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Smart Summary

Structured Summary of the Opinion (Ajit K. Sengupta, J.)

Factual and Procedural Background

The petitioner challenged a notice dated 6 March 1987 issued by the Income-tax Officer (respondent No. 1) under section 154 of the Income-tax Act, 1961, seeking to rectify an alleged mistake in the calculation of interest under section 220(2) for assessment year 1973–74. The notice did not state the exact mistake; the petitioner says its representative was informed that interest under section 220(2) was proposed to be charged from the date of the revised assessment order dated 24 September 1979 until 8 May 1986 when the Income-tax Officer gave effect to the Tribunal's order dated 3 October 1985.

Relevant chronological facts (as set out in the opinion):

  • Return filed 31 October 1973; revised 30 November 1973 claiming gratuity deduction based on actuarial valuation. Revised return showed total income of Rs. 8,29,370 and tax prepaid of Rs. 4,77,858.
  • Initial assessment made 5 June 1976 disallowing gratuity and assessing total income at Rs. 60,56,160; balance tax determined at Rs. 30,18,469. Petitioner appealed.
  • Appellate Assistant Commissioner set aside the assessment by order dated 28 February 1977 and directed fresh assessment.
  • Fresh assessment made 24 September 1979 again disallowing gratuity; balance payable computed at Rs. 30,65,937.
  • Commissioner of Income-tax (Appeals) partly allowed petitioner's appeal on 26 October 1979 allowing gratuity and certain other deductions; the 24 September 1979 assessment and its demand “merged in the appeal order.”
  • The Income-tax Officer gave effect to the appeal order by order dated 31 December 1979; further Tribunal order of 15 November 1980 gave additional relief, and the Income-tax Officer issued consequential order dated 18 December 1981 resulting in a refund of Rs. 46,238 on 18 December 1985 after accounting for payments.
  • The Department's appeal to the Tribunal was allowed in part on 3 October 1985, disallowing gratuity to the extent of Rs. 41,45,444 and leading to recomputed total income and tax; the recomputed balance tax payable after adjustments was Rs. 23,71,695, and interest under section 220(2) of Rs. 11,370 was charged in addition to interest under section 139(8).
  • By rectification proceedings, the Income-tax Officer sought to charge interest on Rs. 23,71,695 from the date of the assessment order of 24 September 1979 to 3 May 1986. The petitioner filed the present writ challenging those rectification proceedings.

Legal Issues Presented

  1. Whether the Income-tax Officer could invoke section 154 (rectification) to charge interest under section 220(2) for a period predating and spanning intervening appellate orders that altered the tax liability.
  2. Whether, for the purpose of section 220(2), interest is payable with reference to the original notice of demand (dated 24 September 1979) when subsequent appellate and consequential orders changed or recomputed the tax liability.
  3. Whether the requirement for a “mistake apparent from the records” under section 154 was satisfied so as to permit rectification to impose interest that was not earlier charged.

Arguments of the Parties

Department's Arguments

  • Relied on Circular No. 334 of 3 April 1982: where an original assessment is restored in part or whole by appellate authority, interest under section 220(2) can be computed with reference to the due date reckoned from the original demand notice.
  • Contended that the assessment of 24 September 1979 was restored by the Tribunal with respect to the gratuity disallowance; therefore, the tax demand computed on 3 May 1986 had been payable since 24 September 1979 and remained unpaid, making the petitioner liable to interest under section 220(2) from the expiry of 35 days from the date of the original notice of demand.
  • Relied on Kerala High Court decisions (K.P. Abdul Kareem Hajee and Mohammed Essa Moosa Sait) to support the proposition that, absent a stay, an assessment under appeal is provisionally executable and when ultimately restored, the original demand may be treated as having operated in full vigour.

