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Commissioner of Income-tax Vs. City Palayacot Co. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtChennai High Court
Decided On
Case NumberTax Case No. 378 of 1975
Judge
Reported in(1980)15CTR(Mad)365; [1980]122ITR430(Mad)
ActsIncome Tax Act, 1961 - Sections 212(3), 215, 216, 217 and 263; Income Tax Rules, 1962 - Rule 40 and 40(1)
AppellantCommissioner of Income-tax
RespondentCity Palayacot Co.
Appellant AdvocateJ. Jayaraman, Adv.
Respondent AdvocateS.V. Subramaniam, Adv.
Cases ReferredRajyam Pictures v. Addl.
Excerpt:
direct taxation - waiver - sections 212 (3), 215, 216, 217 and 263 of income tax act, 1961 - income-tax officer omitted to charge interest under section 217 - no indication in record that interest was waived - whether omission to charge interest in order of income-tax officer amounted to waiver - mere silence in relation to point of interest cannot give rise to inference of waiver - waiver must be intentional act with knowledge - held, omission to charge interest did not amount to waiver. - sethuraman, j.1. in this reference under section 256(1) of the i.t. act, 1961, the following three questions have been referred for the opinion of this court:'(i) whether, on the facts and in the circumstances of the case, the appellate tribunal was right in setting aside the additional commissioner's order under section 263 directing the income-tax officer to charge interest under section 217 for the period from april 1, 1965, to april 6, 1967?(ii) whether, on the facts and in the circumstances of the case, the appellate tribunal was right in holding that the order of the income-tax officer be deemed to have merged with the order of the appellate assistant commissioner on appeal and that, therefore, the commissioner cannot direct the income-tax officer to charge interest under section.....
Judgment:

Sethuraman, J.

1. In this reference under Section 256(1) of the I.T. Act, 1961, the following three questions have been referred for the opinion of this court:

'(i) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in setting aside the Additional Commissioner's order under Section 263 directing the Income-tax Officer to charge interest under Section 217 for the period from April 1, 1965, to April 6, 1967?

(ii) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the order of the Income-tax Officer be deemed to have merged with the order of the Appellate Assistant Commissioner on appeal and that, therefore, the Commissioner cannot direct the Income-tax Officer to charge interest under Section 217 ?

(iii) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that charging of interest under Section 217 must be deemed to have been waived by the Income-tax Officerand in any view even if it can be so deemed, whether the Appellate Tribunal was right in holding that the Commissioner cannot in exercise of his jurisdiction under Section 263 direct charging of interest under Section 217 in the circumstances of the case as given in the Additional Commissioner's order?'

2. The assessee is a firm carrying on business in the manufacture and sale of handloom goods, and purchase and sale of imported dyes and chemicals. It came into existence on 13th April, 1963, under a partnership deed dated 14th March, 1963. For the assessment year 1965-66, for which the previous year ended on 12th April, 1965, the assessee should ordinarily have filed an estimate of the advance tax payable under Section 212(3) during the financial year 1964-65. However, without filing any such estimate the assessee paid a sum of Rs. 10,000 as advance tax on 30th March, 1965. The assessee filed a return of its income on 6th April, 1966, showing a sum of Rs. 1,85,569 as income earned in the previous year for the assessment year 1965-66. The ITO made an assessment on 7th March, 1970, determining the total income at Rs. 6,42,202. This assessment was, however, reduced on appeal by the AAC and the total income as a result of the reduction given by the AAC came to Rs. 3,60,346. The assessee had been assessed as a registered firm and it had to pay the tax payable as such a firm. The appeal was disposed of on 12th July, 1972.

3. During the pendency of the appeal, the Addl. Commissioner examined the records and found that the ITO had in the assessment order dated 7th March, 1970, omitted to charge interest under Section 217 for failure to comply with the provisions of Section 212(3). In the records, there was no indication that interest was waived. As the omission to charge interest was, in his view, an error in so far as it was prejudicial to the interests of the revenue, he issued a show-cause notice and after hearing the learned counsel for the assessee and considering the explanations offered, passed an order on 22nd February, 1972, directing the ITO to charge interest under Section 217 for the period, April 1, 1965, to April 6, 1967, at the prescribed rate and in the prescribed manner, after taking into consideration the sum of Rs. 10,000 paid as advance tax. It may be mentioned here that the date 6th April, 1967, is the date immediately after the termination of one year from the date on which the assessee filed the return on 6th April, 1966. Apparently, the view of the Commissioner was that the ITO was bound to charge interest from 1st of April, 1965, up to the period of the end of one year from the date of the return. He did not charge interest for any period subsequent to 6th April, 1967, because he was of the view that the delay in completing the assessment was not attributable to the assessee.

4. The assessee appealed to the Tribunal and put forward three contentions, viz., (1) that there was no order under Section 217, which could be revised under Section 263(2); (2) that the ITO must be taken to have waived the interest, because he was empowered to do so, under the Act read with the Rules; and (3) that in any event the order of the ITO should be considered as having merged with the order of the AAC and the Commissioner had no power to revise an order which had so merged with the order of the AAC.

5. The Tribunal held that the Commissioner would be justified in holding that the order passed by the ITO was erroneous in so far as it was prejudicial to the interests of the revenue by reason of the interest not having been charged, and that, even though the order of the ITO was silent and there was nothing on record about the levy or waiver of interest, still as the ITO had power to waive the interest and the circumstances of the case fell within the conditions prescribed in Rule 40(1) of the Rules, the ITO could be taken to have waived the interest and that, in any event, there was no order of the ITO, which could be subjected to revision by the CIT under Section 263, after it had merged with the order of the AAC. The result was that the order of the Commissioner was cancelled. The Commissioner feeling aggrieved by the conclusions of the Tribunal has come up under reference on the questions extracted already.

