Shivashankar Bhat, J.:—

An interesting question pertaining to levy of interest is involved in these Writ Petitions. The petitioner has challenged the invocation of Section 220 sub-section (2) of the Income-tax Act, 1961, under the following circumstances.

2. The assessment years in question are 1977-1978, 1978-1979 and 1980-1981. In respect of each of these years, an assessment order was made and demand notices were issued. The petitioner complied with the demands by paying the tax due. However, the petitioner challenged the order by filing the Appeals. The Appellate Authority allowed the Appeals filed by the petitioner. Consequently, the taxes paid were refunded to the petitioner. The appeals filed by the Revenue before the Appellate Tribunal were also dismissed. However, this Court took a different view from that of the Appellate Tribunal and upheld the view taken by the assessing authority resulting in up-holding of all the assessment orders. Consequently, the assessee had to pay tax as assessed. After the High Court disposed of the References consequential orders were made by the Appellate Tribunal under Section 260. Thereafter, fresh demands were raised and the assessee paid the taxes assessed. Not being satisfied with the success before the High Court, the Revenue invoked Section 220(2) of the Act and demanded interest in respect of the assessed tax for the period commencing with the refund of the taxes consequent to the first appellate order, till the taxes were finally paid after the disposal of the References.

3. According to the petitioner, Section 220(2) is not at all attracted to the fact situation. Mr. Ramabhadran, learned Counsel for the petitioner contended that the assessee is not at all in default in the present case and the original demands do not survive at all, because, the assessee paid the taxes in compliance with those demands consequent to the order of the appellate authority and therefore this is not a case where the assessee-petitioner failed to comply with the demands issued.

4. Learned Counsel for the Revenue, on the other hand, contended that, the order of assessment, the appellate orders and the order made on the References resulting in the consequential order are only different steps in the same proceeding and the ultimate order relates back to the original order itself and that, further, in view of Section 3 of the Taxation Laws (Continuation and Validation of Recovery Proceedings) Act, 1964 (referred to as ‘Validation Act’) original demand notices are revived by operation of law and due effect shall have to be given to such revival. According to Mr. Ramabhadran, operation of the Validation Act shall have to be confined for the purpose of recovery of the assessed tax and the provisions of such Act cannot be extended to treat an assessee as a defaulter and to pass an order to the effect that the assessee is liable to pay interest.

Section 220 so far as it relates to our purpose reads thus:

“220(1) Any amount, otherwise than by way of advance tax, specified as payable in a notice of demand under Section 156 shall be paid within thirty days of the service of the notice at the place and to the person mentioned in the notice:

Provided that, where the (Assessing) Officer has any reason to believe that it will be detrimental to revenue if the full period of thirty days aforesaid is allowed, he may, with the previous approval of the Deputy Commissioner, direct that the sum specified in the notice of demand shall be paid within such period being a period less than the period of thirty days aforesaid, as may be specified by him in the notice of demand.

(2) If the amount specified in any notice of demand under Section 156 is not paid within the period limited under sub-section (1), the assessee shall be liable to pay simple interest at one-half percent for every month or part of a month comprised in the period commencing from the day immediately following the end of the period mentioned in sub-section (1) and ending with the day on which the amount is paid:

Provided that, where as a result of an order under Section 154, or Section 155, or Section 250, or Section 254, or Section 260, or Section 262, or Section 264 or an Order of the Settlement Commission under sub-section (4) of Section 245D the amount on which interest was payable under this Section had been reduced; the interest shall be reduced accordingly and the excess interest paid, if any, shall be refunded:”

Sub-section (4) reads thus:

“(4) If the amount is not paid within the time limited under sub-section (1) or extended under sub-section (3), as the case may be, at the place and to the person mentioned in the said notice the assessee shall be deemed to be in default.”

5. To complete the narration, we may also refer to Section 221 which provides for the levy of penalty when an assessee is in default or is deemed to be in default in making the payment of tax. This penalty is in addition to the amount of the arrears and the amount of interest payable under Section 220(2). The language of Section 221 indicates that a discretionary power is given to the assessing authority to levy the penalty. Before proceeding further, it is also necessary to refer to the Circular issued by the Central Board of Direct Taxes as per Circular No. 334 dated 3rd April, 1982. The Circular reads thus:

“Subject: Levy of interest under Section 220(2) when the original assessment is set aside - Instructions regarding.

