1. The assessee, the Tamil Nadu Housing Board, Coimbatore Housing Unit, Tetabad, Coimbatore, through its executive engineer and administrative officer, challenges in this appeal the levy of interest by the ITO under Section 201(1A) of the Income-tax Act, 1961 ('the Act'), for the assessment years 1973-74 and 1975-76.
2. The assessee is a statutory body constituted under the Tamil Nadu State Housing Board Act, 1961, with the sole object of providing housing facility to the public. It engages many contractors for executing various types of work in the implementation of its housing schemes. These housing schemes are executed at various places of which Coimbatore happens to be one. While making the payments to the contractors for executing the various types of work, income-tax was deducted at source at the stipulated rate as provided for in Section 194C of the Act. The consequences of failure to deduct tax at source from the payments made to the contractors or after deducting, fails to pay the tax to the Government, are provided in Section 201. Under Section 201(1), if there is a failure to deduct or after deducting, to pay the tax as required by Section 194C, the person responsible for making the payment to the contractors shall be deemed to be an assessee in default in respect of the tax and a penalty can be imposed upon him under Section 221 of the Act, provided the ITO is satisfied that such person has without good and sufficient reasons failed to deduct and pay the tax. Sub-section (1 A) was added to this section with effect from 1-4-1966 which provided that without prejudice to the provisions of Sub-section (1), i.e., levy of penalty, if there is failure to deduct the tax or pay it as per Section 194C, the persons responsible for making the payment is liable to pay simple interest at twelve per cent per annum on the amount of such tax from the date on which such tax was deductible, to the date on which such tax is actually paid.
3. Now, the assessee-company, after having deducted the tax from the payments made to the contractors, failed to make over those deductions to the Central Government, as required under Section 194C. The ITO, by letter dated 2-12-1975, addressed to the executive engineer and administrative officer of the assessee-company, brought to the notice of the assessee that there were payments made to the contractors from which tax was deducted but was not paid to the Government. He also pointed out that in some cases, payment was made after long delay and in some cases payment was not made at all. In the end, he requested the assessee to explain the irregularities committed before the provisions of Sections 201(1 A), 276B and 27B were invoked. The last two paragraphs of the letter written by the ITO are very important and we reproduce them below : I would request you to kindly explain the circumstances under which the above irregularities have been committed before I invoice penal provisions under Sections 201(1A) and 276B, 27B, etc.
A copy of this letter was endorsed to the IAC, Coimbatore Range II, Coimbatore.
4. Then a reply was sent to the ITO on 11-12-1975 stating that the order of the Government for the deduction of income-tax at source from the payment of contractors was communicated to the Housing Board only in February 1973, with instructions to deduct income-tax from the bills of contractors with retrospective effect from April 1972. Even though some remittances were made, due to paucity of funds, full payment could not be made. A request was, therefore, made to the ITO to allow time for payment till end of December 1975 by treating this case as a special case. By his order dated 1-3-1976, the ITO levied interest, for the belated payments made by the assessee, of Rs. 36,781, in respect of the assessment year 1973-74, and of Rs. 838 in respect of the assessment year 1975-76.
5. There were then appeals to the AAC before whom two contentions were taken. One was that in view of the circumstances explained by the executive engineer, particularly in regard to the lack of funds, the assessee should have been exonerated from the levy of interest, and, secondly, he relied upon a decision of the Appellate Tribunal in the case of the Executive Engineer & Administrative Officer, Salam Housing Unit v. ITO [IT Appeal No. 2377 (Mad.) of 1974-75 dated 10-12-1976], where, considering the reasons put forward by the assessee, the Tribunal held that the assessee had good and sufficient reasons for not making the payment of tax in time and, therefore, there was no case for charging interest. The AAC disagreed with both these contentions. Even though there was a decision of the Tribunal, which he should normally have followed, he refused to follow by pointing out that he would differ from the view of the Tribunal which is totally uncalled for. He should have followed the order of the Tribunal and allowed the matter to be corrected by his superior appellate authorities, i.e., the Tribunal, instead of differing from the order of the Tribunal, forgetting his position that he being a subordinate official, should not have refused to follow the order of the Tribunal. Be that as it may, aggrieved by the order of the AAC, the assessee came up in appeal before the Tribunal.