6. The group of sections, viz., 207 to 219 of the I.T. Act, 1961, had their counter parts in the Indian I.T. Act, 1922. Section 18A was added by the Indian I.T. (Amend.) Act II of 1944, for imposing liability for advance payment of tax in cases where there was no provision for deduction of income-tax at the source. The ITO was empowered to require an assessee to pay quarterly to the credit of the Central Govt., the income-tax and super-tax payable on so much of such income as was included in his total income of the latest previous year, in respect of which assessment had been completed. In cases, where the assessee found that his income liable to be assessed in the particular year was less than the income forming the basis of the demand for the advance tax, he could file his own estimate and pay the tax accordingly. The tax paid, based either on the demand by the ITO or on the estimate by the assessee was given credit in the assessment actually made subsequently. If ultimately the advance tax paid was in excess of the tax finally assessed, refund would be granted to the assessee; if the advance tax paid was less than what was payable, then the balance became payable on the final assessment. By Sub-section 6 of Section 18A, the Legislature sought to penalise an assessee, who attempted to evade liability to pay advance tax by under-estimating his income, by providing that, if in any year an assessee paid the tax on the basis of his own estimate and the tax paid was less than eighty per cent. of the tax determined on the basis of the regular assessment, then so far as such tax related to income towhich the provision of Section 18 did not apply, and so far as the net payment was not referable to any changes in the rates of tax as made by the Finance Act, interest at six per cent. per annum from the first day of January in the financial year in which the tax was paid up to the date of the said regular assessment was payable by the assessee upon the amount by which the tax paid fell short of eighty per cent. of the tax as assessed. Though originally the Act left no discretion to the ITO as regards the charge of interest with reference to the deficiency in the estimate, subsequently a proviso was attached to Section 18A(6) giving power to the ITO to reduce or waive the interest payable by the assessee under such circumstances and in such cases as may be prescribed.

7. These provisions are substantially repeated in the Act of 1961. The present is the case where no estimate of advance tax had been filed by the assessee, though he had paid a sum of Rs. 10,000 as advance tax. Therefore, the relevant provision in the I.T. Act, 1961, is Section 217 which corresponds to Section 18A(8) of the Act, 1922. Section 217 in so far as it is material provides as follows:

'Where, on making the regular assessment, the Income-tax Officer finds that any such person as is referred to in Sub-section (3) of Section 212 (a person who had not so far been assessed) has not sent the estimate referred to therein, simple interest at the rate of twelve per cent. per annum from the first day of April next following the financial year in which the advance tax was payable in accordance with the said Sub-section up to the date of the regular assessment shall be payable by the assessee upon the amount equal to the assessed tax as defined in Sub-section (5) of Section 215.........

(2) The provisions of Sub-sections (2), (3) and (4) of Section 215 shall apply to interest payable under this section as they apply to interest payable under that section.'

8. It is thus necessary to refer to Section 215. Section 215 deals with those cases where an assessee had paid advance tax on the basis of his own estimate, and the advance tax paid was less than seventy-five per cent. of the assessed tax. In such a case, simple interest was payable at the prescribed rate from the first day of April next following the said financial year up to the date of the regular assessment on the amount by which the advance tax made fell short of the assessed tax. The expression, 'assessed tax' has been defined in Sub-section (5) of Section 215, as meaning the tax determined on the basis of the regular assessment as reduced by the amount of tax deducted at source, etc. The assessed tax has also to be computed without taking into account the variations in the rates of tax made by the Finance Act enacted for the year for which the regular assessment was made. Sub-clause (4) of Section 215 provides that in such cases and under such circum-stances as may be prescribed, the ITO may reduce or waive the interest payable by the assessee under Section 215. By reason of Sub-section (5) of Section 215, Sub-section (4) of Section 215 was attracted even to those cases falling under Section 217. The result is that though Section 217 as well as Section 215 made it mandatory on the ITO to charge interest at the prescribed rates from the first day of the relevant assessment year up to the date of the regular assessment, in the prescribed cases the ITO had power to reduce or waive the interest payable. Thus, an element of discretion was introduced. Rule 40 of the I.T. Rules prescribed the cases and the circumstances under which interest could be waived. That rule runs as follows :

'40. The Income-tax Officer may reduce or waive the interest payable under Section 215 or Section 217 in the cases and under the circumstances mentioned below, namely:--

(1) When the relevant assessment is completed more than one year after the submission of the return, the delay in assessment not being attributable to the assessee.

(2) Where a person is under Section 163 treated as an agent of another person and is assessed upon the latter's income.

(3) Where the assessee has income from an unregistered firm assessed under the provisions of Clause (b) of Section 183.

(4) Where the previous year is the financial year or any year ending about the close of the financial year and large profits are made after the 1st March (or the 15th March in cases where the proviso to Section 211 applies) in circumstances which could not be foreseen.

(5) Any case in which the Inspecting Assistant Commissioner considers that the circumstances are such that a reduction or waiver of the interest payable under Section 215 or Section 217 is justified.'

9. The language of the above rule would indicate that the ITO has been given the power to reduce or waive the interest in four such situations and the IAC is also empowered to go into the question whether the circumstances are such that a reduction or waiver of the interest payable under Section 215 or 217 was justified. Thus, a larger area of discretion is given to the IAC.

10. It is in the context of these provisions that we have to consider the questions referred to us. We shall take up the questions in the order in which they appear in the statement of the case.

