Sukumaran, J.:— On the conjoint effect of S. 237 to 240, 241 and 244 of the Income-tax Act, there has been a conflict of judicial opinion. On the one side is the view taken by the Allahabad High Court in Purshottam Dayal Varshney v. C.I.T, (1974) 94 I.T.R 187 and the Bombay High Court which followed it in C.I.T v. S.C Shah, (1982) 137 I.T.R 287. On the other, is the decision of a learned judge of this Court reported in New Woodlands v. C.I.T, 1982 KLT 212 : (1982) 138 I.T.R 795. It is that decision which has been challenged in appeal before us.

2. The facts of the case are not tedious nor complicated. The assessee was subjected to assessments for the years 1968-69, 1969-70 and 1970-71 by Exts. P1 to P3 orders, the first two on 16-3-1972 and the last one on 19-3-1973. The tax demanded for the respective years was Rs. 19,594/-, Rs. 38,702/- and Rs. 58,838/-. Appeals were filed against the assessment orders. The appeals for the first two years were disposed of by the appellate order Ext. P4 dated 15-9-1972 and that of the year 1970-71 by the order Ext. P5 dated 24-10-1973. It is sufficient to notice at this juncture that under the above orders, the assessments had been cancelled. A re-assessment was directed. In due course, that exercise was undertaken and completed by the assessing authority. Exts. P6 to P8 evidence the resultant assessment orders for the three years 1968-69 to 1970-71. The proceedings resulted in a refund of Rs. 7,004/-, Rs. 12,222/- and Rs. 75,547/- for the three years in question. There was a consequential direction for refund of the interest and penalty already levied. The assessee claimed interest for the entirety of the period subsequent to the disposal of the appeals by the Appellate Assistant commissioner. The order of the Income-tax Officer, Ext. P9 dated 30-11-1977, declined that request. The revisional jurisdiction of the Income-tax Commissioner was invoked by petitions, Ext. P10 to P12. The revisions were ultimately disposed of by the Commissioner under Ext. P15 order dated 27-1-1978, which upheld the order Ext. P9 passed by the Income-tax Officer.

3. The pursuit of his remedy before this Court by filing a writ petition under Article 226 of the Constitution, as is evident from 1982 KLT 212 : (1982) 138 I.T.R 795 supra, was unsuccessful. The pursuit continues. The appeal is before us.

4. Judicial thoughts contained in the decisions on the point referred to above, have considerably lightened our work in dealing with this interesting and somewhat involved issue.

5. We feel that the question could be viewed from a larger aspect, in the constitutional framework, and the status and setup of the Unionof India. A government has necessarily to collect taxes from the citizens; but subject to the Constitutional limitations. One limitation is indicated in Article 265. It inhibits the State from levying or collecting any tax without the authority of law. The conjoint effect of that Article with a corresponding provision under S. 72 of the Indian Contract Act has been interpreted by the Supreme Court as casting an obligation on the State, to refund the tax, when the basis of the collection was blasted by a legal process.

6. Interest, ordinarily, is a reckonable compensation, when there is a retention of the amount due, particularly for an unduly long period. We have passed those stages where payment of interest was found to be unsocial or immoral. Even in rigorous climes where such payments were felt to be tabooed, the concept has come to settle and interest payment has come to be recognised.

7. The law has recognised that there could be damage due to delay in the payment of money. Such damage is nothing but interest-declared Lord Kincairney, way back in 1897. In about a decade, another important decision on interest was rendered in Toronto Railway Co. v. Toronto Corporation, 1906 AC. 117. F.A Mann referred to the decision and gave his comment on the legal position thus:

“Where money is due and payment has been demanded, but withheld, interest is recoverable as of right, a fact which has had singularly little influence on English law, but deserves great emphasis”.

(emphasis supplied)

8. (See (1985) 101 Law Quarterly Review, Page 31)

9. The same author points out how “since the days of Roman law interest has rightly and, indeed, necessarily been treated as a form of damages…………… “and recollects how among other legal Codes of modern times, “American law equiparate damages and interest”. The English Court declared the law in a case in which the President of India was a party. The reason for interest payment was explained thus:

“……………when money is owing from one party to another and that other ??? to have recourse to legal proceedings in order to recover the amount due to him, the party who is wrongfully withholding the money from the other ought not in justice to benefit by having that money in his possession and enjoying the use of it, when the money ought to be in the possession of the other party who is entitled to its use”.

