2022 (11) TMI 1037 - HC - Income Tax

Levy of interest u/s 220(2) - Revenue demanded interest on the amount refunded to the Assessee - since the tax liability of the Assessee remained the same even after the matter was remanded by the ITAT to AO for fresh consideration and the addition remained under the same head, the Assessee is liable to pay interest in relation to the demand issued pursuant to the original assessment order - contention of the Revenue that the Assessee is liable to pay interest in relation to the demand issued pursuant to the original assessment order, if on a remand, the addition remained under the same head has no basis in law - HELD THAT - In the present case there was no default by the Assessee as the assessment order dated 28 th December, 2006, was set aside by the ITAT and therefore no liability to pay interest can arise under Section 220 (2) of the Act. The demand for interest raised by the AO is contrary to the Circular issued by CBDT as well as the mandate of Section 220(2). The Section 220(2) does not empower the revenue to demand interest relating back to a set aside order, when a fresh assessment order has been passed thereafter. The facts of the present case are clearly covered by para 2.1 of the said CBDT circular which anticipates the situation that has arisen in the present proceedings and therefore, the CIT(A) and the ITAT have correctly held that the levy of interest by the AO relating back to the set aside assessment order, was incorrect and have correctly ordered the same to be deleted. Thus, this Court sees no merit in the appeal and accordingly, the same is dismissed.

Issues Involved:
1. Levy of interest under Section 220(2) of the Income Tax Act.
2. Validity of demand notice issued pursuant to the original assessment order after remand.

Issue-wise Detailed Analysis:

1. Levy of interest under Section 220(2) of the Income Tax Act:

The primary issue in the present appeal revolves around whether interest can be charged under Section 220(2) of the Income Tax Act from the date of the original assessment order if the original additions are reiterated by the Assessing Officer (AO) on remand in the reframed assessment order.

The Assessee filed its return of income for the relevant year, which was assessed at a higher amount by the AO. The Assessee appealed, and the Income Tax Appellate Tribunal (ITAT) set aside the original assessment and remanded the matter to the AO. On remand, the AO reconfirmed the disallowance and levied interest under Section 220(2) based on the original assessment.

The CIT(A) deleted the levy of interest, and the ITAT upheld this deletion, holding that interest under Section 220(2) can only be charged after the expiry of 30 days from the date of service of demand notice issued pursuant to the fresh assessment order.

The Revenue argued that the ITAT erred in its decision, stating that the interest should relate back to the original assessment order as the tax liability and additions remained the same. The Revenue relied on the Supreme Court judgment in Vikrant Tyres Ltd. v. First Income Tax Officer, Mysore.

2. Validity of demand notice issued pursuant to the original assessment order after remand:

The Assessee contended that the AO erred in charging interest without acknowledging the settled position of law that when an issue is restored to the file of the AO by higher appellate authorities, the original demand is extinguished. Therefore, interest cannot be charged for the period prior to the issue of the fresh demand notice.

The Court held that the original assessment order was set aside by the ITAT, and upon such setting aside, the assessment order ceased to exist. The fresh assessment order dated 29th March 2016 is the subsisting assessment order, and interest under Section 220(2) can only be levied after the expiry of the time limit prescribed in the fresh demand notice issued pursuant to this fresh assessment order.

The Court also referred to CBDT Circular No. 334, which clarifies that no interest under Section 220(2) can be charged pursuant to the original demand notice if the original assessment order is set aside by an appellate authority. The judgment of the Rajasthan High Court and the Bombay High Court further supported this position.

The Court distinguished the Supreme Court judgment in Vikrant Tyres Ltd., noting that it dealt with a different issue where the demand notices had been satisfied, and the Revenue demanded interest on the refunded amount after the appellate decision. In the present case, the original assessment order was set aside, and therefore, no liability to pay interest can arise under Section 220(2).

Conclusion:

The Court concluded that the demand for interest raised by the AO is contrary to the Circular issued by CBDT and the mandate of Section 220(2). The Section does not empower the Revenue to demand interest relating back to a set-aside order when a fresh assessment order has been passed thereafter. The CIT(A) and ITAT correctly held that the levy of interest by the AO relating back to the set-aside assessment order was incorrect and correctly ordered the same to be deleted. The appeal was dismissed.

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