11. The first question raises the point of waiver. The order of the ITO did not contain any reference to the levy of interest under Section 217. The records also did not indicate, as stated by the Commissioner, that there was a waiver of interest. However, the contention taken by the assessee before the Tribunal, which was accepted by it, was that, where the order of the ITO is silent, the ITO must be taken to have waived the interest. It is this aspect which requires attention now.

12. This question has been considered in some of the decisions of the other High Courts rendered under the I.T. Act. The earliest decision is that of the Andhra Pradesh High Court in Meka Venkatappaiah v. Addl. ITO : [1957]32ITR274(AP) . The assessee was assessed for the first time for the assessment year 1947-48. As a result of the appellate orders being given effect to, the final demand came to be made on 13th March, 1952. On 25th June, 1952, the ITO issued a notice to the assessee under Section 18A(8) of the Act of 1922, alleging that the assessee had not paid advance tax and that, therefore, he was liable to pay penal interest under that section. Subsequently, the assessee was served with a notice proposing to rectify the tax under Section 35 of that Act. The assessee's objections were negatived, and the matter was taken in writ proceedings before the Andhra Pradesh High Court. It was held that Section 18A(3) cast a statutory obligation on the ITO to levy penal interest in the manner laid down in Sub-section (6) and that if such assessment was not made either by mistake or otherwise, the omission would attract the rectification proceedings under Section 35. In that case also there was a contention taken that the interest was not charged, because it was waived. As seen from the narration of the facts in that case the regular assessment can be taken to have been completed on 13th March, 1952. The I.T. Act was amended by the addition of a proviso to Section 18A(6) on 24th May, 1953. But the provision was given retrospective effect from 1st April, 1952. The question was whether even though the ITO had been given such a power retrospectively with effect from 1st April, 1952, he could be taken to have exercised that power either at the time when the assessment was finalised on 13th March, 1952, or at the time when he issued a notice under Section 18A(8) on 25th June, 1952, The Andhra Pradesh High Court pointed out at page 288 as follows :

'Therefore, the Income-tax Officer had no power to waive interest on 25th June, 1952, though such power to waive was conferred on him on 24th May, 1953, retrospectively. When the Income-tax Officer had no power to waive the interest, no waiver can be implied on the basis of his inaction in pursuing the proceedings taken by him under Section 18A(8) of the Act. We, therefore, hold that the respondent did not waive his right to claim interest from the assessee under Section 18A(6) of the Act.'

13. This decision was cited before the Bombay High Court in Shantilal Rawji v. M.C. Nair, IVth ITO : [1958]34ITR439(Bom) . In that case, an assessment order was passed on 10th March, 1953. For the assessment year 1948-49, the assessee had paid advance tax on his own estimate under Section ISA of the 1922 Act. The ITO discovered, after the assessment that the assessee was liable to pay interest under Section 18A(6), inasmuch as the assessee had not paid advance tax on the proper amount. He, therefore, proposed to rectify the assessment by issuing a notice on 14th February,1956, and passed an order of rectification on 9th October, 1956. At the relevant time, the proceedings for the rectification were not subject to the appellate jurisdiction of the AAC. Therefore, the assessee invoked the writ jurisdiction of the Bombay High Court. One of the contentions urged on behalf of the assessee was that there was no mistake in the order of the ITO as a result of the omission to charge interest leviable under Section 18A(6) by reason of the amendment made on 24th May, 1953, which came into force retrospectively from 1st April, 1952, since the ITO had power to reduce or waive interest and that if he did not charge interest in such cases, he should be taken to have waived the interest so that there could be no recourse to rectification proceedings as if there was any mistake apparent from the record. The Bombay High Court went into this question elaborately, and at the end of the judgment, reference was made to the decision of the Andhra Pradesh High Court in Meka Venkatappaiah v. Addl. ITO : [1957]32ITR274(AP) . It was pointed out that the said case might appear to have taken a different view from the one that the Bombay High Court had taken and that the particular argument on which the assessee. was succeeding before it (the Bombay High Court) was not advanced before the Andhra Pradesh High Court. This aspect was elaborated by Chagla C.J., as follows (p.. 46):

'What was advanced (before the Andhra Pradesh High Court) was that the court must assume that the Income-tax Officer had waived the penal tax because under the proviso he had the power to do so. Mr. Palkhi-vala has not put his case on that basis. He does not say that a case of waiver has been made out on the record. The argument which has found acceptance with us is an entirely different argument that on the record as it stands it cannot be clearly predicated of the action of the Income-tax Officer that it constituted a violation of a statutory duty or obligation.'

14. This passage shows that the ITO was not always obliged to levy interest and that his omission to do so would not constitute violation of a statutory duty or obligation giving rise to the jurisdiction for rectification. The principle deducible from this decision is that the omission to charge interest cannot constitute an apparent error, because he could under the law retrospectively in force have waived the interest.

15. In Bhagwandas Kevaldas v. N.D. Mehrotra [1959] 36 ITR 538, the Bombay High Court had again to consider the question whether there was mistake apparent from the record in a case where the ITO had not charged interest under Section 18A(6). The relevant assessment was completed on 31st March, 1953. On 4th October, 1956, the ITO passed an order rectifying the assessment by including the interest chargeable under Section 18A(6). Subsequent to the completion of the assessment on 31st March, 1953, Section 18A(6) was amended with retrospective effect from 1st April, 1952, by the addition of the pro-viso, as seen above, giving discretion to the ITO to reduce or waive interest as seen already. The assessee applied to the Commissioner for modifying the order of the ITO only to the extent of directing him to charge interest for a shorter period than had been charged by the ITO. The Commissioner declined to interfere. The assessee took the matter to the High Court and it was held after referring to the decision in Shantilal Rawji v. M.C. Nair, IVth ITO : [1958]34ITR439(Bom) that the order of rectification passed by the ITO was without jurisdiction. The Commissioner's order declining to interfere was considered to be erroneous and the orders of the Commissioner and of the ITO were set aside.