Petitioner's Arguments

  • The notice of rectification dated 6 March 1987 did not specify the mistake and did not show how interest under section 220(2) should be computed; the petitioner was not given adequate clarity as to the 'mistake'.
  • Within the 35-day period specified by section 220(1), the assessment order dated 24 September 1979 became unenforceable by reason of the appeal order dated 26 October 1979; therefore the demand of 1979 was no longer subsisting, payable, or executable.
  • Subsequent payments (including Rs. 6,30,587) and subsequent appellate and consequential recomputations were lawful assessments/orders that replaced or merged with the earlier assessment; the tax demand ultimately charged arose from fresh computations and not from the original 24 September 1979 demand.
  • The Department could not, by rectification under section 154, embark upon a long-drawn re-interpretation of law to create an interest liability that was not obvious from the record; no “mistake apparent from the records” existed.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
T.S. Balaram, ITO v. Volkart Brothers, [1971] 82 ITR 50 (Supreme Court) Standard for rectification under section 154: mistake apparent on the record must be obvious and patent; not for resolving debatable points requiring long reasoning. Applied to hold that section 154 could not be used here because the alleged omission (not charging interest) was not a mistake apparent from the records and would require long-drawn reasoning.
K.P. Abdul Kareem Hajee v. ITO, [1983] 141 ITR 120 (Kerala High Court) Where an order is provisionally executable and ultimately affirmed by Tribunal, the original order may be treated as having operated in full vigour for the relevant period (absent stay). The court distinguished and held this decision was of no assistance to Revenue on the facts: in the instant case the original 1979 demand became unenforceable within 35 days due to subsequent appeal order and later recomputations; thus the Kerala decision did not support charging interest from the original demand date here.
Mohammed Essa Moosa Sait v. GTO, [1987] 167 ITR 338 (Kerala High Court) Similar principle as K.P. Abdul Kareem Hajee — restoration of an earlier order may revive its operative effect. The court observed this decision proceeded on the same basis as K.P. Abdul Kareem Hajee and found it also not helpful to Revenue on the present facts.
ITO v. A.V. Thomas and Co., [1986] 160 ITR 818 (Kerala High Court) Issue of notice alone does not attract liability to pay interest; a consequential order recomputing tax (giving effect to appellate order) is necessary. Quoted for the proposition that a consequential order is necessary and that liability to pay interest is attracted only by non-compliance with an effective demand; applied to support that recomputed orders, not the original notice alone, determine enforceable liability.
Kooka Sidhwa and Co. v. CIT, [1964] 54 ITR 54 Recomputation giving effect to appellate order amounts to a fresh assessment under section 143. Relied upon to support the view that each recomputation constituted a fresh assessment, replacing the earlier assessment and its demand.
CIT v. Chloride India Ltd., [1990] 186 ITR 217 (this court) A fresh assessment made pursuant to appellate decision substitutes the earlier order; after passing of fresh order, the obligation of the assessee arises from the fresh order. Applied to hold that liability became enforceable by reason of the fresh order dated 3 May 1986 (or the consequential orders) and not from the earlier order of 24 September 1979; interest could not be demanded from the earlier date.
Century Enka Ltd. — Judgment by S.C. Sen, J., 21 January 1987 (C.O No. 14001 (W) of 1985) Where tax refunded pursuant to an appellate order is later restored by Tribunal, the refund does not make the taxpayer an assessee in default automatically; notice seeking recovery of interest on refunded amount may be quashed. Relied on as analogous authority in which a notice seeking recovery of interest on refunded amount was set aside; used to reinforce the conclusion that notice for interest here should be quashed.
Circular of the Central Board of Direct Taxes dated 3 April 1982 (Circular No. 334 — [1982] 135 ITR (St.) 10) Administrative guidance: where original assessment is restored (in part or whole) on appeal, interest under section 220(2) is to be computed with reference to the due date reckoned from the original demand notice. Noted as relied upon by Revenue; the court observed the circular proceeds on restoration of original order by Tribunal, but found it inapplicable on the facts where original demand was not wholly restored and subsequent recomputations were operative.

Court's Reasoning and Analysis

The court's analysis proceeded in three interrelated strands: (a) statutory text and statutory construction of section 220(2); (b) the limits of rectification under section 154; and (c) the legal effect of appellate and consequential recomputations on the enforceability of earlier demands.

