2009 (2) TMI 30 - HC - Income Tax

Levy of interest u/s 234B - Revenue s submission that levy u/s 234B is compensatory and not penal in nature is acceptable although no money belonging to the Government was withheld by the assessee in the years in question - interest payable on account of enhanced compensation was not even known to the assessee till much latter - assessee can t be expected to have paid advance tax on something which had not been received - Revenue has not suffered any loss so interest u/s 234B not leviable

Summary

Issues Involved:
1. Nature of interest under Section 234B of the Income Tax Act, 1961.
2. Deletion of levy of interest under Section 234B by the Income Tax Appellate Tribunal.

Issue-Wise Detailed Analysis:

1. Nature of Interest under Section 234B:
The primary issue was whether the interest under Section 234B of the Income Tax Act, 1961, is compensatory or penal in nature. The Tribunal had concluded that the levy of interest under Section 234B was quasi-punitive by applying the Supreme Court's decision in Star India Private Limited v. Chief Commissioner of Central Excise, which stated that liability to pay interest is in the nature of a quasi-punishment. However, the High Court disagreed with this interpretation. The High Court referenced several Supreme Court decisions, including Central Provinces Manganese Ore Co. Ltd v. CIT and Ganesh Das v. Income Tax Officer, which clarified that interest under similar provisions was compensatory and not penal. The High Court also cited the Bombay High Court's decision in CIT v. Kotak Mahendra Finance Ltd and its own decision in Dr. Prannoy Roy v. Commissioner of Income-tax, which supported the view that interest under Section 234B is compensatory. Consequently, the High Court concluded that the levy of interest under Section 234B is compensatory in nature.

2. Deletion of Levy of Interest under Section 234B:
Despite concluding that the interest under Section 234B is compensatory, the High Court upheld the Tribunal's decision to delete the levy of interest. The High Court reasoned that the interest is compensatory, and for the Revenue to charge such interest, it must demonstrate that it suffered a loss due to the assessee's default. In the present cases, the interest on enhanced compensation was not known to the assessees until much later, making it impossible for them to have paid advance tax on it. The High Court emphasized that the law cannot compel someone to do the impossible and highlighted that the Government itself delayed the payment of compensation. Therefore, the High Court concluded that since the Revenue did not suffer any loss, there was no justification for levying interest under Section 234B.

Conclusion:
The High Court decided in favor of the Revenue on the first question, affirming that the interest under Section 234B is compensatory. However, on the second question, the High Court sided with the assessees, maintaining that the Tribunal correctly deleted the levy of interest under Section 234B due to the lack of loss suffered by the Revenue. Consequently, the appeals were dismissed, and each party was ordered to bear its own costs.