1981 (6) TMI 57 - AT - Income Tax

Issues Involved:
1. Legality of the levy of interest under section 216 of the Income-tax Act, 1961.
2. Requirement of a finding by the Income Tax Officer (ITO) before levying interest under section 216.
3. Whether the levy of interest under section 216 is mandatory or discretionary.
4. Applicability of the decision in Hindustan Sanitaryware & Industries Ltd. v. CIT.
5. Relationship between penalty proceedings under section 273(a) and interest levy under section 216.
6. Impact of under-estimate of income on the levy of interest under section 216.

Issue-wise Detailed Analysis:

1. Legality of the levy of interest under section 216 of the Income-tax Act, 1961:
The appeal by the revenue contested the order of the Commissioner (Appeals) which cancelled the interest of Rs. 3,726 levied under section 216 by the ITO. The Commissioner (Appeals) held that the ITO did not apply his mind to the facts and circumstances of the case before directing the assessee to pay interest under section 216. The Commissioner (Appeals) found that there was no clear positive finding by the ITO that the assessee had underestimated the advance tax payable, thereby making the levy of interest under section 216 invalid.

2. Requirement of a finding by the Income Tax Officer (ITO) before levying interest under section 216:
The Commissioner (Appeals) considered it essential that the ITO must make a clear positive finding that the advance tax payable by the assessee was under-estimated. The Calcutta High Court decision in Hindustan Sanitaryware & Industries Ltd. supported this view, emphasizing that the order of the ITO should clearly indicate such a finding. The ITO's failure to provide this finding invalidated the levy of interest under section 216.

3. Whether the levy of interest under section 216 is mandatory or discretionary:
The revenue argued that section 216 is mandatory, suggesting that the word "may" in the section should be construed as "shall". However, the Tribunal disagreed, noting that the provision is discretionary. The Madras High Court in CIT v. City Palayacot Co. observed that the levy of interest under section 216 is discretionary, unlike the mandatory nature of sections 215 and 217. The Tribunal concluded that the word "may" in section 216 should not be interpreted as "shall".

4. Applicability of the decision in Hindustan Sanitaryware & Industries Ltd. v. CIT:
The Commissioner (Appeals) and the Tribunal relied on the Calcutta High Court's decision in Hindustan Sanitaryware & Industries Ltd., which required a finding by the ITO for the application of section 216. The Tribunal noted that the ITO's order did not contain such a finding, making the levy of interest under section 216 invalid.

5. Relationship between penalty proceedings under section 273(a) and interest levy under section 216:
The revenue argued that the initiation of penalty proceedings under section 273(a) indicated a finding of under-estimation of advance tax. However, the Tribunal disagreed, stating that penalty under section 273(a) pertains to knowingly false estimates, which is distinct from the requirements of section 216. The Tribunal found no evidence that the ITO's initiation of penalty proceedings under section 273(a) implied a finding of under-estimation for section 216.

6. Impact of under-estimate of income on the levy of interest under section 216:
The assessee argued that no interest under section 216 is leviable as the under-estimate of advance tax was due to an under-estimate of income. The Andhra Pradesh High Court in Vazir Sultan Tobacco Co. Ltd. held that interest under section 216 cannot be charged if the under-estimate of advance tax is due to an under-estimate of income. The Tribunal agreed that the department did not show any reason other than an under-estimate of income for the under-estimate of advance tax, supporting the assessee's argument.

Conclusion:
The Tribunal upheld the Commissioner (Appeals)'s finding that the ITO did not apply his mind to the facts and circumstances of the case and did not make a necessary finding for the levy of interest under section 216. The appeal by the revenue was dismissed.

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