1. Statutory construction of section 220(2):

  • The court emphasized that both section 220(1) and section 220(2) focus on the “amount specified in the notice of demand”. Liability to pay interest under section 220(2) arises only if that amount is not paid within the period specified in section 220(1) (35 days).
  • The court held that section 220(2) must be strictly construed because it imposes a fiscal burden. Interest under section 220(2) commences only after expiry of the 35-day period; there is no liability for the 35-day marginal period.
  • Where, within the 35-day period, the amount specified in the notice of demand is paid or ceases to be payable or subsisting (for example, by reason of an appellate order), no liability to pay interest under section 220(2) arises. The court stressed that section 220 is part of recovery provisions: if an amount is not recoverable or enforceable it cannot attract interest under section 220(2).

2. Limits of rectification under section 154:

  • The court applied the Supreme Court's test in T.S. Balaram: rectification under section 154 is confined to “mistake apparent from records” — an obvious and patent mistake — and cannot be used to enter into the true scope of substantive provisions or to resolve debatable questions requiring extended reasoning.
  • On the facts, the court found that there was no obvious and patent mistake in not charging interest earlier; establishing a liability under section 220(2) would require detailed legal reasoning and might admit of two opinions. Hence the alleged omission was not a mistake apparent from the record and could not be rectified under section 154.

3. Effect of appellate orders and recomputations:

  • The court noted that the September 24, 1979 assessment order was not upheld in toto; subsequent appellate orders altered the computation of total income and tax and the assessment of 1979 “merged in the appeal order.”
  • Relying on authorities (Kooka Sidhwa; Chloride India Ltd.; and the quoted observations from ITO v. A.V. Thomas), the court held that consequential orders giving effect to appellate decisions amount to fresh assessments and replace the earlier assessment and its demand. Thus, the enforceable liability arises from the fresh computation/order and not necessarily from the original demand notice.
  • Given that the recomputed tax (after appellate orders) was different and, in some respects, more favorable to the petitioner, and given post-assessment payments and refunds, the amount specified in the 1979 notice was not continuously payable or enforceable throughout the period claimed by the Department.
  • The court expressly distinguished the Kerala High Court decisions and the Board circular relied upon by Revenue, observing those authorities apply where the original order is fully restored and operates in full vigour; the court found the facts here different because the earlier order was not wholly restored and subsequent recomputations had lawful effect.

Conclusion of analysis: Because (a) rectification under section 154 is limited to patent mistakes and the claimed omission to charge interest was not a “mistake apparent from the record”, and (b) the enforceable tax liability arose from subsequent recomputations (fresh assessment orders) rather than from the original 24 September 1979 order, the Income-tax Officer exceeded his jurisdiction in issuing the impugned rectification notice to charge interest from 24 September 1979.

Holding and Implications

Holding: The writ petition is allowed: the impugned notice and any order made pursuant thereto under section 154 are set aside and quashed; Rule is made absolute.

Implications (direct and limited to the parties):

  • Direct effect: The petitioner is relieved of the liability to pay interest under section 220(2) as sought to be imposed by the impugned rectification notice; the notice and any consequential order are quashed.
  • No order as to costs was made.
  • Broader implications: The court did not purport to lay down a novel general principle beyond applying established authorities and statutory interpretation; the decision rests on (i) the strict construction of section 220(2), (ii) the limits of section 154 (mistake apparent from record), and (iii) established authorities that a fresh assessment pursuant to appellate orders substitutes the earlier assessment. The opinion did not assert that it was creating a new precedent beyond these applications, and its reasoning is fact-specific (particularly concerning whether an earlier order was restored in full or replaced by subsequent recomputation).

This summary is prepared exclusively from the content of the provided opinion and does not add or infer facts or law beyond what the opinion expressly states.

Show full summary ...

    Birla Cotton Spg. And Wvg. Mills Ltd. v. Income-Tax Officer And Others.