6. At the time of hearing of this case, strong reliance was placed on behalf of the assessee on the decision of the Tribunal in the case of Salem Unit (supra). The Bench there which heard the appeal was of a different opinion. The Bench took the view that it is open to the ITO not to levy interest if there were good and sufficient reasons. Since the Bench which heard the present appeal was of a different opinion, it referred the matter to the President for constitution of a larger Bench. That is how the matter came before this Special Bench.
7. At the time of hearing before this Special Bench, our attention was invited to another order of the Tribunal, passed by B-Bench, Calcutta, in the case of ITO v. Aeicorp (P.) Ltd. [IT Appeal Nos. 2727-2734 (Cal.) of 1979]. There, the Bench, considering the identical circumstances, held that the ITO had no option except levying interest once he satisfied that the assessee was in default. Pressing this order into service, the Departmental Representative argued at great length that under Section 201(1 A), the ITO is prevented from exonerating an assessee from payment of interest once a default has been committed by the assessee. That is to say, when the assessee did not deduct tax, or after deducting it, failed to pay as required under the Act. He pointed out that the penalty spoken of in Section 201(1) is different from, in concept, the levy of interest spoken of in Section 201(1A). While it is open to the ITO to consider whether there are good and sufficient reasons for the failure to deduct and pay the tax and then decide not to levy the penalty, such a consideration is not available while charging interest under Section 201(1A). Charge of interest is for the deprivation of the funds due to the Government and is, therefore, compensatory in nature for which reason the Legislature did not think it proper to vest the ITO with the power to absolve the assessee from the payment of interest, be it even if there are good and sufficient reasons for the failure to deduct the tax or pay it after deduction.
8. The learned counsel for the assessee, Shri Munirathinam, although resisted the levy of interest, ultimately gave it up when his attention was drawn to the decision of the Supreme Court in the case of Associated Cement Co. Ltd. v. CTO AIR 1981 SC 1887. In this case before the Supreme Court, the assessee was a cement manufacturing company. It did not include freight charges in its taxable turnover in the bonafide belief that they were not liable to be included. However, after the decision of the Supreme Court in another case, Hindustan Sugar Mills v.State of Rajasthan  1 SCR 276, declaring freight charges as components of sale price, the assessee filed a revised return and paid sales tax on freight charges also. Since the amount of tax due in respect of the freight charges was not paid within the period allowed, in addition to levying penalty for non-payment of tax, interest also was levied. Section 11B of the Rajasthan Sales Tax Act provided that if the amount of any tax payable under Sub-sections (2) and (2A) of Section 7 is not paid within the period allowed, simple interest on such amount at one per cent per month, from the day commencing after the end of the said period, for a period of three months and at one and a half per cent per month thereafter, during the time he continues to make default in the payments shall be leviable. The Sales Tax Officer levied interest by invoking this section. The Supreme Court found that there was no justification for the levy of penalty because the assessee bonafide believed that no sales tax was payable in respect of the freight and that bonafide belief was held to be a reasonable cause and as a consequence, the penalty was cancelled. But, in so far as the levy of interest was concerned, by majority of the Supreme Court held that interest was leviable under Section 11B whatever be the assessee's attitude in so far as the filing of the return was concerned or reporting the correct turnover. The Supreme Court there pointed out the difference between a tax, interest and penalty. Tax becomes payable by the assessee by virtue of the charging provision in a taxing statute.
Penalty ordinarily becomes payable when it is found that an assessee has wilfully violated any of the provisions of the taxing statute.
Interest in ordinarily claimed from an assessee who has withheld payment of any tax payable by him and it is always calculated at the prescribed rate on the basis of the actual amount of tax withheld and the extent of delay in paying it. It may not be wrong to any that such interest is compensatory in character and not penal. Those observations of the Supreme Court make it abundantly clear that the interest sought to be levied in this case under Section 201(1A) is mandatory and compensatory in character because of the deprivation of the user of the money by the Government. Since they are not penal in character, the question of absolving the assessee from the levy would not arise.
9. But here a question may arise. If the levy of interest is so automatic and mandatory, why an appeal has been provided against the levy of such interest and what are the possible arguments that could be raised against the levy of such interest. Is it open to an assessee to argue in an appeal against levy of interest that he had good and sufficient reasons for nonpayment of tax deducted or for the failure to deduct the tax .and whether such contention could be accepted by the appellate authorities. To this question, the departmental representative's answer is that all that could be urged in an appeal against the levy of interest was either that the assessee was not liable to the levy of interest because tax need not be deducted or the tax had been paid but the ITO for reasons of mis-communication, levied the interest. But it is not open to an assessee to argue and the appellate authorities to consider that the assessee though deducted the tax, did not pay that for good and sufficient reasons.
