1999 (8) TMI 37 - HC - Income Tax

Summary

Issues: Validity of section 220(2) of the Income-tax Act, 1961 challenged as violative of articles 14 and 19(1)(g) of the Constitution.

The judgment dealt with the challenge to the validity of section 220(2) of the Income-tax Act, 1961, on the grounds of being violative of articles 14 and 19(1)(g) of the Constitution. The petitioner argued that the interest levied while creating the demand under sections 139(8) and 217 of the Act, inclusive of tax, interest, and penalty liability, was confiscatory. Reference was made to a judgment by the Madras High Court in A. M. Sali Maricar v. ITO [1973] 90 ITR 116, where similar provisions were held violative of constitutional articles. However, the court observed that the demand notice is issued for the determined tax, interest, and penalty liability, and section 220 specifies when the tax is payable, deeming the assessee in default and providing for interest payment. The court clarified that the distinction between tax, interest, and penalty ends once the demand notice is issued, and the total amount specified therein must be paid by the assessee, including interest on the total liability. The court also referenced Gujarat State Fertilisers Co. Ltd. v. ITO [1983] 142 ITR 787 (Guj) where it was noted that the interest levied under section 220(2) is compensatory and not unreasonable.

The judgment further distinguished between sections 220 and 221, emphasizing that penalty could only be imposed in case of default in tax payment, in addition to the interest under section 220(2). It highlighted that the interest was compensatory and necessary for non-payment or late payment of the specified amount in the demand notice. The court referred to Khazan Chand v. State of Jammu and Kashmir [1984] 56 STC 214, stating that interest provision in fiscal legislation ensures timely tax payment. Upholding the validity of interest provisions, the court cited Smt. Achamma Kuriakose v. State of Kerala [1988] 171 ITR 494 (Ker) regarding similar provisions in the Agricultural Income-tax Act, 1950. The judgment concluded that Parliament's power to levy interest for late tax payment was ancillary to its main tax levy power, dismissing the contention that the provisions violated constitutional articles 14 and 19(1)(g).

In summary, the court rejected the challenge to the validity of section 220(2) of the Income-tax Act, 1961, ruling that the interest provision was compensatory and essential for ensuring timely tax payment, dismissing the claims of constitutional violations.