was not valid because there was no finding by the ITO as required under Section 216. We agree with the Commissioner (Appeals) that in the absence of such a finding, the ITO cannot proceed to levy interest under Section


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