Doubts have been raised as to the quantum of interest chargeable u/s. 220(2) of the Income-tax Act, when the original assessment order passed by the Income-tax Officer is—

(i) cancelled by him u/s. 146 of the Income-tax Act;

(ii) set aside/cancelled by an appellate/revisional authority and Such appellate/revisional order has become final; or

(iii) set aside by one appellate authority but, on further appeal, the order setting aside the assessment is varied by the second appellate authority and the demand gets finally determined.

2. These issues were comprehensively examined in consultation with the Ministry of Law and the Board has been advised:

(i) where an assessment order is cancelled u/s. 146 or cancelled/set aside by an appellate/revisional authority and the cancellation/setting aside becomes final (i.e, it is not varied as a result of further appeals/revisions), no interest under Section 220(2) can be charged pursuant to the original demand notice. The necessary corollary of this position will be that even when the assessment is reframed, interest can be charged only after the expiry of 35 days from the date of service of demand notice pursuant to such fresh assessment order.

(ii) where the assessment made originally by the ITO is either varied or even set aside by one appellate authority but, on further appeal, the original order of the ITO is restored either in part or wholly, the interest payable under Section 220(2) will be computed with reference to the due date reckoned from the original demand notice and with reference to the tax finally determined. The fact that during an intervening period there was no tax payable by the assessee under any operative order would make no difference to this position.”

6. Learned Counsel for the petitioner submitted that the petitioner is not a defaulter in the instant case. The petitioner was prompt in complying with the demands raised immediately on the making of the assessment order. The refund was obtained by the petitioner, because, the Appellate Authority reversed the order of the assessing authority. In fact, even the Appellate Tribunal upheld the contention of the assessee. In these circumstances, it cannot be said that the assessee had not paid the tax specified in any notice of demand under Section 156.

7. Sub-section (2) of Section 220 is attracted if the amounts specified in any notice of demand under Section 156 is not paid within the period limited under sub-section (1), that is to say, within 30 days from the service of the notice. The petitioner has complied with this demand by paying the tax originally. The learned Counsel also referred to a Decision of the Kerala High Court in Income Tax Officer v. A.V Thomas & Company . 160 ITR 818.. A Division Bench of Kerala High Court accepted a similar contention. At page 823, the Court observed thus:

“We feel the statutory provision in Section 220(2) is clean and clear. It is not difficult to understand what are the requirements under the provision which will attract payment of interest. As stated by Lord Jenkins, our task is to construe the provision, Section 220(2), according to the ordinary and natural meaning of the language used and to apply that meaning to the facts of the case. As stated earlier, the facts of the case are simple. When the assessing authority demanded payment of tax as assessed by the assessment order, exhibit P-1, the assessee paid the tax. Section 220(2) which provides for payment of interest enjoins certain conditions for attracting the liability of payment of interest. The condition is that even after the notice of demand under Section 156 and after a further period of 35 days as provided under Section 220(1), the assessee should continue as a defaulter in the matter of payment of tax demanded. Only in case the assessee defaults in payment of tax assessed, 35 days after the notice of demand under Section 156, the liability to pay interest accrues. It is admitted that the assessee has paid the tax when he received the demand notice under Section 156. The requirements under Section 220(2) for attracting the liability to pay interest are not present in this case.

The counsel for the Department relied on the Taxation Laws (Continuation and Validation of Recovery Proceedings) Act, 1964 (Act 11 of 1964). The counsel particularly relies on Section 3 of Act 11 of 1964. He contends that the original notice under Section 156 of the Act survives by virtue of Section 3 of Act 11 of 1964. He also referred us to the decision in ITO v. Seghu Buchiah (1964) 52 ITR 538(SC). In that case, the Supreme Court held that as and when an assessment is challenged and the order of assessment is set aside or modified by the appellate authority, all consequential proceedings pursuant to the assessment order are also rendered ineffective. So, a notice issued under Section 156 of the Act pursuant to an assessment order which was set aside subsequently by the appellate authority would not remain in force and the Department has to proceed afresh by issuing a fresh demand notice under Section 156 of the Act. This decision caused great difficulty for the Revenue and in order to tide over the difficulty, the said Act, namely, the Taxation Laws (Continuation and Validation of Recovery Proceedings) Act, was passed. Section 3 of the said Act provided that if the assessment order is set aside or modified by the appellate authority and, subsequently, the original order is restored by a second appellate authority, the actions taken pursuant to the first order including the demand notice will survive and a fresh demand notice is unnecessary. Basing on this provision, the counsel developed his argument by urging that so long as no fresh demand notice is now required under law, the assessee is liable to pay interest on the basis of the original notice of demand. It is difficult to accept this contention. Perhaps, no fresh demand notice may be necessary and the original notice under Section 156 of the Act may be revived. Even if we accept that the original notice is revived, it has no consequence. The assessee has paid the amount demanded as per the original notice. In a case where the assessee has paid the demand made in the original notice, there is no liability on the part of the assessee to pay interest. So even if we take that the original notice is revived, the Department may not be justified in demanding the interest from the date of the original notice. The non-compliance of the original notice is the event which attracts payment of interest. In this case, there is no non-compliance of the original notice and so the assessee is not liable to pay interest.”