10. We thought we need not go into this question at this stage because the assessee conceded after the decision of the Supreme Court was brought to his notice that he would not argue the matter any further.
Secondly, we found that what the assessee had been bargaining for by taking recourse to the appeal procedure was to establish a point that the ITO must before levying the interest, give the assessee an opportunity of being heard and in that opportunity the assessee could put forward his difficulties, which prevented it from deducting the tax or paying it to the Government after deduction. For this purpose, analogy was taken from Section 201 which clearly provided that an opportunity must be given to the assessee. The clue or strength, whatever may be called, for that argument is taken from Section 201(1).
Assuming that the assessee is right, the facts of this case clearly show that the ITO did give an opportunity to the assessee on 2-12-1975, and the assessee-did reply to it on 11-12-1975 and it was after considering the reply given by the assessee that interest had been levied, That shows that department was not convinced of the reasons given by the assessee. The assessee did not dispute the fact that it had deducted the tax from the payments made to the contractors. It is also not disputed that those payments have been made to the Government after considerable delay. When the assessee deducted tax from the payments made to the contractors; it is not proper and just to withhold the money from paying it to the Government. It was there that the ITO was not satisfied with the reasons advanced and when no reasons were advanced before us and the case was given up, we also not satisfied and we agree that the assessee is an assessee in default. In the result, the interest has to be levied and rightly levied.
11. In view of the decision of the Supreme Court cited above, we arc inclined to think that the view taken by the Calcutta Bench as well as by the Madras Bench in the assessee's own case in another unit, namely, the Salem Unit, do not conflict with each other, on the question of giving the assessee an opportunity of being heard, before the interest is levied.
12. No doubt, as per the law declared by the Supreme Court conceptually, tax, penalty and interest are different and what applies to penalty in the matter of procedure, may not apply to the interest.
In the case before the Supreme Court, the question was not whether the assessee was entitled to an opportunity or not before the levy of interest. We have gone through the judgment of the Supreme Court and it appeared to us that it was only after giving an opportunity to the assessee, interest had been levied. But the dispute was whether the assessee was still liable to pay interest for non-payment of such tax which it did not pay on the bonafide belief that a part of its turnover was not liable to sales tax, but, nonetheless, paid it immediately after the Supreme Court clarified the point. The contention of the assessee was that since the tax had been paid after the matter had been clarified by the Supreme Court, there was no failure to pay the tax.
What the Supreme Court decided by a majority view was that the liability was not erased or created by the decision of the Supreme Court, but it was only declaring the law as it existed from the beginning and, therefore, that part of the turnover which the assessee bonafide believed to be not taxable, must also be regarded as taxable and if tax had not been paid thereon, interest is leviable even in respect of that portion of the tax. But, here, the question is whether the assessee is entitled to an opportunity and whether the ITO has got any option to exonerate the assessee from the levy of interest if there are good and sufficient reasons for non-payment. The difference of opinion between the Bench that decided the assessee's case in the earlier year and the Calcutta Bench, was on this point. The Calcutta Bench held that once it is established that the assessee is in default, levy of interest is automatic. All it pointed out was that Section 201(1A) did not provide for any particular formula or procedure or method before passing an order under Sub-section (1A) of Section 201.
The Bench pointed out that, the only prerequisite was that the assessee must have committed a default cognisable under Section 194C. Once such a default was there, the levy of interest is unavoidable and consequential. Therefore, even according to the view expressed by the Calcutta Bench, the condition precedent for the levy of interest was that the assessee must be deemed to be an assessee in default. Once there is commission of the default, levy of interest is automatic.
Therefore, it is open to an assessee, even according to this view, to agitate that such an offence had not been committed. Since the offence spoken of in Section 201(1A) consists of two ingredients, namely, failure to deduct tax or failure to pay the tax after deduction, either one of them can be explained, Since an explanation is permissible and deemed contemplated, it is possible only when the assessee was put on notice, and this follows that an opportunity has to be given. It is also the fundamental principle of natural justice that no person shall be penalised unless he has been given an opportunity of being heard.
