Per Shri H. S. Ahluwalia, Judicial Member - The dispute in this appeal relates to the assessees liability for payment of interest under section 217(1A) of the Income-tax Act, 1961 (the Act).
2. Initially the ITO did not charge any interest under this provision of law though he mentioned in the assessment order that interest may be charged according to law. In relation to that assessment the assessee filed rectification application under section 154 of the Act on 7-7-1977. By his order dated 27-4-1981 the ITO rectified the assessment and simultaneously directed the levy of interest under section 217(1A). The said direction has been quashed on appeal by the AAC relying upon a decision of the Kerala High Court in Mohammed Kunhi v. Addl. ITO : 66ITR250(Ker) .
The revenue has come up in second appeal before us.
3. We have heard the representatives of the parties at length in this appeal. So far as the reliance upon the decision of the Kerala High Court in Mohammed Kunhis case (supra) by the AAC is concerned, we are of the considered opinion that the present case is distinguishable. What had happened in that case was that in the original assessment the ITO had not charged any interest under section 18A (6) of the Indian Income-tax Act, 1922 (the 1922 Act). subsequently, he purported to levy the same by an order under section 154 of the 1961 Act, corresponding to section 35 of the 1922 Act. The assessee filed a writ and the contention raised on this behalf was that the question as to whether an interest under section 18A (6) must be charged was dependent on the exercise of discretion vested in the ITO by the fifth proviso to that sub-section and also on the further fact as to whether any of the conditions mentioned in rule 48 of the Indian Income-tax Rules, 1922, had been fulfilled. The High Court held that it could very well be argued that the ITO had exercised his discretion to waive the interest conferred by him by the proviso to section 18A (6). Though there is a similar provision contained in section 215(4) of the Act, which would apply to this interest also, it cannot be said by any stretch of imagination that the ITO had waived the charging of interest in the present case. It may be pointed out that in the original the ITO had specifically mentioned that interest according to law should be charged. The circumstances under which interest according to law should be charged. The circumstances under which interest can be waived are specified in detail in rule 40 of the Income-tax Rules, 1962 and in the circumstances of the case it cannot be said that any of the clauses of that rule was applicable to the present case. If the Honble Kerala High Court had chosen to hold that the ITO should be deemed to have waived the interest in the first instance in that case, it does not lay down an absolute rule of law that interest should be deemed to have been waived in all similar cases. Each case would have to depend on its facts and circumstances. The crucial thing to note in this behalf is that even at the time of original assessment the ITO had passed an order that interest may be charged according to law and ordinarily interest under section 217(1A) has to be charged and not waived.
4. Faced with this situation, the representative of the assessee contended that the question of levy of interest under section 217(1A) had already been considered and decided by the AAC in the appeal relating to the original assessment and, therefore, could no longer be the subject-matter of rectification. The facts in this behalf are that the assessee had filed an appeal against the levy of interest under section 217 along with a similar appeal in relation to the earlier assessment year 1971-72 too. Both these appeals were dismissed by the AAC on the ground that no appeal lay against were dismissed by the AAC on the ground that no appeal lay against the order levying interest. Thereafter, the matter came before the Tribunal which sent the same back to the AAC with a direction that the appeals were competent but it was not clear as to whether at all the ITO had charged interest and what was the amount demanded from the assessee. This was so ordered by the Tribunal Bench A in IT appeal Nos. 1754 and 1755 (Cal.) of 1981 dated 12-4-1983. Subsequently, the AAC rehearing the appeals came to the conclusions that in the assessment year 1971-72 no interest had been levied according to the copy sent to the assessee. In the year 1972-73 interest had been directed to be levied according to law but this direction was too vague. There were many sections in the Act which empower the ITO to charge interest and unless the section under which the interest was charged had been mentioned it could not be said that the ITO had applied his mind as to whether interest under this section was chargeable. He, therefore, cancelled the levy of interest for this year also. We are, however, of the opinion that by no stretch of imagination can this decision be deemed to have held that no interest was leviable. All that the AAC held was there being no specific direction for the levy of interest under section 217(1A), the said interest would not be charged merely by inclusion in the demand notice. Without commenting on the correctness of this view taken by the AAC it is difficult to understand as to how this order can be deemed to have held that the assessee was not liable to pay any interest. All that the AAC did was to delete the levy of interest from the demand notice on the ground that there was no specific direction in the assessment order itself. In other words, had there been a direction that interest might have been leviable, what follows therefrom is that the direction was missed by the ITO. If it was missed then clearly there was a mistake and then there is absolutely no reason as to why this mistake could not be rectified if otherwise permissible in law.
5. At the time of hearing of this appeal the representative of the assessee, however, raised a new argument which goes to the root of the matter. According to him, the rectification made by the ITO was on an application made by the assessee and not suo motu. Before any amendment which had the effect of enhancing an assessment reducing a refund or otherwise increasing the liability of an assessee, could be made, the ITO should have given notice to the assessee of his intention to do so and allowed him reasonable opportunity of being heard in accordance with sub-section (3) of section 154. Although this plea was not taken before the AAC this goes to the root of the matter inasmuch as legality of the order of the ITO passed under section 154 was in question before the AAC and even if the AAC has not chosen to express any opinion on this matter the assessee can very well agitate the same as it goes to the root because the ITO would have not jurisdiction to levy any interest unless he had given a notice as required by the said provision of law. In this behalf the contention of the departmental representative was that the original file was not before him and, therefore, he was not in a position to say anything. We may point out that if this notice was not given to the assessee the present order of the ITO cannot stand because failure to give notice would deprive the ITO of the jurisdiction to rectify the order altogether and notice given today will not be worthwhile inasmuch as the time limit for rectification has already expired.
6. Accordingly, we accept the appeal, set aside the order of the AAC and direct him to decide the matter in dispute afresh in the light of our aforesaid observations.
7. For statistical purposes this appeal shall be deemed to have been allowed as such.