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Commissioner Of Income-Tax v. H.V Mirchandani
Factual and Procedural Background
This reference arises under section 256(1) of the Income-tax Act, 1961. The Commissioner proposed five questions for reference to this Court; the Tribunal referred only two questions, considering them to cover the other three. These two questions concerned (1) whether an order under section 154 falls under section 240/244(1A) and hence whether proceedings under section 154 are "appeal or other proceedings", and (2) whether the assessee was entitled to interest under section 244(1A).
The factual matrix: the assessee was initially a Government servant and later absorbed in the public sector, with a right under service rules to commute his pension fully. The Income-tax Officer (ITO) originally exempted one-third of the amount and taxed the balance. Subsequently, pursuant to Central Board of Direct Taxes Circular No. 286 dated November 17, 1980, the ITO rectified the assessment under section 154 and allowed a refund of Rs. 27,104 by an order of rectification dated December 8, 1980.
On December 29, 1980 the assessee wrote to the ITO claiming that interest under section 244(1A) had not been granted. The ITO replied on January 2, 1981 that the assessee was not entitled to such interest because, in the ITO’s view, interest under section 244(1A) was payable only on orders passed on appeal or revision and not on a refund arising from an order under section 154.
The assessee appealed the section 154 order (seeking interest together with the refund). The Appellate Assistant Commissioner dismissed that appeal. The assessee then appealed to the Income-tax Appellate Tribunal (the Tribunal), which accepted the assessee's contention, holding that the assessee was entitled to interest under section 244(1A) because rectification proceedings under section 154 constituted "other proceedings" envisioned by section 244(1A). The Tribunal also held the appeal to be maintainable as part of the assessment, treating the omission to grant statutory interest as an omission in reckoning the amount of tax/refund.
Legal Issues Presented
- Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in law in holding that the assessee is entitled to interest under section 244(1A)?
- Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in entertaining the assessee's appeal as the assessee had no right of appeal against the determination of interest under section 244(1A)?
Arguments of the Parties
Revenue (Mr. Srinivasan)
- Not strongly contesting the Tribunal's entitlement conclusions on the merits; did not press for affirmative answers to the two originally referred questions.
- Concentrated on the maintainability of the appeal against the ITO's order under section 154, urging that such an appeal is not maintainable under the statutory appeal provisions.
Assessee (Mr. Chandra Kumar)
- Contended that the rectification order under section 154 should be treated as reducing a refund (or as refusing a claim), and therefore is appealable under section 246(1)(f).
- Relied primarily on the second category in section 246(1)(f) — an order under section 154 which has the effect of reducing a refund — arguing that denial of interest effectively reduced the refund payable and so rendered the order appealable.
- Also relied on the third category — an order refusing to allow the claim made by the assessee under section 154 — to contend appealability.
Tribunal
- Accepted the assessee's contention that the assessee was entitled to interest under section 244(1A) even when the refund was allowed upon rectification under section 154, treating rectification proceedings as "other proceedings" under section 244(1A).
- Held the matter appealable as part of the assessment because the omission to allow statutory interest was an omission in reckoning the amount of tax/refund payable.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| CIT v. Nanda Theatres, [1978] 115 ITR 301 (Karnataka High Court) | Principle that interest under section 217 required a separate order and is not part of the assessment (illustrative of a distinction between interest regimes). | The Tribunal referenced this decision by way of comparison (noting that under section 217 a separate order is necessary). The Court recorded the citation but did not base its decision on it; rather, it relied on its analysis of the statutory scheme for refunds and interest. |
| CIT v. S.C. Shah, [1982] 137 ITR 287 (Bombay High Court) | The Bombay High Court construed an order under section 154 granting a refund but not granting interest as effectively "reducing the amount repayable" and therefore falling within section 246(1)(f) as appealable. | The Supreme Court (K. Jagannatha Shetty, A.C.J.) discussed this decision, observed that it supports the assessee's contention, but expressly disagreed with that reasoning and declined to follow it for the facts and statutory interpretation adopted in this case. |
Court's Reasoning and Analysis
The Court focused primarily on the maintainability of the appeal under section 246(1)(f). It analyzed the language of section 246(1)(f), which makes appealable only three categories of orders under sections 154 or 155: (i) orders having the effect of enhancing the assessment, (ii) orders having the effect of reducing a refund, and (iii) orders refusing to allow a claim made by the assessee under those sections.
