2001 (4) TMI 62 - HC - Income Tax

Summary

Issues Involved:
1. Interpretation of section 220(2) of the Income-tax Act, 1961.
2. Applicability of the Validation Act, 1964.
3. Doctrine of merger and its implications on interest liability.
4. Impact of appellate orders on original demand and interest calculations.

Summary:

1. Interpretation of Section 220(2) of the Income-tax Act, 1961:
The primary issue is the interpretation of section 220(2) of the Income-tax Act, 1961, which prescribes the period within which payment must be made and the interest liability if the amount specified in any notice of demand u/s 156 is not paid within the stipulated period. The court held that interest is payable if a sum is due, and where the assessee is in default in making payment of the assessed amount demanded from him, he is liable to pay interest. However, if there does not exist any demand, interest would not become payable.

2. Applicability of the Validation Act, 1964:
The Validation Act, 1964, was enacted to address the difficulties in the collection of income-tax and other direct taxes following the Supreme Court's decision in ITO v. Seghu Buchiah Setty [1964] 52 ITR 538. The Act provides that it shall not be necessary to take proceedings afresh or to serve fresh notices of demand except in the case of an enhancement of assessment. The court noted that section 3 of the Validation Act revives the old demand notice which had never been satisfied by the assessee and does away with the need to issue a fresh notice.

3. Doctrine of Merger and Its Implications on Interest Liability:
The doctrine of merger implies that the original order of the Income-tax Officer merges into the order of the appellate or revising authority. Consequently, in all cases of an order varying the assessment, the original order goes, and all steps already taken for recovery of the demand become null and void. The court held that the finality of the original order is subject to appeal, and once the appellate order is set aside, the original order regains its full effect.

4. Impact of Appellate Orders on Original Demand and Interest Calculations:
The court observed that when an appellate authority reverses the order of the assessing authority, the original demand notice becomes ineffective. If the appellate order is later overturned, the original demand notice is revived, and interest can be charged from the date of the original demand. However, if the assessee has already paid the amount pursuant to the notice of demand and received a refund due to a favorable appellate order, interest cannot be charged from the date of the original demand upon reversal of the appellate order.

Conclusion:
The court allowed the writ petitions, holding that interest u/s 220(2) cannot be charged from the date of the original demand if the assessee had already paid the amount and received a refund due to a favorable appellate order. The decisions of various High Courts that contradicted this view were not considered good law. There was no order as to costs.