10. (See observations of Lord Brandon of Oakbrook in President of India v. La Pintada Compania Navigacion S.A (1984) 3 W.L.R 10).

11. These general principles underlying the right to claim in one case, and liability to pay, in the other, interest could be useful in giving a proper perspective of the problem even beyond the confines of the statutory frame work.

12. At times when the society was somewhat static, and when inflationary spiral was a rare phenomenon, interest may not have been of much significance. It is not so, in modern times. This has hightened the obligation of a party who had the benefit of undeserved money in his hands. To insist upon such a party to disgorge a benefit or advantage received by the retention of the amount to which it was not entitled to, will not be inequitable or immoral. Is it illegal?-is the question which we have to consider in the backdrop of the scheme of the Income-tax Act, in particular, the provisions preferred to above.

13. S. 237 of the Act specifically provides for the revision of tax in the circumstances made mention of therein. Ss. 240, 241 and 244, have relevance, in understanding the scheme of the enactment. It is unnecessary to extract those sections over again, in as much as the essence thereof had been already subjected to detailed discussion by the judicial decisions referred to already. S. 240, primarily casts an obligation with Incometax Officer to Tefund to the assessee, the amount which has become due to him as a result of an order passed in appeal or other proceeding under this Act. This makes it abundantly clear that to entitle to him to the refund, it is superfluous for the assessee to make a claim in that behalf. The ingredients of the section are not difficult to be visualised. It is not enough that favourable order is passed in appeal or other proceedings, as far as the assessee is concerned. The question of refund must have arisen on the basis of such an appellate order or other proceedings. In the case of an assessee who has not paid any amount by way of tax, the question of refund does not arise at all. In the case of an assessee who has been assessed somewhat excessively, but who had paid only a portion of the tax, a refund of a tax will not arise as a result of the appellate order, if even after reckoning the relief as granted by the appellate order, further tax is payable. In other words, the mere passing of an appellate order is not sufficient to entitle an assessee to the refund referred to in S. 240. Other conditions also have to be satisfied. That, according to us, is the significance of the term “refund of any amount becomes due to the assessee”.

14. S. 244 is the substantial provision with which we are concerned. It posits a case where refund is due to the assessee, by virtue of S. 240. If the scope of the order under S. 240 is as indicated above, in the present case, refund had already become due as a result of the appellate order. (It is unnecessary to consider hypothetical cases, where for technical reasons an assessment has been set aside, but has been restored with an equal measure of tax on the recomputation or re-assessment. In the present case, it cannot be overlooked that the ultimate position is one where the assessee was entitled to considerable amounts byway of refund. A projection of these state of affairs to an ??? point of time, would also therefore not make any difference in the situation).

15. The other ingredients of the section had been satisfied, in the background of the above factual position and the legal interpretation we have placed on the two sections.

16. If there be any lingering doubt, that too vanishes when a reference is made to S. 241 of the Income-tax Act.

17. That ??? where an ordergiving rise toarefund is the subject matter of an ??? proceedings, or where any other proceedings under the Act is pending. Parliament has sought to make equitable provision between the Revenue on the one hand and the citizen on the other. To protect the interest of the Revenue, it is necessary that the realisation of the legitimate tax is not in jeopardy. A bird in hand is worth two in the bush. Amounts already paid but found returnable due to the technical reason for a temporary phase, may become payable again in the event of completion of other proceedings or the hearing of an appeal. Such amounts need not be parted with, during the interregnum. At the same time, the resultant hardship to an assessee arising out of the retention of the amount due by way of refund, when such retention of amount is to subserve the interest of the Revenue, has also to be taken care of. It is a balancing of these two ideas, that is reflected in S. 241. It enables the officer to retain with him the amount, subject ofcourse, to safeguard ofpriorapproval as visualised therein. Simultaneously-and that is important-the assessee is also enabled to have some compensation for the retention of the amount so made by the Income-Taxauthority, albeit without the authority of law. The scheme is therefore clear that when consequent on an appellate order, and de hors the justifiability for the retention of the tax amount paid by the assessee, an obligation arises on the part of the Revenue to effect the refund. S. 244 is fully attracted to such a situation, with a corresponding obligation for the payment of interest as well. An analysis of this provision has been undertaken in th earlier decision of Allahabad High Court, as indicated earlier in Purshottam Dayal Varshney v. C.I.T, (1974) 94 I.T.R 187 The crux of the reasoning of the Allahabad High Court is contained in the passage reading:

“Under the Income-tax Act, although the liability to pay tax is cast upon an assessee each year in accordance with the Finance Act of that year, yet the tax becomes due and payable only when an assessment order is passed and a notice of demand…………is served upon the assessee. If there is no assessment order, the assessee is not liable to pay any tax. It follows, therefore, that if an assessment order is set aside, the notice of demand becomes ineffective and the taxalready paid under such a notice of demand becomes refundable. If a fresh assessment is made, the tax determined as a result of the fresh assessment order again becomes due and payable only after a fresh notice of demand is served upon the assessee.”

18. Adverting to the provisions in S. 244, that court observed:

“This provision fully covers the cases where remand proceedings are pending after the assessment order is set aside. In such cases the Income-tax Officer can, with the approval of the Commissioner of Income-tax, withhold the refund till the remand proceedings are over. The legislature has taken care that if the refund is withheld the assessee is not deprived of the interest on such refund to which he may be ultimately found entitled to”.

19. The fact that as soon as an assessment order is set aside, the tax paid by the assessee under the assessment order becomes refundable to him, subject to the restrictions indicated above is also emphasised in the judgment. The Division bench of the Bombay High Court, Madon and Sujata v. Manohar, JJ. approvingly referred to the Allahabad judgment in Commissioner of Income-tax v. S.C Shah, (1982) 137 I.T.R 287. The court observed:

“The Allahabad High Court in this case hasobserved that as soon as the assessment order is set aside, the tax paid by the assessee under the assessment order becomes refundable to him. No doubt, the ITO is entitled to withhold the refund with the previous approval of the Commissioner during the pendency of remand proceedings under the provisions of S. 241 of the I.T Act. But even in such a case, under the provisions of S. 244, sub-section (2), interest becomes payable on the amount of refund ultimately determined to be due for the period commencing after the expiryofsix months from the end of the month in which the order referred to in S. 241 is passed, to the date the refund is granted”.

20. Thedecision of the Bombay High Court which was rendered on 3-7-1981, was apparently unavailable when the learned Single Judge pronounced the present judgment reported in New Woodlands v. C.I.T, 1982 KLT 212 : (1982) 138 I.T.R 795. The learned Judge took the view that the Allahabad decision did not have its force and effect after the Taxation Laws (Continuation and Validation of Recovery Proceedings) Act, 1964. An assessment order may merge in the appellate orders but not the notice of demand. Even when the assessment order disappears as a result of appellate or other actions the notice of demand remains with its life and activity-observed the learned Judge. The learned Judge further observed:

“What is required by an order of remand is not to refund the money collected as per the original orders, but to recompute the amount of tax that is payable by the assessee. The original assessment is annulled, not with a view to refund, but with a view to the correct determination of the liability. Refund is only the consequence of that determination. The object of remand is, therefore, not to refund, but to recalculate, and then to refund the excess, if any. That being the position, the question of interest as per S. 244 does not arise until a fresh computation of the taxis made by fresh assessment. With great respect, I do not accept as correct law the views expressed to the contrary by the Allahabad High Court in Purshottam Dayal Varshney v. C.I.T, (1914) 94 I.T.R 187”.

21. We are clearlyoftheview that the Amendment Act does not have the effect as indicated by the learned Judge. The amendment refers to a specified situation, and operates only in a limited field. The Validation Act only dispenses with a fresh notice of demand in cases where the amount of tax had been reduced by the Appellate Authority. It cannot have any effect when the Appellate Authority annuls absolutely the assessment in its totality, with a further direction to make a fresh determination. The basic reasoning contained in the decisions of the Allahabad and Bombay High Courts remains unaffected by the Validation Act. On principle and precedent, we are therefore of the view that the Commissioner and Income-tax Officer erred when they declined the payment of interest as demanded by the petitioner. We allow the original petition, quashing Exts. P9 and P15. We direct the Income-tax Officer to effect the refund, in accordance with the principles indicated herein above. The appeal is allowed as above. There will be no order as to costs.

22. Allowed.