16. In explaining the earlier decision in Shantilal Rawji v. M.C. Nair, IVth ITO : [1958]34ITR439(Bom) and pronouncing on what was decided in that case, the learned judges, one of whom (S.T. Desai J.) was a party to the earlier decision observed at page 541 (of 36 ITR) as follows:

'The view which we ultimately took of the matter was that the Income-tax Officer had no jurisdiction to pass the order of rectification. By operation of the deeming provision, which was retrospective in its operation, it was to be assumed and taken that on the date on which he made the assessment order he had jurisdiction and power to reduce or waive the amount of interest payable by -the assessee. The Income-tax Officer not having done so and not having said anything in his order as to why he had not done so, the only inference possible was that he had decided to waive the amount of interest and in those circumstances he had no jurisdiction subsequently to rectify that order on the ground that there was an error apparent on the face of the record.' (underlined* by us).

17. With respect, this understanding of what was decided in that case does not appear to be correct, as Chagla C.J. has clearly stated that the point was not argued. It could not, therefore, have been decided.

18. This decision was taken on appeal to the Supreme Court in S.A.L. Narayan Row v. Ishwarlal Bhagwandas : [1965]57ITR149(SC) . The Supreme Court affirmed the judgment of the Bombay High Court. Shah J., who pronounced the judgment on behalf of the majority, held that the order of the ITO, which did not take note of the law deemed to be in force, must be regarded as defective and that the matter was, therefore, brought before the CIT. In the view of their Lordships it was unfortunate that the Commissioner in considering the matter assumed that the Amending Act 25 of 1953 had no retrospective operation and erroneously rejected the claim of the assessee on the ground that at the date when the order of assessment was made the Amendment Act 25 of 1953 had not come into operation. It was, therefore, held that the High Court was right in setting aside the order which was passed by the Commissioner without consideringthe proviso to Section 18A(6) which was applicable to the facts of the assessee. A close scrutiny of the judgment of the Supreme Court shows that it cannot be taken to be an authority for the proposition that there was waiver of the interest chargeable when the ITO did not charge the interest at the time of the completion of the assessment. The only point decided was that the omission to charge the interest in the context of the power to waive it, cannot be taken to be an apparent mistake. The logical result of this view is that the ITO cannot undo the omission to charge interest by recourse to rectification proceedings. The High Court, it must be remembered, had quashed the order passed by the ITO under Section 35 and also the order of the Commissioner in revision declining to interfere with the order of the subordinate. The Supreme Court, by majority, affirmed this judgment of the Bombay High Court. The matter as to whether silence by itself could lead to the inference of waiver was not considered.

19. The decision of the Bombay High Court in Shantilal Rawji v. M.C. Nair, IVth ITO : [1958]34ITR439(Bom) came to be considered in two decisions of two other High Courts. In CIT v. Cochin-Malabar Estates Ltd. : [1974]97ITR466(Ker) , the Kerala High Court had to consider the question in the context of Section 215 of the Act. The ITO had not charged the interest leviable under that section and the Commissioner took proceedings under Section 263. The Commissioner subsequently passed orders directing the levy of interest. The question before the Kerala High Court was whether the ITO had exercised his discretion and decided not to levy the interest for the relevant year. At page 471, the learned judges pointed out as follows :

'The Commissioner is certainly entitled to know on what grounds interest had been waived. The discretion vested in the Income-tax Officer ranges between a right to waive interest completely or to reduce it. Naturally, interest cannot be automatically waived altogether. We conceive, a judicial exercise of discretion is necessary to find out what interest should be charged or whether any interest at all should be charged, and naturally being a quasi-judicial act, the order must state the reasons for the waiver or the reduction of interest.'

20. It was held that the assessment in so far as it related to the levy of interest was unsatisfactory and unsupported as a quasi-judicial pronouncement and could legitimately be set aside by the Commissioner, since the order was prejudicial to the revenue. In Singho Mica Mining Co. Ltd. v. CIT [1978] Ml ITR 231 , the omission to levy interest under Section 18A(8) was the subject of consideration. At page 240, after referring to the case of Shantilal Rawji : [1958]34ITR439(Bom) and also the decision of the Kerala High Court referred to immediately above, the Calcutta High Court agreed with the observations of the Kerala High Court and as the order was absolutely silent as regards the reduction or waiver of interest,it was not permissible therefrom to infer that the ITO had, in fact, considered the matter and exercised his discretion. In a later judgment of the Calcutta High Court in CIT v. Lalit Prasad Rohini Kumar : [1979]117ITR603(Cal) the conclusion was that from the mere fact that an order had been passed in which interest had not been charged, it would not be proper to hold, on the presumption of regularity, that consideration of the factors mentioned by the rules, had been made by the ITO.

21. The view taken by the Bombay High Court in the case of 'Shantilal Rawji : [1958]34ITR439(Bom) cannot be taken as definite so as to show that in every case where there is a silence on the part of the ITO in the matter of exercise of discretion, he should be taken to have exercised his power under the statute read with the Rules. Though in the, subsequent decision in Bhagwandas Kevaldas v. N.D. Mehrotra. : [1959]36ITR538(Bom) there is a statement as to what was actually decided in the earlier decision, still the discussion was not really necessary for the decision in that case. The only question that arose for consideration by the Bombay High Court was whether the omission to charge interest could be taken as an error apparent from the record so as to justify the rectification. In the context of the powers available to the ITO, it was considered that the ITO's order cannot be said to suffer from any apparent error so as to be rectifiable in exercise of the powers under Section 35 of the Act of 1922, The other High Courts have uniformly taken the view that the silence on the part of the ITO will not lead to the inference that there was a waiver. However, the matter requires to be considered in the light of two decisions of this court which have examined a similar problem in the light of the provisions of the Tamil Nadu General Sales Tax Act.