The Court reasoned that the phrase "reducing a refund" must be read in light of the prior category "having the effect of enhancing the assessment." If an original assessment order already contained a refund, and a subsequent rectification under section 154 reduced that previously allowed refund, only then would the phrase "reducing a refund" have work to do. In other words, "reducing a refund" presupposes that a refund had been allowed in the original assessment and was reduced upon rectification.
Applying that interpretation, the Court concluded that a rectification order under section 154 which, for the first time, results in a refund (i.e., where no refund had been ordered in the original assessment) cannot be treated as an order that "reduces a refund" within the meaning of section 246(1)(f). Thus, such a rectification order is not appealable under that provision merely because it grants a refund without interest.
The Court further explained why the third category (an order refusing to allow the claim made by the assessee under section 154) did not assist the assessee. Two points were decisive:
- The rectification in this case was not made at the instance of the assessee; it arose on the ITO's own motion in the light of the Board's circular.
- There was no claim for interest made by the assessee prior to the rectification order. The assessee only requested interest on December 29, 1980, after the rectification order dated December 8, 1980. Section 154 procedures allow an assessee to ask for a refund but do not permit an assessee to ask for interest prior to the grant of refund; interest provisions are dealt with separately in the statute.
The Court emphasized the statutory separation between refund provisions (sections 237–241 in Chapter XIX) and interest provisions (sections 243 and 244). Interest under section 244(1A), while statutory and possibly payable without a separate claim, is consequential to an order of refund and is distinct from the refund itself. Therefore, it cannot be equated with a refund for the limited purpose of expanding the appealable categories under section 246(1)(f).
The Court considered the Bombay High Court's reasoning in CIT v. S.C. Shah, which treated a rectification granting refund without interest as reducing the amount repayable and therefore appealable. The Court rejected that approach, reiterating the necessity of an original assessment refund having been reduced on rectification before the "reducing a refund" language can apply.
Holding and Implications
Holding: The Court held that the appeal preferred by the assessee before the Appellate Assistant Commissioner and the Tribunal was not maintainable. The Court answered question No. 3 in the negative and in favour of the Revenue.
Direct Effect on the Parties:
- The appeals against the ITO's rectification order under section 154 (as the rectification produced a refund for the first time and did not arise from a prior refund being reduced) were declared not maintainable under section 246(1)(f).
- Questions Nos. (1) and (2) (concerning whether an order under section 154 falls under section 240/244(1A) and whether the assessee was entitled to interest under section 244(1A)) were treated as academic in light of the determination on maintainability and therefore were not answered.
- The Court made no order as to costs.
The opinion focuses on the statutory interpretation and the direct consequences for the parties; it does not elaborate broader doctrinal consequences beyond the statutory interpretation applied to the facts of this case.
K. Jagannatha Shetty, A.C.J:— This is a reference under section 256(1) of the Income-tax Act, 1961. The Commissioner of Income-tax proposed for reference as many as five questions before the Tribunal. The Tribunal, however, has referred only two questions which according to it would cover the remaining three questions also. The two questions referred are as follows:
“(1) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the order under section 154 falls under section 240/244(1A) and that the proceedings under section 154 are ‘appeal or other proceedings’?
(2) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in law in holding that the assessee is entitled to interest under section 244(1A)?”