8. Further, sub-section (4) was referred to point out that, the assessee becomes a defaulter only if the amount is not paid within the time limited under sub-section (1) or extended under sub-section (3). This is not a case where the assessee failed to pay the tax within 30 days of the demands issued earlier.

9. A literal reading of the provision no doubt, prima facie supports the contention of the petitioner. But we cannot ignore the other provisions of relevant law which also operates on the fact situation.

10. In Income-Tax Officer, Kolar Circle, v. Seghu Buchiah Setty . 52 ITR 538., the Supreme Court held that demand notice issued consequent upon the assessment order would not survive if the said order is reversed or modified in Appeal or Revision and in such a situation, a fresh demand notice has to be served before he could be treated as a defaulter and recovery proceedings are initiated against the assessee. To get over the difficulty caused by this Decision, the Validation Act came to be passed. As per Section 3(1)(a), a fresh demand notice shall have to be served upon the assessee only when the tax is enhanced. In case, the tax levied is reduced in an Appeal or proceedings as per sub-clause (3), a fresh notice need not be served upon the assessee for the amount payable. Sub-clause (c) states that no proceedings in relation to such Government dues including the imposition of penalty or charging of interest shall be invalid, by reason that no fresh notice of demand was served upon the assessee after the disposal of the Appeal or proceeding, in which, there is a change in the liability of the assessee. Sub-section (2) is quite relevant here which reads thus:

“For the removal of doubts it is hereby declared that no fresh notice of demand shall be necessary in any case where the amount of Government dues is not varied as a result of any order passed in any appeal or other proceeding under any scheduled Act.”

11. There is no dispute that the Income-tax Act is one of the Scheduled Act. This provision makes it very clear that if the original assessment order is ultimately upheld the question of issuing a fresh notice of demand does not arise.

12. Immediate purpose of enacting this Validation Act was the Decision of the Supreme Court in Buchiah Setty's case. But the effect of the Validation Act cannot be ignored on the operation and the working of the Act. We are of the view that sub-section (2) of Section 3 of the Validation Act keeps alive the earlier demand notice or treats the said demand notice as having been kept alive all along, if ultimately the assessment order is upheld by the higher forum.

13. While considering the provision of sub-section 2 of Section 220 we cannot ignore the purpose behind the provision, providing for levy of interest. Interest is payable as a matter of compensation towards deprivation of the benefits of money which lawfully belongs to a person or authority. The Income-tax due to the State, is certainly an amount which lawfully belongs to the State; if the payment is postponed for any reason, there can be no doubt that the State is deprived of the benefits of the amount which lawfully belongs to the State. It is in this background, Section 220 will have to be considered. We find similar provisions under Sections 214 and 215 as well as 244 where either the assessee or the Revenue, as the case may be, has been provided for the payment of interest when the payment of the amount due by the assessee or the State gets postponed. The scheme of the Act thus is quite clear that it provides for awarding of compensation to the assessee or to the State by way of interest.

14. In Commissioner of Income-Tax v. Deepchand Kishanlal . 183 ITR 299., this Court had to consider the scope of Section 214 of the Act. The Court pointed out that there is a substantial reciprocity between the class of tax-payers and the Revenue in Sections 214 and 215 and that the fluctuation in the fortunes of an assessee or of the Revenue, depending upon the facts and circumstances of a particular case, is inevitable. The law has to be understood in a reasonable manner and the scheme of legislation should be deemed to have a logical base for it. The Court also pointed out that, an initial order of assessment gets effaced by the appellate or revisional order and the only effective order is the ultimate order of the superior authority. We may add here that this ultimate order of the appellate order would normally relate back to the date of the original order, as otherwise, the very concept of having a hierarchy of Appellate and Revisional forums will be defeated. The Bench observed at page 309 thus:

“Payment of interest, essentially, is compensatory in nature. Logically, the compensation should cover the entire period during which the person to whom the money belongs lawfully was made to part with it to another. To reduce the period for which compensation is payable, when, in fact, the person was deprived of his money for a longer period, is to truncate the very concept of compensation.”

