1992 (11) TMI 48 - HC - Income Tax

Summary

Issues Involved:
1. Applicability of Section 220(2) of the Income-tax Act, 1961.
2. Interpretation of the Taxation Laws (Continuation and Validation of Recovery Proceedings) Act, 1964.
3. Liability of the assessee to pay interest on the tax amount.

Summary:

1. Applicability of Section 220(2) of the Income-tax Act, 1961:
The petitioner challenged the invocation of section 220(2) of the Income-tax Act, 1961, arguing that the assessee is not in default as the original demands were complied with and did not survive after the appellate authority's order. The Revenue contended that the ultimate order relates back to the original order, and the original demand notices are revived by operation of law, necessitating the payment of interest.

2. Interpretation of the Taxation Laws (Continuation and Validation of Recovery Proceedings) Act, 1964:
The court referred to section 3 of the Validation Act, which states that no fresh notice of demand is necessary if the original assessment order is ultimately upheld. The court emphasized that the Validation Act keeps the earlier demand notice alive if the assessment order is upheld by a higher forum, thereby supporting the Revenue's claim for interest.

3. Liability of the assessee to pay interest on the tax amount:
The court highlighted that interest under section 220(2) is compensatory in nature, intended to compensate the Revenue for the deprivation of money lawfully due to the State. The court disagreed with the Kerala High Court's view in ITO v. A. V. Thomas and Co., emphasizing that the original demand notice remains operative, and interest is payable from the date of the original notice. The court also referred to the Delhi High Court's decision in Bharat Commerce and Industries Ltd. v. Union of India, which supported the view that the first demand notice remains effective, attracting interest under section 220(2).

Conclusion:
The court upheld the Revenue's claim for interest under section 220(2), dismissing the writ petitions and discharging the rule. The court emphasized that the interest payable under section 220(2) is compensatory and not penal, and the original demand notice remains effective, attracting interest even if the assessment order is initially reversed but later upheld.