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Income Tax Officer & Another, Bombay v. Simplex Mills Ltd. Bombay .
Factual and Procedural Background
The respondent-assessee had made advance tax payments for Assessment Year 1952-53 under Section 18-A(1) of the Income-tax Act, 1922. Upon regular assessment on 30 August 1952, part of the advance tax was found refundable and the Income-tax Officer (ITO) paid the respondent interest amounting to Rs 14,720-14-0, as mandated by the then-existing sub-section (5) of Section 18-A. A subsequent amendment to Section 18-A(5), effective 1 April 1952, reduced the interest the Government was required to pay to Rs 9,404-5-0.
On 18 March 1957 the ITO issued a notice under Section 34(1)(b) asserting that the respondent’s income had been under-assessed or granted excessive relief. A reassessment order dated 30 July 1957 invoked the amended Section 18-A(5) and sought to recover the “excess interest” paid in 1952. The respondent challenged this action by filing a writ petition under Article 226 of the Constitution. The Bombay High Court quashed the reassessment order. The State (Revenue) appealed to the Supreme Court.
Legal Issues Presented
- Whether a reassessment under Section 34 of the Income-tax Act, 1922 can be invoked to recover interest previously paid to an assessee when a subsequent retrospective amendment reduces the statutory rate of such interest.
- Whether the payment of interest by the Government to an assessee constitutes “income under-assessed” or “excessive relief” within the meaning of Section 34(1)(b).
- Whether interest payable by the Government forms part of “tax” so that an excessive payment of interest amounts to excessive relief in assessment.
Arguments of the Parties
Appellant (State/Revenue) Arguments
- The notice of demand form demonstrates that interest under Section 18-A is integral to the computation of tax; therefore, overpayment of interest equals excessive relief.
- Sub-sections (8) and (11) of Section 18-A treat certain interest payments as tax, implying that over-allowed interest can be corrected via Section 34.
- Reliance on the Supreme Court’s remark in M. Chockalingam v. CIT to suggest that interest forms part of the assessment and its reduction constitutes permissible enhancement.
Respondent (Assessee) Arguments
- Section 34 conditions—escaped income, under-assessment, or excessive relief—are not met because the issue concerns interest payable by the Government, not the assessee’s income.
- The demand form merely deducts interest from tax payable; it does not merge interest with tax.
- Section 18-A(8) and (11) address interest payable by an assessee, not interest payable by the Government; hence they are irrelevant.
- The precedent cited by the Revenue dealt with penal interest payable by the assessee, distinguishable from the present case.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| M. Chockalingam v. CIT (1963 Supp 1 SCR 599) | Observation that addition of penal interest constitutes enhancement of assessment. | The Court distinguished the case, noting it concerned penal interest payable by an assessee, whereas the present matter involves interest payable by the Government; therefore, the principle was inapplicable. |
Court's Reasoning and Analysis
The Supreme Court held that none of the statutory pre-conditions for reopening an assessment under Section 34 were satisfied:
- No under-assessment: The advance tax payment resulted in a provisional over-assessment; the assessee’s income was not under-assessed.
- No excessive relief: Interest paid under Section 18-A(5) is not a relief in computing income; it is a statutory liability of the State. When originally calculated, the law in force justified the higher amount; the later amendment cannot retrospectively convert it into excessive relief.
- The statutory change merely reduced the Government’s liability; it did not alter the assessee’s earlier income computation.
- The Court rejected Revenue’s reliance on the demand form and on sub-sections (8) and (11) of Section 18-A, clarifying that those provisions concern interest payable by an assessee, not by the Government.
- The precedent cited by the Revenue was found irrelevant as it dealt with penal interest, not the kind involved here.
- When counsel sought to shift reliance to Section 35 at the hearing, the Court refused leave because the Revenue had proceeded solely under Section 34 in earlier proceedings.
Holding and Implications
Appeal Dismissed with Costs.
The Supreme Court affirmed the Bombay High Court’s quashing of the reassessment order. The decision clarifies that Section 34 cannot be used to recover interest lawfully paid under the statute as it then stood, even if a retrospective amendment later reduces such interest. Interest payable by the Government to an assessee is not part of the assessee’s taxable income nor an assessment relief; consequently, reassessment machinery under Section 34 is inapplicable. The ruling directly binds the parties and reinforces limits on the Revenue’s power to reopen assessments; it sets no broader new precedent beyond interpreting Section 34’s scope.
Sarkar, J.— This appeal is entirely without substance. It arises out of an application under Article 226 of the Constitution made by the respondent-assessee for a writ quashing an order of assessment made under Section 34 of the Income Tax Act, 1922.
2. The respondent made advance payment of tax under Section 18-A(1) of the Income Tax Act for Assessment Year 1952-53. On August 30, 1952, regular assessment for this year was made and a part of the tax paid in advance was thereupon found refundable to the respondent. Under the provisions of sub-section (5) of Section 18-A, as it then stood, interest at a certain rate was payable on the amount paid in advance by an assessee under this section. Rupees 14,720-14-0 were found payable to the respondent under this provision and this sum was paid sometime in September 1952. On May 24, 1953, sub-section (5) of Section 18-A was amended with effect from April 1, 1952. It is not necessary to refer to this amendment in detail and it is enough to state that under it the Government was to have paid to the respondent Rs 9404-5-0 instead of Rs 14,720-14-0.