15. The liability to pay income-tax is a debt due on the last date of the accounting period is a principle now established by the Decision of the Supreme Court in Kesoram Industries and Cotton Mills Ltd. v. Commissioner of Wealth-Tax (Central), Calcutta . 59 ITR 767.. At page 784, the Supreme Court observed:

“A liability to pay income-tax is a present liability though it becomes payable after it is quantified in accordance with ascertainable date. There is a perfected debt at any rate on the last day of the accounting year and not a contingent liability.”

16. Therefore, jurisprudentially, the Revenue is a Creditor and the tax-payer is a Debtor and there is nothing strange if the law contemplates that the debtor should compensate the creditor by paying interest on the amount due. The fact that the law has postponed the discharge of tax liability, to the date of issuance of a demand notice and the period of 30 days from the date of the demand, would not alter the nature of the said liability.

17. In M.N Jadhav v. Fourth Income-Tax Officer . 161 ITR 275., this Court referred to the Circular of the Board (which we have already quoted) and observed that this Circular correctly expounds the legal position. The learned Judge, in fact, referred to Clause (ii) of the Circular which states that the interest payable under Section 220(2) Will be computed with reference to the due date reckoned from the original demand notice and with reference to the tax finally determined. Mr. Ramabhadran, learned Counsel pointed out an earlier passage in the said Decision, from which, it is clear that the assessee had not made the payment on receipt of the demand notice originally in the said case. That may be so, but we are concerned with the legal effect of sub-section (2) of Section 220 read with Section 3(2) of the Validation Act. The Circular of the Board may not be binding on the assessee and the interpretation of the provision of law cannot depend upon the meaning given by the Board, in all cases. The Circular has been issued to facilitate the due administration of the Act by the authorities under the Act. The effect of Section 220(2) has been duly clarified by the Board while issuing the Circular.

18. With utmost respect, we cannot agree with the observations of the Kerala High Court referred earlier. The nature of the interest payable under the Act has not been considered in the said Decision.

19. The view we have taken is in accordance with the view taken by a Bench of Delhi High Court in Bharat Commerce and Industries Ltd. v. Union of India . 188 ITR 277.. The Delhi High Court held that the first notice of demand issued after the original assessment order was passed by the Income-tax Officer could not be deemed to have been extinguished by virtue of the appeal having been filed before the Commissioner or the conditional stay of the operation of the assessment having been ordered by the Commissioner (Appeals), pending disposal of the appeal before him or by virtue of the subsequent reduction of the taxable income. The Court pointed out that, under the order of the Tribunal which had attained finality, the original assessment had been restored with the result the first demand notice became operative and therefore, Section 220(2) was attracted. The Bench also pointed out that to levy interest on delayed payment of tax is not to penalise the party but to make a provision for compensating the Revenue on the failure of the assessee to make payment as per the first demand notice.

20. We have already referred to Section 221 which provides for levy of penalty in case the assessee defaults in the payment of tax demanded. The present argument of Mr. Ramabhadran certainly could be accepted in case the Department proceeds to levy any penalty. A comparison of Section 220(2) and 221 highlights the quality of levy under Section 220(2) as compensatory in nature as against the penalty that is imposed under Section 221.

21. In A.V Thomas & Co. Ltd. v. Income-Tax Officer, “A” Ward, Companies Circle, Ernakulam, . 138 ITR 275., it was observed:

“Where the tax computed by the ITO was paid in full and within time by the assessee and a portion of the tax was refunded to the assessee consequent to the order of the AAC but, on further appeal, the Tribunal reversed the order of the AAC and restored that of the ITO and, thereafter, a fresh notice of demand was served on the assessee calling upon him to pay back to the department the tax refunded to him, the liability to pay interest to the department under Section 220(2) of the I.T Act, 1961, arises only from the date when the fresh notice of demand is issued to the assessee and not from the date when the tax was refunded to the assessee.”

This Decision was affirmed by the Division Bench which we have already referred to and reported in A.V Thomas's Case.

22. In Abdul Kareem Haji v. Income Tax Officer . 141 ITR 120., the learned Judge held that the assessment order which was modified or reversed by the Appellate Authority which in turn was reversed by the Appellate Tribunal, revive the original assessment order and therefore, the liability for interest under Section 220(2) gets attracted from the date of the original demand. No doubt, in the said case, the assessee had not paid the tax demanded earlier, but, obviously the assessee had the advantage of the interim order of stay made by the higher authorities.

23. Having regard to the nature and quality of interest leviable under Section 220(2), we have no hesitation in upholding the claim made by the Revenue in the instant case.

The Writ Petitions are accordingly dismissed and Rule discharged. However, there shall be no order as to costs.