Commissioner Of Income-Tax v. Nagri Mills Ltd.

1. The Revenue, being aggrieved by the judgment and order passed by the Income-tax Appellate Tribunal ("Tribunal " for short) refusing to refer the following question to us for our opinion, has filed this application under Section 256(2) of the Income-tax Act, 1961 (" Act " for short) :

"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal has been right in law in holding that interest under Section 216 of the Income-tax Act, 1961, was not chargeable ? "

2. The Income-tax Officer framed an assessment by his order dated February 26, 1982, and directed charging of interest under Sections 215 and 216 of the Act. In this application, we are concerned only with the interest charged under Section 216 of the Act. While giving direction to charge interest under Section 216, the Income-tax Officer did not record a finding that the assessee had underestimated the advance tax payable by it and thereby reduced the amount payable in either of the first two instalments. It is the case of the Revenue that the assessee had become liable to pay interest under Section 216 as it had underestimated the advance tax payable by it. The assessee, being aggrieved by the direction given by the Income-tax Officer to charge interest, contended before the Commissioner of Income-tax (Appeals), before whom it had preferred an appeal against the assessment made by the Income-tax Officer, that there was no justification for charging interest. It was submitted that the assessee had filed estimate of advance tax which he had reason to believe to be correct because it was based on estimated profits at the time of filing the estimate. According to the assessee, subsequently, there was sudden increase in its income which resulted in increase in profit and consequently the tax payable also increased. In substance, the contention of the assessee was that it had not underestimated the advance tax payable by it. The Commissioner was of the view that since the interest was not illegally levied, it was not open to him to go into the issue whether the estimate filed by the assessee was correct or not. It would appear that the Commissioner had not fully appreciated the contention which was raised by the assessee before him. However, in the view which he took, the Commissioner rejected the assessee's contention. In the further appeal before the Tribunal, the assessee reiterated its contention. The Tribunal held that the Income-tax Officer had not recorded a finding which he was required to do under Section 216 before levying interest and that he had only mechanically mentioned in the order for charging interest under Section 216. The Tribunal, relying on the decision of the Andhra Pradesh High Court in the case of Addl. CIT v. Vazir Sultan Tobacco Company Lid. [1980] 122 ITR 251, further held that where the underestimate of advance tax is because of underestimation of income, the provisions of section 216 are not attracted. In the result, the Tribunal directed the Income-tax Officer to delete the interest levied under Section 216 of the Act. The Revenue, being dissatisfied with the view taken by the Tribunal, applied to the Tribunal to refer to this court the question set out above for its opinion under Section 256(1) of the Act. The Tribunal, however, declined to refer the question because a finding in respect of levy of interest under Section 216 was "lacking". The Revenue has, therefore, approached this court by way of this application.

3. Section 216 in so far as it is relevant reads as under :

"216. Where on making the regular assessment, the Income-tax Officer finds that any assessee has-

(a) under Sub-section (1) or Sub-section (2) or Sub-section (3) or Subsection (3A) of Section 212 underestimated the advance tax payable by him and thereby reduced the amount payable in either of the first two instalments ; or......

he may direct that the assessee shall pay simple interest at twelve per cent, per annum-

(i) in the case referred to in Clause (a), for the period during which the payment was deficient, on the difference between the amount paid in each such instalment and the amount which should have been paid, having regard to the aggregate advance tax actually paid during the year ; and......"

4. It is under the aforesaid provision that the Income-tax Officer gave direction to charge interest. It is not disputed that the Income-tax Officer did not record a specific finding that the assessee had underestimated advance tax payable by it. It was, however, urged on behalf of the Revenue that it was not necessary for the Income-tax Officer to record such a specific finding and the fact that he had charged interest under Section 216 would indicate that he had found that the assessee had under estimated the advance tax payable by it. It other words, according to the Revenue, it was implicit in the direction to charge interest that the assessee had underestimated the advance tax payable by it. It is submitted that under the circumstances, the question of law which arises is whether it was necessary for the Income-tax Officer to record a specific finding that the assessee had underestimated the advance tax payable by it, and if he failed to do so, no interest under Section 216 was leviable. It is, therefore, submitted that the Tribunal ought to have referred the question set out above for the opinion of this court under Section 256(1) of the Act.

5. On a plain reading of Section 216, it is clear that interest could not have been levied under that section unless the Income-tax Officer found that the assessee had underestimated the advance tax payable by him. The finding that there was underestimate of the advance tax payable by the assessee was a pre-condition for levy of interest. And unless such a finding was recorded, no interest could have been levied. Now, the section says " he (ITO) may direct that the assessee shall pay simple interest ". This clearly shows that the Income-tax Officer has a discretion to levy or not to levy interest. The discretion has no doubt to be exercised judicially and not arbitrarily. The question of exercising such a discretion would arise only when the Income-tax Officer finds that the assessee had underestimated the advance tax payable by him. It is needless to say that the finding which the Income-tax Officer is required to record has to be backed by reasons. It is interesting to compare the provisions of Section 216 with the provisions of Sections 215 and 217 which also provide for levy of interest. Under Sections 215 and 217, if the conditions laid down therein are satisfied, it is incumbent upon the Income-tax Officer to levy interest. Under both these provisions, if they are applicable, the assessee is under an obligation to pay interest. In other words, payment of interest is mandatory if the circumstances as mentioned in those provisions exist, while on the other hand, whether or not to levy interest under Section 216 is discretionary. However, as observed above, no interest would be leviable without recording a finding that the assessee has underestimated the advance tax payable by it. It is also important to note that the order levying interest under Section 216 is appealable under Section 246(m). How would the appellate authority be able to determine whether or not interest levied under Section 216 is correctly levied unless a finding as required under Section 216 is recorded by the Income-tax Officer ? The Income-tax Officer is therefore also required to record such finding which is backed by reasons. What he is required to find is that the assessee had underestimated the advance tax payable by it. The term " underestimate " indicates that he must find that the assessee had made too low an estimate. The estimate can be said to be an " underestimate " if it is deliberate or intentional. There has to be lack of bona fides on the part of the assessee. The finding of underestimation, therefore, cannot be made without appreciation of the facts which are pleaded or which are on record. It is on appreciation of the facts on record that the Income-tax Officer is required to reach the conclusion that when the assessee filed estimate of advance tax, he underestimated it. It is, therefore, necessary for the Income-tax Officer to record a finding that the assessee had underestimated the advance tax payable by it and unless he records such a finding, the question of levy of interest would not arise. Therefore, the answer to the question sought to be raised by the Commissioner is self-evident. In our opinion, therefore, the Tribunal was right in declining to refer the question as suggested by the Commissioner to us for our opinion.