2. Mr. Srinivasan, learned counsel for the Revenue, is not very much particular about getting the answers for the above questions. Obviously, he has not got much to say against the view taken by the Tribunal. Counsel, however, concentrated primarily on the maintainability of the appeal against the order of the Income-tax Officer made under section 154 of the Act and urged that such an appeal is not maintainable. In the circumstances, we rearrange the questions as follows:
“Qus.: (2) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in law in holding that the assessee is entitled to interest under section 244(1A)?
Qus. (3) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal Was right in law in entertaining the assessee's appeal as the assessee had no right of appeal against the determination of interest under section 244(1A)?”
3. The assessee was a Government servant. Later, he was absorbed in the public sector. Under the rules regulating his service conditions, he had a right to commute his pension fully. The Income-tax Officer, however, exempted ⅓rd. of the amount and brought the balance to tax. But, subsequently, on the basis of a circular issued by the Central Board of Direct Taxes (Circular No. 286 dated November 17, 1980) [1981] 127 ITR (Statutes) 6 the Income-tax Officer rectified the assessment under section 154 of the Act allowing a refund of Rs. 27,104.
4. The order of rectification was made on December 8, 1980. On December 29, 1980, the assessee wrote to the Income-tax Officer inviting his attention to the fact that he had not been granted interest under section 244(1A) of the Act. On January 2, 1981, the Income-tax Officer replied that the assessee was not entitled to get such interest. He took the view that such interest was payable only on orders passed on appeal or revision and not on the refund entitled to by an order under section 154 of the Act.
5. The assessee preferred an appeal against the order made under sec-ion 154 contending that interest should have been allowed along with the refund granted. The Appellate Assistant Commissioner did not allow the appeal. Thereupon, he preferred a further appeal to the Tribunal. The Tribunal accepted the contention of the assessee. It was of the opinion that the assessee would be entitled to interest even if the refund is allowed upon rectification of the assessment order, since the rectification proceedings would be “other proceedings” as envisaged under section 244(1A) of the Act.
6. On the question as to the maintainability of the appeal, the Tribunal held as follows:
“Such interest, we have held, should be reckoned from the date of the assessment order as the date on which such amount was paid by way of adjustment to the date on which the refund was actually granted. Since this was a statutory interest to be allowed without a claim, not granting such interest is an omission in reckoning the amount of tax (or refund) payable (refundable) to (by) the assessee. Hence, this is a matter which is appealable as part of the assessment unlike, for example, interest under section 217 where a separate order is necessary as held by the Karnataka High Court in the case of CIT v. Nanda Theatres, [1978] 115 ITR 301.”
7. We may now take up the third question first for consideration. The question relates to the maintainability of the appeal preferred by the assessee either before the Appellate Assistant Commissioner or before the Tribunal. There is no dispute that there is no other provision to prefer an appeal except under section 246(1)(f) of the Act which reads thus:
“246. (1) Subject to the provisions of sub-section (2), any assessee aggrieved by any of the following orders of an Income-tax Officer may appeal to the Appellate Assistant Commissioner against such order—……
(f) an order under section 154 or section 155 having the effect of enhancing the assessment or reducing a refund or an order refusing to allow the claim made by the assessee under either of the said sections.”
8. From the above provisions, it will be seen that all orders under section 154 or 155 have not been made appealable. The orders which are appealable have been classified into three categories: (i) those having the effect of enhancing the assessment, (ii) those having the effect of reducing a refund, and (iii) an order refusing to allow the claim made by the assessee either under section 154 or 155. The first category which we have set out is totally inapplicable and, indeed, it was also not relied upon by Mr. Chandra Kumar, learned counsel for the assessee. Counsel, however, strenuously relied on the second category, i.e, an order under section 154, which has the effect of reducing a refund. Counsel urged that the assessee was entitled to a larger refund including the interest eligible under section 244(1A) and since that has been denied to him, it will have the effect of reducing the refund and, therefore, is appealable.
