2018 (1) TMI 840 - AT - Income Tax

Levy of interest under section 220(2) - amount seized from the accounts of various companies during the course of search - interest imposed from the date of original demand notice - Held that - If the Department on its own volition has made the addition, both in the hands of the assessee as well as in the hands of the companies for the same amount and chooses to adjust cash seized out of the demand of the companies, which was denied by the companies in their hands; and ultimately has been found to be not sustainable in their assessments, then charging of interest under section 220(2) from the assessee for such a huge delay of payment of demand cannot be attributed to the assessee, especially when finally Revenue in the wake of appellate orders had accepted that the amount seized from the companies belong to the assessee and instead of refunding the same to the said companies should have adjusted the cash in the hands of the assessee that very time under the given facts and circumstances of the case. Now finally, when Revenue has admitted that the amount seized belong to the assessee and tax liability was upon the assessee only, then, in our opinion, such cash seized/ offered to settle the cash liability, should have been accepted and assessee should be deemed to have made the payment specified in the demand notice within the period of limitation as provided u/s 220(1); and cannot be treated in default for not making the payment and thereby shift the adjustment of seized cash after expiry of more than 10 years from the date of demand created by the Assessing Officer. Thus, we hold that the interest u/s 220(2) under the given facts and circumstances of the case cannot be imposed from the date of original demand notice - Decided in favour of assessee.

Issues Involved:
1. Charging of interest under section 220(2) of the Income Tax Act, 1961.
2. Adjustment of seized funds against tax liability.
3. Applicability of CBDT Circular No. 334 dated 3/4/1982.
4. Validity of assessment orders and adjustments made by the Assessing Officer.

Detailed Analysis:

1. Charging of Interest under Section 220(2):
The primary issue was the charging of interest amounting to ?32,58,48,452/- under section 220(2) on the tax liability of ?16,66,74,000/-. The assessee argued that funds amounting to ?22,52,83,598/- were seized during the search and should have been adjusted against the tax liability, thus negating the interest charge. The Tribunal noted that the assessee had declared undisclosed income and requested the adjustment of the seized amount against the tax liability before the completion of the assessment. The Tribunal concluded that the interest under section 220(2) could not be imposed from the date of the original demand notice as the delay in adjustment was attributable to the Department. The Tribunal allowed the assessee's appeal on this ground.

2. Adjustment of Seized Funds Against Tax Liability:
The assessee and the group companies had requested the adjustment of the seized funds against the tax liability of the assessee. The Tribunal observed that the seized amount of ?22.55 crores was offered for tax in the hands of the assessee, and the group companies had also confirmed that the funds belonged to the assessee. Despite this, the Department adjusted the seized funds against the tax demands of the companies, which were later found to be unsustainable. The Tribunal held that the Department should have adjusted the seized cash against the assessee's tax liability from the beginning, and the delay in doing so could not be attributed to the assessee.

3. Applicability of CBDT Circular No. 334:
The assessee relied on CBDT Circular No. 334, which clarifies the levy of interest under section 220(2). The Circular states that if an assessment order is cancelled or set aside and becomes final, no interest can be charged pursuant to the original demand notice. The Tribunal found that the original assessment order was set aside by the ITAT, and the fresh assessment order was passed on 28/12/2007. Therefore, interest under section 220(2) could only be charged after the expiry of thirty days from the date of service of the demand notice pursuant to the fresh assessment order, i.e., from 01/02/2008.

4. Validity of Assessment Orders and Adjustments Made by the Assessing Officer:
The Tribunal reviewed the chronology of events and noted multiple rounds of litigation and assessments. It was observed that the Department had made additions in both the hands of the assessee and the companies for the same amounts, which was later found to be incorrect. The Tribunal criticized the Department for its delay and insouciant attitude, which led to an unjust imposition of interest on the assessee. The Tribunal emphasized that the Department's actions caused the delay, and the assessee should not be penalized with interest for this period.

Conclusion:
The Tribunal concluded that the interest under section 220(2) could not be charged from the date of the original demand notice due to the Department's delay in adjusting the seized funds against the assessee's tax liability. The appeal was partly allowed, with the Tribunal directing that interest could only be charged from 01/02/2008, following the issuance of the fresh assessment order. The other issue raised by the assessee was dismissed as infructuous. The order was pronounced on 30th November 2017.

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