22. In State of Madras v. V.P. Ramulu Naidu [1965] 16 STC 865 (Mad) the assessee reported a turnover of Rs. 92,749.27. However, the representative of the assessee showed that the sales amounted to Rs. 1,48,749.49. The difference between the figure furnished in the return and the figure subsequently furnished was considered to be an omission in the return submitted by the assessee and, therefore, the total turnover was taken at the figure as furnished by the representative. The assessing authority issued a notice to show cause why penalty equal to one and a half times the amount of tax on the turnover that was proposed and not disclosed in the original return should not be levied. When the matter came to be heard in revision in this court it was held that the penalty should also be levied at the time of the assessment, as penalty should form part and parcel of an assessment proceeding and an order of assessment and if the officer at the time of making an assessment was silent about the imposition of penalty, it must be taken that the assessing authority hadapplied his mind, but did not think it necessary to levy a penalty. The learned judges also referred to the fact that the assessing authority may not have levied the penalty because the highest figures which ultimately went into the assessment had been furnished by the assessee's representative himself.

23. In Dy. CCT v. K.M. Thomas & Co. [1973] 31 STC 529, a Division Bench of this court which came to consider the scope of Section 12(3) reiterated what was decided in State of Madras v. V.P. Ramulu Naidu [1965] 16 STC 865 (Mad) and pointed out that the succeeding authority would have no jurisdiction to reopen the earlier assessment order or act independently for the purpose of levying penalty. In the case under consideration, the assessing authority had not levied penalty, but the Deputy Commissioner sought to do so by exercising his powers of revision. It was held, after referring to two other decisions, that the revisional authority cannot exercise the powers of the assessing authority under Section 12(3) and seek to levy penalty.

24. Based on these decisions the contention urged for the assessee was that, at any rate, as far as this court is concerned, the view taken is that the silence in the assessment must be taken as indicating waiver on the part of the assessing authority of the interest leviable under the Act. It is necessary to bear in mind the distinction between the provisions in the Sales Tax Act and the provisions in the I.T. Act. Section 12(3) of the Tamil Nadu General Sales Tax Act, which was the subject of consideration in both the above decisions vested an absolute discretion on the assessing authority to levy or not to levy penalty, while Section 217 of the I.T. Act confers a discretion exercisable under certain circumstances to reduce or waive the penalty. Thus, the provisions are not in Pari materia. Apart from the above, the latest reported decision of the Supreme Court in Motilal Padampat Sugar Mills Co. Ltd. v. State of U.P. : [1979]118ITR326(SC) throws light on the question as to when an inference of waiver can be drawn. In that case, an assurance was given by the Government of U.P. that there would be an exemption from sales tax for a period of three years to all new industrial units in the State. In pursuance of it, the Motilal Padampat Sugar Mills Ltd. went ahead with the establishment of a vanaspathi factory in U.P. The Government took a decision to give only a partial exemption. The sugar mills wrote to the Government that it would be availing itself of partial exemption. It filed a writ petition with a view to securing full exemption. The Government pleaded waiver in defence. The Supreme Court, after pointing out that the plea of waiver had not been taken in the affidavit and could not be allowed to be raised, pointed out at page 338 :

'Waiver means abandonment of a right and it may be either express or implied from conduct, but its basic requirement is that it must be 'an intentional act with knowledge'.'

25. Judged by this test, silence, without more, cannot give rise to an inference of waiver. Hence it is not possible to apply the two decisions under the Sales Tax Act to the problem before us.

26. Under the I.T. Act, an absolute discretion is vested in the ITO under Section 216 which applies to a case where, on making the regular assessment, he finds that the assessee had underestimated the advance tax payable or wrongly deferred the payment of advance tax on a part of his income, he may direct the assessee to pay simple interest at the prescribed rate as in the cases under Sections 215 and 217. The use of the word 'may' in Section 216 as contrasted with the word 'shall' appearing in Sections 215 and 217 brings out in bold relief the existence of discretion in one case and the absence of it in another. The cases decided by this court under the Sales Tax Act would have better relevance to Section 216 than to Sections 215 and 217. While in cases under Section 216, it may be possible to infer waiver because of the existence of the absolute discretion, in cases under Sections 215 and 217, it is not possible to infer any waiver from the omission to charge interest, especially when the power to waive is restricted to particular cases. It may also be remembered that Rule 40 has no application to Section 216, and the existence of the discretion in an absolute form in Section 215 is obvious from the fact that an appeal is provided against the charging of interest under it, while there is no right of appeal against the charging of interest in other cases except to the extent to be indicated later. It would also be necessary for the ITO, if he exercises his discretion, to indicate in his order as to why he waives or reduces the interest liable to be charged. The particular clause in Rule 40 may have also to be referred to as that alone would give a clue to his exercise of the power.

27. The point that arises for consideration now is the procedure to be adopted where interest is not charged by the ITO. We have earlier referred to the cases decided by the Bombay High Court and by the Supreme Court in which the attempt of the ITO to charge interest by taking rectification proceedings has been discountenanced.

28. In CIT v. Executors of the Estate of late H.H. Rajkuverba Dowager Maharani Saheb of Gondal [1918] 115 ITR 301, the Karnataka High Court has held that such an order charging interest has to be passed only after the assessment is made. In view of the time limits set out in Section 153 to the assessments, it would be reasonable to take it that the order charging interest cannot be passed after any length of time. Any other view would result in the interest factor in the assessment proceedings hanging like a Damocles' sword on an assessee indefinitely. The charging of interest and the omission to do so would be subject to the revisional power of the Commissioner under Sections 263 and 264.