Even though the observance of the healthy, time-honoured basic principle of natural justice is not specifically written into Section 201(1A), since it was mentioned in Section 201(1) and since an appeal has been provided against the levy of interest under Section 201(1 A), it does appear to us that an opportunity has to be given. We do not wish to dwell length in this place as to the imperative need of giving an opportunity to an assessee before he is charged with an offence, since it has now been a trite law. To that extent, we are of the opinion that the view expressed by the Madras Bench is not incorrect.
As a matter of fact, there does not seem to be any difference in the approach of either the Madras Bench or the Calcutta Bench because both have stated that the basic ingredient for the levy of interest must be present, i.e., deeming of the assessee to be in default. While this point was not specifically raised before the Calcutta Bench. The Calcutta Bench proceeded on the assumption perhaps that the assessee was in default. Once an assessee is in default, one entirely agreed that the levy of interest is mandatory. The Madras Bench after going into the matter, found that the assessee was not in default. It, therefore, cancelled the interest charged. There does not, therefore, seem to be any basic difference in the approach of the two Benches and we do not have to embark upon any attempt to reconcile the views at all. In the opportunity that was given to the assessee of being heard.
It is open to the asessee to show that there was no default or deemed default within the meaning of Section 201(1A). If the ITO is satisfied that the assessee is not to be deemed to be an assessee in default, no interest will be levied. But if the ITO is satisfied that the assessee is an assessee in default, then he has no option except levying interest.
13. Now, to sum up, since levy of interest under Section 201(1A) is made appealable under Section 246, and since it is open to an assessee in an appeal against levy of such interest, to show that he could not be deemed to be an assessee in default, it follows, therefore, that the assessee has to be given an opportunity of being heard before the levy of interest. The levy of interest without giving an opportunity of being heard in such circumstances, may amount to violation of the principles of natural justice which are written into the section though not in Section 201(1 A) specifically. That was perhaps the reason why Section 201(1A) opened with the words 'without prejudice to the provisions of Sub-section (1)', which mean, in our opinion, without prejudice to the provisions of Sub-section (1), since Sub-section (1) provided for the levy of penalty after giving the assessee an opportunity of being heard- These words, in our opinion, would only mean that the interest can also be levied in addition to the penalty and not in substitution thereof and there is nothing limiting the assessee's right to have an opportunity of explaining the circumstances under which the ingredients referred to in Sub-section (1A) are not present or did not exist.
14. The scope of Section 201 is to enact a three-fold punishment for a person bound to deduct tax at source and defaulting to so deduct tax or, after having deducted, defaulting in making payment thereof to the credit of the Central Government as prescribed. Firstly, the defaulter is to be treated as an assessee in default with the consequence that the assessee in default is liable to a penalty under Section 221.
Secondly, any such person failing to deduct tax at source while being liable to deduct, or failing to make due payment after having deducted tax is liable to pay interest at. the prescribed rate per annum. These two consequences are without prejudice to each other and both will operate simultaneously even against persons who, being liable, have failed to make the deduction of tax at source. The third consequence is meant to be applicable to persons making deduction but failing to make payment of the deducted amount in the' manner prescribed. That is why a statutory charge upon all assets of the defaulter for the amount of tax deducted and not paid plus the amount of interest leviable under Section 201(1 A) was created.
15. Since in this case, opportunity was given to the assessee and since the assessee failed to show that the ingredients were not present, the levy of interest is justified. We, therefore, dismiss these appeals both on grounds of concession as well as on the discussion above, on the various points raised before us by the departmental representative.
We thought, in all fairness, we should give our decision on the points made by the departmental representative, which he really endeavoured ably to put forward before us.
16. The Supreme Court case though decided that interest was leviable was not concerned with the question whether opportunity should be given or not. Atleast, that is how we understood the Supreme Court's decision. Before the Calcutta Bench, the question was not whether opportunity should be given or not. The facts before the Calcutta Bench were somewhat similar to the facts before the Supreme Court. The only Bench that held that opportunity must be given and reasons must be considered, was the Madras Bench 'B' with which the Members, who heard the assessee's appeals first, were hesitant to agree. As we have already recorded elsewhere, the reasons that are to be considered by the ITO at that stage were only to find out whether the assessee is an assessee in default or not. For this reason, we are of the opinion that opportunity needs to be given before the interest is levied.