    Ajit K. Sengupta, J.:— In this writ petition, the petitioner challenges the legality and validity of a notice dated March 6, 1987, issued by the Income-tax Officer, respondent No. 1, under section 154 of the Income-tax Act, 1961 (“the Act”), for the assessment year 1973–74. By the said notice, the Income-tax Officer seeks to rectify an alleged mistake in the calculation of interest under section 220(2) of the Act. The notice itself does not make it clear as to how and what was the mistake sought to be rectified. It is stated by the petitioner that in the course of discussion, the petitioner's representative was informed that the Income-tax Officer proposed to charge interest under section 220(2) of the Act from the date of the revised assessment order dated September 24, 1979, till May 8, 1986, when the Income-tax Officer made assessment giving effect to the appeal order dated October 3, 1985, of the Income-tax Appellate Tribunal for the said assessment year 1973–74.

    2. The facts of the case are that for the assessment year 1973–74, the petitionef filed its return under the Act on October 31, 1973, which was revised on November 30, 1973, claiming, inter alia, deduction for gratuity liability calculated on the basis of actuarial valuation. The total income shown in the revised return was Rs. 8,29,370 and the tax paid thereon by way of tax deducted at source and self-assessment was Rs. 4,77,858. Assessment thereon under the Act was made on June 5, 1976, wherein the Income-tax Officer disallowed the claim of deduction of gratuity for not complying with the conditions of section 40A(7) of the Act. The total income assessed was Rs. 60,56,160. The tax thereon was computed at Rs. 34,96,327 and after adjusting the tax paid as above the balance tax payable was determined at Rs. 30,18,469. Against the said assessment, the petitioner preferred an appeal. The Appellate Assistant Commissioner of Income-tax, by his order dated February 28, 1977, set aside the assessment with the direction to make fresh assessment after examining the question relating to deduction of gratuity afresh. The assessment was set aside to scrutinise other claims of the assessee as well. By reason of the said appeal order setting aside the assessment there was no subsisting outstanding tax demand payable by the petitioner. The Income-tax Officer pursuant to the said appeal order, made a fresh assessment on September 24, 1979, again disallowing the claim for deduction of gratuity. In the said assessment total income was computed at Rs. 61,38,357 by making addition for gratuity of Rs. 12,13,929 (provided in the accounts and which was allowed by the Income-tax Appellate Tribunal) and Rs. 41,45,444 (not provided in the accounts). There were other additions and disallowances as well. Tax was computed at Rs. 35,43,895 and after adjusting the prepaid tax of Rs. 4,77,858, the balance payable was determined at Rs. 30,65,937.

    3. The petitioner's appeal against the fresh assessment was partly allowed by appeal order dated October 26, 1979, of the Commissioner of Income-tax (Appeals). In the said order, the Commissioner of Income-tax (Appeals) accepted the claim for deduction of gratuity and the claim for deduction of Rs. 34,398 and Rs. 56,106 and for relief under section 80G of the Act, but rejected the petitioner's claim for deduction of Rs. 69,245.

    4. As a result of the said order of the Commissioner of Income-tax (Appeals), the total income of the petitioner and the tax payable by it required to be computed afresh. Therefore, the assessment order dated September 24, 1979, and tax demand computed thereby no longer subsisted and the assessment order dated September 24, 1979, merged in the appeal order.

    5. The Income-tax Officer gave effect to the said appeal order dated October 26, 1979, by his order dated December 31, 1979, and deductions for provision for gratuity of Rs. 41,45,444 and other deductions as per the said appeal order were allowed. This resulted in the computation of total income at Rs. 18,76,834.

    6. In the meantime, the petitioner had preferred an appeal to the Income-tax Appellate Tribunal on the point of relief under section 80G of the Act. The Income-tax Appellate Tribunal, by its order dated November 15, 1980, partly allowed the appeal of the petitioner. The Income-tax Officer gave effect to the said order of the Tribunal, by his order dated December 18, 1981, and recomputed the total income at Rs. 18,02,409 and tax thereon was computed at Rs. 10,39,784. After adjusting prepaid tax of Rs. 4,77,858 and further post-assessment payment of Rs. 6,30,587, a refund of Rs. 46,238 was found to be due to the petitioner which was granted on December 18, 1985.