29. In cases where the ITO has omitted to exercise his jurisdiction. it would be necessary for the Commissioner to act under Section 263, as otherwise in the absence of a power of rectification, the ITO may not be able to take appropriate action and the provisions of Section 217 would be rendered nugatory.

30. This aspect leads to the consideration of the question as to what form the order of the Commissioner should have taken. Even on the basis that the omission to charge interest was prejudicial to the interest of the revenue, the Commissioner was not justified in automatically charging the interest for the period April 1, 1965, to April 6, 1967. The present cases would fall either within the scope of Rule 40(1) or Rule 40(5). Rule 40(1) applies to a case where the assessment was completed more than one year after the submission of the return. From the language of this rule, the learned standing counsel for the Commissioner contended that up to the date of completion of one year from the date of the return the assessee was liable to pay interest and that only the subsequent delay in assessment has to be examined to see whether it (the delay) was attributable to the assessee. If the delay was not attributable to the assessee, then for the period of one year from the date of the return, the assessee would, in his submission, have to pay interest. In other words, according to the learned counsel, the question of exercise of discretion arose only after the period of one year from the date of the submission of the return. If that is so, then there was no need under Clause (5) of Rule 40 to vest the discretion in the IAC withput reference, to any period or condition, to examine whether the circumstances were such that a reduction of the interest was justified. From the fact that the IAC was vested with a discretion, which is in addition to what is available to the ITO it is clear that he is not bound by any mandatory period of one year, from the date of the return, up to which interest is bound to be charged. The particular statutory provision envisages reduction or waiver of the interest payable by the assessee and the prescription of the cases by the Rules. Though the Rules can provide for the cases or the circumstances, in the absence of any specific provision in the statute to show that interest was bound to be charged up to the period of one year from the date of the return, we are unable to hold that there is any such period for which there is a statutory mandate to charge interest. We do not think it possible also to construe the statutory provision in the light of the rules. The rules can only prescribe, and cannot control the construction of the statutory provision. It is not possible, therefore, to accept the submission that in the present case it was mandatory on the part of the ITO to levy interest from 1st April, 1965, till 6th April, 1967. The rule-making authority has vested the discretion, apart from the ITO, on the IAC also. The CIT could nothave fettered the discretion available to the IAC by exercising the power himself or by denying the assessee an opportunity to approach him (the IAC). The proper order that should have been passed by the Commissioner would-be to direct the ITO to consider the question of levy of interest in the context of Rule 40. In so far as the order of the Commissioner suffers from this defect, it cannot be supported as an order properly passed under the law. The result is that question No. 1 is answered in the negative and in favour of the revenue. The Tribunal in passing the order in the light of the opinion of this court must take into account what we have observed and give appropriate directions to the Commissioner. The decision of this court in Dy. CCT v. K.M. Thomas & Co. [1973] 31 STC 529 has also pointed out after referring to the earlier decision in Abdul Waheed v. CCT [1972] 30 STC 277 (Mad) and East India Corporation Ltd. v. State of Madras [1973] 31 STC 330 (Mad) that the revisional authority cannot itself exercise the powers of the assessing authority under the relative sections. We respectfully agree.

31. The second question raises the problem of merger. It is not clear how this problem in the form in which it was argued before the Tribunal arises here. As already stated the assessment was made on 7th March, 1970. The assessee filed an appeal before the AAC on 23rd April, 1970. The AAC heard the appeal and disposed of it on 12th July, 1972. The Commissioner took proceedings under Section 263 and passed orders on 22nd February, 1972. Therefore, on the day when the Commissioner passed the order, there was no order of the AAC and the assessment order could not have merged in any view in the order of the AAC.

32. However, in view of the question referred, we may, for our present purpose, assume that the order of the AAC was earlier than the order of the Commissioner and examine the question of applicability of the doctrine of merger. The first aspect to be examined is whether the ITO had to pass an order for levy of interest under Section 217. We have already indicated that some order is necessary to charge, waive or reduce the interest. This can be part of or supplemental to the assessment order. The same view has been taken by the other High Courts.

33. The Allahabad High Court in Addl. CIT v. Saraya Distillery [1978] 115 ITR 34, in dealing with a case arising under Section 215 of the Act, has pointedout at page 37 as follows :

'For charging interest for default or shortfall in payment of advance tax due, the Income-tax Officer is not required to pass any formal order. Under the law he is required to calculate the interest in the manner provided under the Act and the Rules framed thereunder.'

34. Reference has been made to two earlier decisions of that court in support of that proposition. However, the Karnataka High Court in CITv. Executors of the Estate of Late H.H. Rajkuverba Dowager Maharani Saheb of Gondal : [1978]115ITR301(KAR) has taken a different view. At page 308, the learned judges observed as follows :

'Having regard to the quasi-judicial nature of the proceedings under Section 217, we are of the opinion that an order has to be passed by the ITO to give effect to Section 217 of the Act.'

35. The Kerala High Court has also taken the view in CIT v. Cochin-Malabar Estates Ltd. : [1974]97ITR466(Ker) that the power to reduce or waive interest was a quasi-judicial act and that hence an order under Section 215(4) must state the reasons for it. We agree with the Kerala and Karnataka decisions.

