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Issues: Challenge to notice under section 221 of the Income-tax Act, 1961; Provision for charging interest under the 1922 Act; Imposition of penalty for non-payment of interest; Bar on penalty imposition by limitation; Nature of penalty as a recovery proceeding; Application of res judicata principle.
Challenge to Notice under Section 221: The petitioner challenged the notice under section 221 of the Income-tax Act, 1961, regarding outstanding amounts for various assessment years. The petitioner argued that interest under the 1922 Act was not payable, hence no obligation existed for interest payment, and consequently, no penalty could be imposed. The petitioner contended that the notice was flawed as it included interest in the outstanding amounts, which was illegal. However, the court held that the notice was valid, allowing the petitioner to contest the recoverability of the interest claimed. Imposition of Penalty and Interest: The court analyzed the outstanding demands for different assessment years and the applicability of interest under section 220(2) of the Income-tax Act, 1961. It was concluded that interest could not be charged for the assessment year under the 1922 Act, and thus, penalty for non-payment of interest could not be imposed. The court referred to relevant provisions and previous case law to support its decision. Bar on Penalty Imposition by Limitation: The petitioner argued that the proceeding for penalty imposition was time-barred under section 231 of the Income-tax Act, 1961. The court deliberated on whether penalty imposition constituted a recovery proceeding and examined various recovery mechanisms under the Act. It was determined that penalty imposition was not a direct recovery of tax, and hence, the limitation period did not apply to penalty proceedings. Nature of Penalty as a Recovery Proceeding: The court discussed the nature of penalty as a measure to ensure tax payment but distinct from tax recovery itself. Various case laws were cited to support the view that penalty imposition was not a mode for tax recovery. The court emphasized that penalty was a punishment for non-payment of taxes, aiding tax collection through deterrence. Application of Res Judicata Principle: Lastly, the petitioner invoked the principle of res judicata, arguing that previous proceedings should bar the current penalty imposition. However, the court rejected this argument, stating that the previous proceedings were necessary, and the principle of res judicata did not apply in this context. The court referenced relevant case law to support its decision. In conclusion, the court dismissed all contentions challenging the notice under section 221 of the Income-tax Act, 1961. The Income-tax Officer was directed to provide the assessee with further opportunity and consider the non-applicability of interest under the 1922 Act before proceeding. The rule was discharged with no order as to costs.
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