    7. The Department had also preferred an appeal to the Income-tax Appellate Tribunal against the appeal order dated October 26, 1979, against the allowance of gratuity and other reliefs. The Department's appeal was decided by the Income-tax Appellate Tribunal on October 3, 1985, by which the disallowance of gratuity by the Income-tax Officer was upheld but the allowances of Rs. 34,398 and Rs. 56,106 were held to be justified. Pursuant to the Tribunal's order, the provision for gratuity to be disallowed was fixed at Rs. 41,45,444. By reason of the Tribunal's order dated October 3, 1985, the total income and tax thereon for the assessment year 1973–74 was recomputed at Rs. 59,48,067 and the tax thereon at Rs. 34,33,902. After adjusting the prepaid tax of Rs. 4,77,858 and interim post-assessment payment of Rs. 5,84,349, the balance tax payable was found to be Rs. 23,71,695. Interest under section 220(2) of the Act amounting to Rs. 11,370 was also charged in addition to interest under section 139(8) of the Act. In earlier orders interest under section 220(2) was not charged. Details of interest charged under section 220(2) of the Act were not given.

    8. It is relevant to point out here that the total income and tax thereon computed by the order dated May 3, 1986, was not the same as computed by the order dated September 24, 1979, but was much less than that. The assessment order dated September 24, 1979, was not upheld in totality but partially. Hence the total income and tax computed by the assessment order dated September 24, 1979, was not legal and payable.

    9. By the impugned rectification proceedings, the Income-tax Officer sought to charge interest on the balance tax of Rs. 23,71,695 computed by the order dated May 3, 1986, from the date of assessment order dated September 24, 1979, to May 3, 1986. This act of the Income-tax Officer has been questioned in the present writ.

    10. Reference is made to section 220(2) of the Act as it stood at the relevant time which provided as follows:

    “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 12 per cent. per annum from the day commencing after the end of the period mentioned in sub-section (1):

    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, the amount on which interest was payable under this section has been reduced, the interest shall be reduced accordingly and the excess interest paid, if any, shall be refunded.”

    11. Sub-section (1) of section 220 of the Act provides that the amount, otherwise than by way of advance tax, specified as payable in a notice of demand under section 156 shall be paid within thirty-five days of the service of the notice of demand at the place and to the person mentioned in the notice.

    12. Both under sections 220(1) and 220(2) of the Act, what is important and relevant is the “amount specified in the notice of demand”. An assessee is liable to pay interest under section 220(2) of the Act, if the amount specified in the notice of demand is not paid within the period specified in section 220(1).

    13. The Department in support of the impugned notice have relied upon a circular of the Central Board of Direct Taxes dated April 3, 1982 (see Circular No. 334—[1982] 135 ITR (St.) 10), which provides, inter alia, that where the assessment made originally by the Income-tax Officer was either varied or even set aside by an appellate authority, but on further appeal, the original order of the Income-tax Officer was 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.

    14. Therefore, the contention of the Department is that the assessment order dated September 24, 1979, was restored in respect of gratuity disallowance by the appeal order of the Income-tax Appellate Tribunal/Therefore, the tax demand computed on May 3, 1986, was payable and remained unpaid all through since September 24, 1979, until it was paid and, therefore, the assessee is liable to pay interest under section 220(2) of the Act on the said unpaid amount from the expiry of the period of 35 days from the date of the service of the notice of demand pursuant to the assessment order dated September 24, 1979.

    15. Learned counsel for the Department also relied on the decisions of the Kerala High Court in the cases of K.P Abdul Kareem Hajee v. ITO, [1983] 141 ITR 120 and Mohammed Essa Moosa Sait v. GTO, [1987] 167 ITR 338. In K.P Abdul Kareem Hajee v. ITO, [1983] 141 ITR 120, the Kerala High Court held, inter alia, as follows (at page 122):

    “In the absence of any statutory provision to the contrary, or an interim stay granted by a competent authority, the order, although not final, is provisionally executable, subject to restoration. The finality of exhibit P-2-A was qualified by and subject to appeal, which was taken before the appellate authority. The order of the appellate authority itself was likewise provisional during the period allowed for filing an appeal or during the pendency of the appeal. When the order of the Appellate Assistant Commissioner concerning the petitioner was finally set aside by the Tribunal, thereby affirming exhibit P-2-A order of the Income-tax Officer, the cloud hanging over exhibit P-2-A was removed and its finality was affirmed. Consequently, for the relevant period, exhibit P-2-A is deemed to have operated in full vigour to make the petitioner liable in law by reason of the Tribunal's affirmative order.”