9. In our opinion, it would be too hard to accept the submission. To understand the scope of the words “reducing a refund”, we must read the earlier part of the clause containing the first category of the orders referred, i.e, having the effect of enhancing the assessment. If the original order of assessment upon rectification results in enhancing the assessment, then, the first category will apply. There is no dispute as to this meaning. That being so, the meaning to be ascribed to the second category is not far to seek. In the original assessment, if the assessee was entitled to a refund and that refund has been reduced upon rectification, then, the second category would, be attracted. Otherwise, the term reducing a refund” carries no meaning. It evidently presupposes a refund which has been allowed in the original assessment, but upon rectification under section 154, it has been reduced. In our opinion, it is only such orders that are appealable under section 246(1)(f).
10. Mr. Chandra Kumar, in support of his contention, then relied upon the third and last category, i.e, an order refusing to allow the claim made by the assessee under either of the sections. But here, he has got insurmountable difficulties. The rectification was not made at the instance of the assessee in the first place. Secondly, from the statement of facts, it will be seen that there was no claim made by the assessee regarding the interest before the rectification order was made. Such a request was made only on December 29, 1980, claiming interest under section 244(1A) of the Act, whereas the assessment was rectified on December 8, 1980. That apart, the assessee under section 154 could only ask for a refund and he cannot ask for interest even before refund is allowed. The provisions relating to refund and interest to be charged are quite distinct and different. In Chapter XIX, sections 237 to 241 deal with refund. Sections 243 and 244 deal with interest on refund or delayed refund. These provisions are independent. It may be, as the Tribunal has observed, that the interest is a statutory interest to be allowed without a claim. But that does not mean that the interest could be equated with a refund which an assessee is entitled to. The interest to be charged is consequential to the order of refund and also in addition to the refund.
11. The view taken by the Bombay High Court in CIT v. S.C Shah, [1982] 137 ITR 287, no doubt, supports the contention urged by Mr. Chandra Kumar. There it was observed (at page 293):
“The next question that arises for determination is whether the assessees had a right of appeal before the Appellate Assistant Commissioner against the order of the Income-tax Officer not granting interest for the period of delay in granting refund. Under the provisions of section 246(1)(f) of the Income-tax Act, an order under section 154 or section 155 having the effect of enhancing the assessment or reducing a refund or an order refusing to allow the claim made by the assessee under the said sections is an appealable order. In the present case, by his order dated 17th July, 1967, the Income-tax Officer rectified the assessment of the partner under the provisions of section 154 read with section 155 of the Income-tax Act. By his order, although he granted a refund, he did not grant any interest on the refund amount. His order, therefore, had the effect of reducing the amount repayable to the assessees. His order can, therefore, be construed as an order under section 154 read with section 155 of the Income-tax Act, reducing the amount of refund payable to the partners. In any case, his order can also be construed as an order which refused to allow the assessees' claim for interest on the refund amount to which they would have been entitled on the rectification made under these two sections. Such an order of the Income-tax Officer clearly falls within section 246(1)(f) and is appealable.”
12. It will be seen from the above observations that an order under section 154 granting refund without the interest allowable would amount to reducing the amount repayable to the assessee or reducing a refund and, therefore, such an order could be construed as an order under section 154 read with section 155 of the Act. With respect, we are unable to agree with that view. We have already stated that the expression “reducing a refund” envisaged under section 246(1)(f) presupposes that there should have been already an assessment order in which refund has been ordered and that refund upon rectification under section 154 read with section 155 of the Act must have been reduced. An order for the first time made under section 154 resulting in a refund cannot obviously fall within the fold of section 246(1)(f). We must, therefore, hold that the appeal preferred by the assessee before the Appellate Assistant Commissioner and the Tribunal were not maintainable.
13. In the conclusion that we have reached, questions Nos. (1) and (2) become academic and, therefore, they are not answered. We answer question No. 3 in the negative and in favour of the Revenue. In the circumstances of the case, we make no order as to costs.
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