36. If an order were necessary, then the question arises as to whether the absence of an order could give rise to the jurisdiction of the Commissioner under Section 263. The Karnataka High Court in CIT v. Executors of the Estate of Late H.H. Rajkuverba Dowager Maharani Saheb of Gondal : [1978]115ITR301(KAR) has taken the view that the Commissioner could not exercise his power under Section 263 in a case where there was no such order, and his power under Section 263 was premature. The learned standing counsel for the revenue contended that on the language of Section 263, even in the absence of an order, the Commissioner could exercise the power of revision. Section 263 provides:

'263. (1) The Commissioner may call for and examine the record of any proceeding under this Act, and if he considers that any order passed therein by the Income-tax Officer is erroneous in so far as it is prejudicial to the interests of the revenue, he may, after giving the assessee an opportunity of being heard and after making or causing to be made such inquiry as he deems necessary, pass such order thereon as the circumstances of the case justify.....'

37. His point was that though there must be some kind of indication by the ITO as to whether he proposes to levy interest or reduce or waive it, the absence of any such indication in the assessment order would be prejudicial to the revenue, so that the Commissioner could revise such a wrong exercise of the power on the part of the ITO. We agree with him in this submission. The assessment is required to be made within a particular period as indicated in Section 153 of the Act. The computation of interest arises at the time of the assessment. Section 215 provides that where, in any financial year, an assessee has paid advance tax on the basis of his own estimate and the advance tax so paid is less than 75% of the assessed tax, simple interest at the prescribed rate shall be payable by the assessee upon the difference between the assessed tax and the tax paid on the estimate. Section 215 does not indicate the stage at which the the ITO has to compute the interest. It has necessarily to be done on the completion of the regular assessment. However, Section 217 uses the expression 'on making aregular assessment'. The language of Section 217 shows that the ITO would have to exercise the power only after making the regular assessment, as the tax as assessed forms the basis for the computation of interest. Thus, in either event, where the case falls under Section 215 or under Section 217, the question of computation of interest would immediately follow the assessment. If the assessment order did not indicate the levy of any interest, then the prejudice caused to the revenue could authorise the Commissioner to take proceedings under Section 263. Section 143 of the Act relates to the assessment of income. Sub-section (3) of Section 143, as it was in force in the relevant year, provides that after taking into account all relevant materials which the ITO has gathered, he shall by an order in writing, make an assessment of the total income or loss of the assessee and determine the sum payable by him or refundable to him on the basis of such assessment. From the expression used in Section 143 'determine the sum payable by him or refundable to him on the basis of such assessment' the learned standing counsel contended that what the ITO does is not merely to compute the tax, but also to compute the other sums like interest. In one view, the expression ''determine the sum payable by him or refundable to him' would appear to show that what the ITO is required to do is to determine not only the tax, but also any other amount. The use of the expression 'sum' in Section 143(3) is also explainable by reference to another reason that the ITO has to determine the tax payable by an assessee. But as far as the refund due to the assessee is concerned, it cannot be described as tax, as what is provisionally received and returned after being found to be in excess is not really a tax. Parliament could not, therefore, have substituted the word 'tax' in the place of the word 'sum' in Section 143.

38. Section 156 of the Act is the provision which authorises the issue of a notice of demand. It provides that where any tax, interest, penalty, fine or any other sum is payable in consequence of any order passed under the Act, the ITO shall serve upon the assessee a notice of demand in the prescribed form specifying the sum so payable. There is only one form of notice of demand and no separate form has been prescribed in respect of interest. This also shows that the levy of interest is bound up with the assessment. In cases arising under Section 216 also, it is a common practice to find the interest aspect adverted to in the assessment order. In such cases, the assessment order is a composite order. The same would be the position in regard to charging of interest under Sections 215 and 217 also. The charge of interest is open to challenge, at any rate in revision: CIT v. Sharma Construction Co. : [1975]100ITR603(Guj) .

39. The problem now to be examined is whether there is a merger of this order in the order of the AAC. When there has been an omission on the part of the ITO to levy interest and the order so passed is prejudicial tothe revenue, the Commissioner would have, as discussed already, jurisdiction to exercise his powers under Section 263. Section 263 provides that the Commissioner may examine the order only of the ITO. If the order of the ITO would merge in the order of the AAC, then on the language of Section 263 the Commissioner could not have exercised his power. It is on this aspect that the question of examination of the doctrine of merger becomes relevant.

40. The doctrine of merger has been examined by the Supreme Court in State of Madras v. Madurai Mills Co. Ltd. [1967] 19 STC 144. The company was assessed to sales tax and it carried the matter on appeal to the CTO and partly succeeded. The Dy. CTO made a revised assessment on 28th November, 1952. The assessee preferred a revision petition to the Dy. CCT objecting to the inclusion in its turnover of a sum collected by it by way of tax. There was no other objection regarding the assessment order dated 28th November, 1952. By his order dated 21st August, 1954, the Deputy Commissioner dismissed the revision petition. But on 4th August, 1958, the Board of Revenue issued a notice proposing to revise the assessment of the Dy. CTO by including in the net turnover a certain sum representing the value of cotton purchased by the company from outside the State of Madras, on the ground that it was wrongly excluded in the computation of the turnover. The company objected to the proposed revision on several grounds. The High Court set aside the order on the ground that the Board's proceedings were barred by limitation. On appeal before the Supr.eme Court, one of the arguments urged was that there was merger of the order of assessment dated 28th November, 1952, in the order of the Dy. CTO dated 21st August, 1954, and, therefore, the revision proceeding before the Board was barred by limitation. If the assessment order dated 28th November, 1952, was alone relevant, then the Board could not have passed the order in revision. However, if the order of the Deputy CTO dated 21st August, 1954, was the relevant order or if in that order there was a starting point of limitation, then the order of the Board would be within time. The Supreme Court held that the revision proceedings before the Board of Revenue was barred by limitation and, in doing so, observed at page 149 as follows :