    16. This decision of the Kerala High Court, it is contended, is of no assistance to the Revenue and is distinguishable and, if at all, supports the case of the petitioner. The Kerala High Court in principle held that in the absence of the stay orders, the assessed demand under appeal is executable and is deemed to be operative, during the pendency of the appeal. Therefore, the assessee is liable to pay interest under section 220(2) of the Act. Further, in the said Kerala case, the whole of the order of the Income-tax Officer was disputed and was the subject-matter of appeal and was set aside by the Appellate Assistant Commissioner and restored by the Tribunal. But, in the case of the petitioner here, within the period of 35 days from the date of the service of the notice of demand, the relevant assessment order dated September 24, 1979, became unenforceable by reason of the appeal order dated October 26, 1979. Therefore, the demand as raised by the said notice was no longer subsisting, payable or executable. Further, by reason of subsequent payment of Rs. 6,30,587 under the order dated December 31, 1979, the demand notice was fully satisfied and was no longer outstanding. Even by reason of the subsequent order of the Tribunal, the assessment dated September 24, 1979, and the tax demand raised thereby, as it was, was not wholly restored. By reason of the subsequent appeal orders including the order of the Tribunal, the total income and the tax was recomputed. Hence, in the words of the Kerala High Court decision, the assessment order dated September 24, 1979, could not be said to be “deemed to have operated in full vigour to make the petitioner liable….”. In fact, subsequently, by reason of the appellate order fresh computations of the total income and tax payable have been made. All the said subsequent orders of recomputations are assessment orders lawfully made. They cannot simply be ignored and deemed to have never existed or been made. The recomputed demand arose from the fresh orders and not by assessment or notice of demand dated September 24, 1979. What the Kerala High Court, on the facts of that case laid down was that the demand as originally made was all along executable and was wholly affirmed by the Tribunal's order. This is not the case in the instant case.

    17. The other decision of the Kerala High Court in the case of Mohammed Essa Moosa Sait, [1987] 167 ITR 338, also proceeds on the same basis as in the case of K.P Abdul Kareem Hajee, [1983] 141 ITR 120 (Ker). In Mohammed Essa Moosa's case, [1987] 167 ITR 338 (Ker), the order of the Gift-tax Officer was restored to full vigour by the decision of the High Court in reference. Therefore, the said decision also is of no assistance to the Department. The circular of the Board dated April 3, 1982 (see Circular No. 334—[1982] 135 ITR (St.) 10), referred to above, also proceeds on the basis that the assessment made originally by the Income-tax Officer is restored by the Tribunal and, therefore, the assessee is liable to pay interest under section 220(2) of the Act from the date of the original demand notice.

    18. The liability to pay interest under section 220(2) of the Act is a statutory liability. It is not based on equity. The provisions of section 220(2) which impose a fiscal burden have to be strictly construed. Whether, on the facts of a particular case, the assessee is liable to pay interest under section 220(2) of the Act is a question of law which calls for interpretation of the provision of section 220(2) of the Act.

    19. It is to be remembered here that, in the instant case, the Department is proceeding under section 154 of the Act. In order that section 154 may be invoked, there must exist a “mistake apparent from records” which can be rectified. The Supreme Court in the case of T.S Balaram, ITO v. Volkart Brothers, [1971] 82 ITR 50, at page 53, observed as follows:

    “It was not open to the Income-tax Officer to go into the true scope of the relevant provisions of the Act in a proceeding under section 154 of the Income-tax Act, 1961. A mistake apparent on the record must be an obvious and patent mistake and not something which can be established by a long-drawn process of reasoning on points on which there may conceivably be two opinions.”

