1975 (9) TMI 3 - SC - Income Tax

Whether Income-Tax Officer can extend time for payment in instalments and whether he can arrive at an agreement accepting rate of interest different from that provided - question which really arose in this case with respect to the payment of interest at the rate of 6 per cent. in accordance with the Finance Act, 1965 - assessee shall pay interest on the entire amount of arrears at the rate of 4 per cent. per annum only during the period January to March, 1965

Summary

Issues Involved:
1. Interpretation of Section 220, sub-sections (2) and (3) of the Income-tax Act, 1961.
2. Validity of the Income-tax Officer's agreement to a higher interest rate.
3. Applicability of amended interest rates under the Finance Act, 1965.

Detailed Analysis:

1. Interpretation of Section 220, sub-sections (2) and (3) of the Income-tax Act, 1961:
The core issue revolves around the interpretation of Section 220, sub-sections (2) and (3) of the Income-tax Act, 1961. Sub-section (2) mandates that if the amount specified in any notice of demand under section 156 is not paid within the prescribed period, the assessee shall be liable to pay simple interest at four percent per annum. Sub-section (3) allows the Income-tax Officer to extend the time for payment or allow payment by installments, subject to conditions he may impose. The judgment clarifies that sub-section (3) is not independent of sub-section (2), but inter-connected. Any order under sub-section (3) must not be inconsistent with the provisions of sub-section (2), particularly regarding the rate of interest.

2. Validity of the Income-tax Officer's agreement to a higher interest rate:
The respondent firm negotiated with the Income-tax Officer to pay the arrears in installments with an interest rate of 5% per annum, higher than the statutory 4%. The High Court initially found in favor of the respondent, suggesting that the Income-tax Officer's agreement constituted a binding settlement. However, the Supreme Court disagreed, stating that section 220(3) does not empower the Income-tax Officer to enter into any binding agreement or settlement that would override statutory provisions. The judgment emphasized that any conditions imposed under sub-section (3) must comply with sub-section (2), and any deviation would be illegal and invalid.

3. Applicability of amended interest rates under the Finance Act, 1965:
The Finance Act, 1965, amended the interest rate from 4% to 6% per annum effective from April 1, 1965. The Income-tax Officer informed the respondent that the new rate would apply to the unpaid balance from that date. The respondent contested this, arguing that the agreed-upon rate of 5% should remain applicable. The Supreme Court held that the Finance Act's provisions must be adhered to, and any order under sub-section (3) of section 220 must reflect the amended rate. The judgment noted that the Finance Act did not operate retrospectively but applied to continuing defaults after the amendment. Thus, the respondent was liable to pay interest at the rate of 6% per annum from April 1, 1965.

Conclusion:
The appeals were allowed, and the High Court's order was set aside with a modification. The respondent was directed to pay interest at the rate of 4% per annum for the period from January to March 1965, and 6% per annum from April 1, 1965, onwards. The judgment underscored that statutory provisions regarding interest rates must be strictly followed, and any agreement to the contrary by the Income-tax Officer would be invalid. The parties were directed to bear their own costs throughout.