'But the doctrine of merger is not a doctrine of rigid and universal application and it cannot be said, that wherever there are two orders, one by the inferior tribunal and the other by a superior tribunal, passed in an appeal or revision, there is a fusion or merger of two orders irrespective of the subject-matter of the appellate or revisional order and the scope of the appeal or revision contemplated by the particular statute. In our opinion, the application of the doctrine depends on the nature of the appellate or revisional order in each case and the scope of the statutory provisionsconferring the appellate or revisional jurisdiction......In the circumstancesof the present case, it cannot be said that there was a merger of the order of assessment made by the Deputy Commercial Tax Officer dated the 28th November, 1952, with the order of the Deputy Commissioner of Commercial Taxes dated the 21st August, 1954, because the question of exemption on the value of yarn purchased from outside the State of Madras was not the subject-matter of revision before the Deputy Commissioner of Commercial Taxes.'

41. The Gujarat High Court has applied this principle to a case arising under the I.T. Act in Karsandas Bhagwandas Patel v. G.F. Shah, ITO : [1975]98ITR255(Guj) , Bhagwati C.J., as he then was, pointed out, in delivering the judgment of the court, as follows :

'It is only that part of the order of assessment which consists of decisions reviewed by the Appellate Assistant Commissioner--and when we use the word 'reviewed', we mean, considered and examined irrespective of whether ultimately affirmed, modified or reversed--that is superseded by the order of the Appellate Assistant Commissioner.'

42. The principle of this decision is that the doctrine of merger will have to be taken into account in the light of what was in controversy before the appellate authority or what could have been considered by the appellate authority. The AAC did not have before him any appeal on the point of levy of interest as none had been levied. He could not have also on his own considered the question of levy of interest, as the matter had not been examined by the ITO. The result is that there is no merger of the assessment order in the order of the AAC so as to rule out the exercise of jurisdiction under Section 263. The same view has been taken in Singho Mica Mining Co. Ltd. v. CIT : [1978]111ITR231(Cal) .

43. Our attention was drawn to a decision of this court in South India Flour Milk Pvt. Ltd. v. CBDT : [1968]70ITR863(Mad) . In that case, the assessee was charged interest under Section 18A(6) and (7) of the Indian I.T. Act, 1922, on 1st September, 1960. It filed an application before the CIT to revise the order of the ITO. The Commissioner dismissed the order on the ground that the revision was barred under prov. (c) to Section 33A(2) of the Act of 1922. Section 33A(2) provided for the exercise of the power of revision on an application by the assessee. However, the Commissioner is not to revise any order under that sub-section, if, where an appeal to the AAC or to the Appellate Tribunal had not been made, and the time within which such appeal may be made had not expired or in the case of appeal to the Appellate Tribunal the assessee had not waived his right of appeal. The power could not also be exercised in cases where the matter was pending before the AAC or the order of the AAC had been made the subject of an appeal tothe Tribunal. The Commissioner took the view in the said case that the order had been made' subject to an appeal to the Appellate Tribunal and in taking the view he purported to follow a decision of this court in C. Gnanasundara Nayagar v. CIT [1961] 41 ITR 375. This court held that the Commissioner had no power to revise any order, if the order is made subject t6 an appeal to the Appellate Tribunal and if the relief claimed in the revision was different from the relief claimed in the appeal. It was pointed out that the said decision did not apply to the facts of the present case. Following the decision of the Andhra Pradesh High Court in Boddu Seetharamaswamy v. CIT : [1955]28ITR156(AP) , this court pointed out that the imposition of penal interest was not a part of the process of assessment of the income under Section 23 so as to make the order appealable under Section 30 for the reason that the tax and the penal interest were added together and collected in the same manner. The learned judges observed that levy of interest arose on account of underestimated income for the purpose of payment of advance tax and that there was no right of appeal against the levy of such interest.

44. In a later decision of this court to which one of us was a party in Rajyam Pictures v. Addl. CIT : [1978]114ITR847(Mad) , it was held that no appeal would lie against the imposition of penal interest alone, and that, however, in an appeal filed against the assessment, the levy of penal interest could also be challenged. The scope of the challenge was described to be the absence of liability to levy interest and not to the quantum thereof.

45. The arguments appeared to proceed before us as if there were some inconsistencies between the two decisions of this court. In South India Flour Mills Pvt. Ltd. v. CBDT : [1968]70ITR863(Mad) , it was ruled that the levy of penal interest could not be challenged in any appeal. In the later decision in Rajyam Pictures' case : [1978]114ITR847(Mad) also, the same view was taken, but with the modification that in an appeal against the assessment there could be a challenge to the legality of the levy of interest. There is no inconsistency between the two decisions. This aspect as to whether the legality of the levy of penal interest could be challenged in an appeal against the assessment on other aspects had not to be considered in the earlier decision. The same view as taken in the later decision of this court has also been taken by the Calcutta High Court in CIT v. Lalit Prasad Rohini Kumar : [1979]117ITR603(Cal) , which has reviewed all the earlier cases on the point.

46. It is not necessary to pursue this point further. We have already found that there is no merger of the order of the ITO in that of the AAC. The result is that question No. 2 is answered in the negative and in favour of the revenue.

47. The third question challenges the correctness of the order; of the Tribunal in so far as it set aside the order of the Commissioner passed under Section 263 of the Act. The discussion hereinabove would show that the Commissioner could exercise his power in a case like this in view of the fact that the ITO had not levied interest and cannot be taken to have waived it and his order had not merged in any order of the superior authority. It would follow that the Tribunal was wrong in setting aside the order of the Commissioner. Therefore, the third question has to be answered in the negative and against the assessee. There will be no order as to costs.


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