    20. The instant case falls squarely within the aforesaid observations of the Supreme Court. It cannot be said that there is an obvious and patent liability on the petitioner to pay interest under section 220(2) of the Act. The alleged mistake, if any, in not charging interest, is not a mistake apparent from the records. The alleged liability to pay interest under section 220(2) of the Act could be established, if it be so possible, only by a long-drawn process of reasoning on points where there may conceivably be two opinions. It cannot be said that there can be no two opinions. In rectification proceedings, it is not open to the Income-tax Officer to go into the true scope of the provisions of the Act. That being so, the impugned notice is in excess of jurisdiction under section 154 of the Act and, therefore, is liable to be declared invalid.

    21. Although not strictly necessary, yet, since it has been argued by both sides, a view about the applicability of the provisions of section 220(2) of the Act in the instant case may be expressed.

    22. Section 220(2) of the Act has to be strictly construed. Liability to pay interest would arise under section 220(2) of the Act only in case where,—

    (i) the amount specified in the notice of demand is not paid;

    (ii) within the period specified under sub-section (1) of section 220.

    23. Liability to pay interest under section 220(2) will commence after the end of the period mentioned in section 220(1). There is no liability to pay interest from the date of the service of the notice of demand for the marginal period of 35 days specified in section 220(1). Section 220(2), necessarily assumes that the amount specified in the notice of demand remains outstanding and payable by the assessee even after the expiry of the period mentioned in section 220(1). Where within the period specified in section 220(1), the amount specified in the notice of demand is either already paid or no longer payable or subsisting, no liability to pay interest under section 220(2) can arise. An assessee cannot be said to be a defaulter or liable in respect of a demand which is no longer subsisting, payable or enforceable. Section 220 is part of recovery provisions of the Act. If an amount specified in the notice of demand is not recoverable and enforceable, the assessee cannot be held responsible for non-payment of the said amount during the period it is not recoverable and enforceable. The Act, except for advance payment of tax or tax deducted at source, does not provide for any provisional collection of tax or for collection of a tax set aside or reduced by the appellate, revisional or rectification orders subsisting. Neither the Income-tax Officer nor the Tax Recovery Officer can collect nor is the assessee liable to pay the amount set aside or reduced by appellate, revisional or rectification orders.

    24. By reason of the provisions of the Taxation Laws (Continuation and Validation of Recovery Proceedings) Act, 1964, read with section 225(3) of the Act, although no fresh notice of demand is necessary but whenever by reason of appellate, revisional or rectification order the amount specified in the notice of demand is wholly or partly reduced a consequential order is necessary and that has been done in the instant case as well by giving effect to the appellate order. It is the statutory duty of the Income-tax Officer to recompute the total income and the tax payable thereon by giving effect to appellate or revisional or rectification orders.

    25. As observed by the Kerala High Court in the case of ITO v. A.V Thomas and Co., [1986] 160 ITR 818 (at page 825):

    “True, perhaps that no fresh notice is required in this case. But a consequential order is necessary and that has been issued by the assessing authority which is evidenced in this case by exhibit P-5. As stated earlier, issue of notice alone will not attract the liability to pay interest. The liability is attracted only if there is non-compliance of the demand made in the notice.”

    26. It is submitted that the aforesaid observation of the Kerala High Court fully applies in the instant case. Each appellate order in the instant case required consequential order recomputing the tax and the redetermined and recomputed tax was not the same as determined in the assessment order dated September 24, 1979. Each recomputation giving effect to appeal order is a fresh assessment order under section 143 as has been held by this court in the case of Kooka Sidhwa and Co. v. CIT, [1964] 54 ITR 54.

    27. Even if it is assumed that the notice of demand, as such, issued in September, 1979, subsisted all along and no fresh notice was required to be issued the amount specified in that notice was never payable, enforceable or recoverable even after the final determination. Hence, even on the interpretation of the provisions of section 220(2) of the Act, it is submitted that the petitioner has no liability to pay interest on the balance demand determined to be payable by the order dated May 3, 1986, right for the September 24, 1979.

