2012 (1) TMI 10 - HC - Income Tax

Levy of interest u/s 220(2) - requirement of notice Held that - (a) fresh notices of demand need not be issued every time the total income undergoes a change due to appellate or revisional orders - (b) a case where the assessee has paid the full amount of tax demanded by the AO pursuant to the assessment order stands on a different footing from a case where such demand was not satisfied in full and different considerations shall apply to such a case; (c) the original demand made by the AO on the basis of the assessment order is merely kept in abeyance or suspension during the entire proceedings by way of appeal or revision taken against the assessment and gets revived from inception once the assessment gets finally confirmed in those proceedings; (d) when the assessment order is finally affirmed, the doctrine of merger also applies and interest being compensatory in nature, the revenue is entitled to charge the same from the date of the original order which merged with the final appellate order; (e) as a corollary to the above, it follows that where an assessment is restored and the original demand gets revived from inception, the assessee is liable to pay interest u/s.220(2) of the Act from that date on the unpaid amount and any variation in the amount of the demand favourable to the assessee which was directed by any of the appellate authorities in the interregnum has no effect on the liability of the assessee to pay the interest.

Issues Involved:
1. Validity of the interest charged under Section 220(2) of the Income Tax Act.
2. Legality of the Commissioner's refusal to waive/reduce the interest under Section 220(2A).
3. Requirement of fresh demand notices following appellate orders.
4. Applicability of the Taxation Laws (Continuation and Validation of Recovery Proceedings) Act, 1964.

Issue-wise Detailed Analysis:

1. Validity of the Interest Charged under Section 220(2):
The primary contention is whether interest under Section 220(2) is chargeable for the period from the date of the CIT(A)'s order (15-5-1998) until the date the Assessing Officer gave effect to the Tribunal's order (23-8-2004). The petitioner argued that interest represents compensation for being deprived of the use of money and is only payable when lawful dues to the Income Tax Department are not paid. Since the CIT(A)'s order reduced the assessed income and granted a refund, the petitioner contended that no demand was payable during this period, and thus no interest should be charged.

2. Legality of the Commissioner's Refusal to Waive/Reduce Interest under Section 220(2A):
The petitioner sought waiver/reduction of interest under Section 220(2A), claiming that all conditions for waiver were satisfied, and the charge of interest caused genuine hardship. The CIT rejected the application, which led to the present writ petition. The court examined whether the CIT's refusal was justified, considering the petitioner's cooperation with the Income Tax Department and partial payment of the demanded tax.

3. Requirement of Fresh Demand Notices Following Appellate Orders:
The court discussed whether fresh demand notices are necessary when the amount of tax payable changes due to appellate or revisional orders. The Supreme Court's judgment in ITO v. Segu Bechiah Setty and the provisions of the Taxation Laws (Continuation and Validation of Recovery Proceedings) Act, 1964, were considered. The Act provides that fresh notices are not required except to the extent of an increase in demand due to enhancement.

4. Applicability of the Taxation Laws (Continuation and Validation of Recovery Proceedings) Act, 1964:
The court analyzed the impact of the validating Act on the controversy. The Act ensures that original notices of demand remain valid and enforceable despite changes in the tax amount due to appellate orders. The court concluded that the validating Act applies to the present case, as it addresses the continuation of recovery proceedings based on the original demand notice.

Conclusion:
The court held that the petitioner is liable to pay interest under Section 220(2) for the entire period on the amount of tax as computed in the assessment order, from November 1997 until the date it was actually paid. The interest is not affected by the reduction in tax liability due to the CIT(A)'s order until the Tribunal restored the original assessment. However, no interest shall be charged on the interest amounts allowed to the petitioner under Section 244A on the refunds granted. The Assessing Officer is directed to recalculate the interest accordingly. The writ petition is disposed of with no order as to costs.

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