3. On March 18, 1957, a notice was issued under Section 34(1)(b) stating that as the Income Tax Officer had reason to believe that the respondent's income for the assessment year ending March 31, 1953 had been under-assessed and had been the subject of excessive relief, he proposed to reassess the said income. The respondent protested but notwithstanding the protest, the reassessment under Section 34 was made on July 30, 1957. The order of reassessment stated: “As per the amended provisions of Section 18-A(5) the assessee was entitled to interest of a much smaller amount than what has been allowed to him during the original assessment. As excessive relief has been allowed to the assessee in the original assessment under Section 23(3) and in order to enable me to recover the excess interest allowed action under Section 34 was taken. Hence I will proceed to recover the excess interest allowed to the assessee during the original assessment.” On the application of the respondent under Article 226 of the Constitution this order was set aside by the High Court of Bombay. Hence this appeal.
4. Section 34 of the Act under which the impugned order was made so far as material for our purposes is in these terms:
“34. (1) If
(a)-(b) * * *
The Income Tax Officer has … reason to believe that income, profits or gains chargeable to income tax have escaped assessment for any year, or have been under-assessed or assessed at too low a rate, or have been made the subject of excessive relief under this Act, or that excessive loss or depreciation allowance has been computed,
he may ... proceed to assess or reassess such income, profits or gains or recompute the loss or depreciation allowance;”
5. The assessment, reassessment or recomputation under this section is to be made according to the provisions of the Act as if it was pursuant to a notice under Section 22 of the Act.
6. Under this section, therefore, an assessment earlier made can be re-opened if income, profits or gains have escaped assessment or have been underassessed or assessed at too low a rate or have been made the subject of excessive relief or excessive loss or depreciation has been computed. It does not seem to us that any of these conditions can be said to have been fulfilled in the present case. The notice under Section 34 stated all these grounds but only two of them have been mentioned in the notice which has been earlier set out by us because counsel for the appellants has not relied on any other ground. With the other grounds we are not, therefore, concerned in this case. The two that have been relied on are cases where income has been underassessed or has been made the subject of excessive relief. It may be noticed here that the order of July 30, 1957 was based only on the ground that excessive relief had been allowed. It did not hold that the income had been underassessed.
7. It does not seem to us that it is a case where the respondent's income was under-assessed or where excessive relief was granted in computing that income. It is a case where tax had been paid in advance and upon subsequent regular assessment for the period for which the tax had been paid it was found that what had been paid was in excess of what was actually due. This is really a case of over-assessment though only provisional and not of under- assessment at all. The payment of interest was in no sense a relief granted in computing income, it was paid at the rate calculated according to the law then in force. No doubt in view of the subsequent amendment of the law and in view of this amended provision being given retrospective operation covering the date when the original assessment had been made, if the interest has to be computed according to the amended law then a smaller sum might have been payable as interest. But when it was computed, the new law was not in fact there and, therefore, the computation had been according to the law then in force. That computation cannot be re-opened under Section 34 because it cannot be said that it is a case either of under-assessment or of excessive relief having been granted. It is really a case where the statutory liability of the State to pay interest was reduced from a higher figure to a lower one. Therefore, quite clearly it was not a case within Section 34.
8. We were referred to the form of the notice of demand for the tax. It was contended that the form showed that in computing the tax interest under Section 18-A had to be taken into account. Therefore, it was said, interest was a part of the tax and when more interest had been paid to the assessee than was due, it had been given excessive relief. As was rightly pointed out by Mr Kolah appearing for the respondent, this is a wrong reading of the form. The form specified the net amount of the tax payable and thereafter provided for deduction of certain interest to show the amount of the demand. Therefore the interest which had to be deducted in accordance with it in arriving at the demand is not a part of the tax. At least it is not so treated in the form. That is enough to dispose of this argument.
9. We were then referred to sub-sections (8) and (11) of Section 18-A. Sub-section (8) provides for payment of certain interest by an assessee and sub-section (11) says that any sum other than a penalty or interest paid by an assessee under the provisions of Section 18-A shall be treated as a payment of tax. It was contended that the provisions of these two sub-sections show that the interest with which we are concerned is a part of the tax, and therefore, when more interest was allowed to an assessee than was due, he was given encessive relief. This is obviously fallacious. The sub-sections deal with interest payable by an assessee and we are concerned in this case with interest payable by the Government.
10. Lastly, our attention was drawn to M. Chockalingam v. CIT (1963) Supp 1 SCR 599 in which referring to the proviso to Section 35 of the Income Tax Act this Court observed: “The learned counsel for the Department raised the forlorn argument that the addition of penal interest is not enhancement of assessment as stated in the proviso. We do not see what else it could be.” It was contended that this showed that the penal interest was part of the tax. We do not think so. In any event, we are not concerned with a case of penal interest here. It cannot obviously be suggested that the interest payable by the Government to the assessee for amounts paid by the assessee as tax in advance, is a tax paid by the assessee.
11. At the hearing learned counsel for the State sought leave to contend that the order of July 30, 1957, could be supported under Section 35 of the Income Tax Act. This leave was refused for such a point was not raised in the court below and the action by the Revenue Authorities had expressly been taken under Section 34 of the Act.
12. This appeal must, therefore, be dismissed with costs and we order accordingly.
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