    28. This court in the case of CIT v. Chloride India Ltd., [1990] 186 ITR 217, at page 224, observed as follows:

    “There is yet another approach that could be made to the controversy. What happens to an assessment by the Income-tax Officer when such assessment is subject to an appeal and pursuant to the appellate decision, the matter is reopened obliging the Income-tax Officer to pass a fresh order? When he makes a fresh order of assessment, he determines afresh the tax payable by the assessee. It is not as if two assessment orders survive against the assessee then. The first order is substituted by the second order. The first order, when it did operate was legal and recovery and enforcement could legally have been made pursuant to that order. But, after the passing of the second order, the obligation of the assessee arises from that order and where it is a fresh assessment determining tax payable for the year consequent upon the appellate decision setting aside the order of the Income-tax Officer, the order of the Income-tax Officer would no longer survive. It is true that it lived earlier. But by the passing of the fresh order it is the fresh order that would operate.”

    29. The aforesaid principle shall apply to the facts of the instant case as well. Fresh income and tax were determined by the order dated May 3, 1986. Hence, the liability became enforceable by reason of that order and not from the order dated September 24, 1979. Interest, therefore, could not be demanded under section 220(2) of the Act from September 24, 1979.

    30. This matter is also covered by a judgment of this court delivered by Mr. Justice S.C Sen, on January 21, 1987, on a writ petition filed by Century Enka Ltd., in C.O No. 14001 (W) of 1985. In that case also there was a demand pursuant to the original assessment order passed by the Income-tax Officer. On appeal, the Commissioner of Income-tax (Appeals) allowed in part the appeal of the petitioner therein and consequently a refund was granted by the Income-tax Officer by passing a fresh order pursuant to the order of the Commissioner of Income-tax (Appeals). The Income-tax Appellate Tribunal, on appeal by the Department, reversed the order of the Commissioner of Income-tax (Appeals). The Income-tax Officer again passed a fresh order in pursuance of the order of the Income-tax Appellate Tribunal and determined a sum of Rs. 18,97,663 to be payable by the assessee. The Income-tax Officer also charged interest under section 220(2) with effect from the date on which the amount of tax was refunded to the petitioner. The circular of the Board dated April 3, 1982 (see Circular No. 334—[1982] 135 ITR (St.) 10) and the judgment of the Kerala High Court in ITO v. A.V Thomas and Co., [1986] 160 ITR 818, were noted and discussed. It was held:

    “The Taxation Laws (Continuation and Validation of Recovery Proceedings) Act, 1964, merely lays down that where tax dues are reduced in appeal or are not varied in appeal, no fresh notice of demand will be required to be served upon the assessee. But the Income-tax Officer will have to send an intimation of the fact of such reduction to the assessee. The provisions of this Act do not have the effect of nullifying the payment that has been made originally by the assessee. Refund of the tax paid by the assessee pursuant to the order of the Appellate Assistant Commissioner does not have the effect of making the taxpayer an assessee in default merely on the ground that the order of the Appellate Assistant Commissioner was ultimately reversed by the Tribunal. Therefore, the notice dated August 30, 1985, in so far as it seeks to recover interest on the amount refunded to the petitioner must be set aside and is hereby quashed.”

    31. It is submitted that by reason of the subsequent appellate orders the original order dated September 24, 1979, on the points in issue decided by the appellate orders expressly merged in the appeal orders and only the appeal orders and orders consequential thereto were operative and the assessment order or notice of demand dated September 24, 1979, or amount of tax specified therein were no longer executable, valid and subsisting. For the foregoing reasons, it must be held that the impugned notice is without jurisdiction and authority of law. There is no mistake, much less any mistake apparent from the records which could be rectified under section 154 of the Act. The application, therefore, succeeds. Rule is made absolute. The impugned notice and order if any made, pursuant to such notice are set aside and quashed.

    32. There will be no order as to costs.

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    Birla Cotton Spg. And Wvg. Mills Ltd. v. Income-Tax Officer And Others.
    (Jun 10, 1993)