Civil Appeals Nos
76 to 80 of 1971 From the Judgment and orders dated the 17th October 1968 of the Madhya Pradesh High Court in Misc
Petitions No 277 279 to 282 of 1966
G C Sharma P L Juneja and section P Nayar for the appellant
S Chowdhury Leila Seth and U K Khaitan for respondent
The Judgment of the Court was delivered by FAZAL ALI J
These appeals are by Income tax officer A  Ward Indore against the judgment of the Madhya Pradesh High Court and involve a question of law regarding the interpretation of section 220 sub sections
2 and 3 of the Income tax Act 1961
In order to understand the scope and ambit of the question involved it may be necessary to mention a few facts leading to these appeals
The respondent firm carries on the business of manufacturing cloth
In 1947 the then Maharaja of Gwalior granted to the firm exemption from tax for a period of twelve years from the date when the firm started its factories
Under the Part States Taxation Concessions Order 1950 the Commissioner of Income tax of the region concerned approved of the exemption only to the weaving division of the respondent for ten years but deferred decision regarding the staple fibre division until the  factory started functioning in 1954
The Commissioner was approached again for granting exemption but he refused to do so
The respondent thereafter moved the Hi h Court of Madhya Pradesh for cancelling the order of the 857 Commissioner refusing exemption
The writ petition before the High Court succeeded and the respondent s right to exemption was upheld by the High Court
Thereafter the Revenue filed an appeal to this Court which was allowed and by its order dated April 28 1964 reported in this Court reversed the decision of the High Court and maintained the order of the Commissioner refusing exemption
As a result of the cancellation of the exemption a huge amount of income tax became due from the respondent and the provisional assessments made for the years 1959 60 to 1965 65 reached the aggregate amount of over Rs 660 crores which was payable by the firm was actually demanded from the respondent
In fact the effect of the order of this Court was that the amount exempted became payable at once and was according demanded from the respondent but the respondent instead of paying the amount tried to negotiate with the Revenue for certain concessions
In this connection a series of correspondence followed between the respondent and the Income tax Department including a letter which was written by the assessee on December 26 1964 by which the assessee paid a sum of Rs 3 crores and wanted the balance of Rs 360 crores to be paid in instalments
The assessee further undertook to pay interest on the arrears at the rate  of 5 per annum even though under sub s 2 of section 220 of the Income tax Act 1961 hereinafter referred to as the Act he was required to pay interest at the rate of 4 only
In view of these favourable terms offered by the assessee the Income tax officer acceded to its request by his letter dated January 16 1965
The assessee had agreed to pay the arrears in the following manner Rs 10000000 by March 15 1966
Rs 12000000 by March 15 1967
Rs 13476000 by March 15 1968
Soon after the request of the assessee was granted by the Income tax officer sub section
2 of section 220 of the Act was amended by the Finance Act 1965 by which the rate of interest was increased from 4 to 6 per annum
In view of this amendment the Income tax Officer by his letter dated January 101966 informed the assessee that on the unpaid balance of tax arrears the respondent would be liable to pay interest at the rate of 6 per annum with effect from April 1 1965 instead of 5 as agreed to by the Income tax officer in his previous letter
The Income tax officer pointed out that this course was necessitated in view of the amendment made by the Finance Act 1965
Consequently a notice of demand under section 156 of the Act was served on the respondent which resulted in his filing writ petitions before the High Court with the result mentioned above
The main point urged in the petitions before the High Court by the respondent was that the Income tax officer having acceded to the request of the assessee a settlement between the parties was arrived at to pay the balance of arrears at the rate of interest at 5 per annum and it was not open to the Income tax officer to vary that 858 rate to the prejudice of the assessee even in spite of a change in the rate of interest by the Finance Act 1965 because a vested right could not be taken away by a statute which in terms did not apply retrospectively
This plea appears to have found favour with the High Court though not on the ground expressly taken by the respondent
The High Court found that in view of the notice of demand the liability of the assessee to pay the arrears arose only after the expiry of 35 days and this period had expired before the Finance Act 1965 amending section 2202 of the Act and therefore the Revenue had no jurisdiction to demand payment of the arrears at the rate of 6 interest
Thus it would appear that the High Court actually decided the case on a point which was not raised by the respondent in his petition but after making out a new case made out at the time of arguments and without giving any opportunity to the Revenue to rebut the same
The High Court has written a detailed judgment regarding the time as to when the liability of the assesse to where a notice of demand under section 156 of the Act is issued would arise
It is however not necessary for us to consider the reasons given by the High court in detail because in the view that we take we find that the basis on which the High Court has decided this case is wholly irrelevant and is not at all germane to the issue that was involved
It was not a case of a notice of demand under section 156 of the Act simpliciter but the admitted position was that in view of the decision f the Supreme court the respondent was in arrears of tax and had to pay heavy amounts of over Rs 66 crores
The respondent voluntarily paid the amount of Rs 3 crores and requested the Income tax officer to allow it to pay the balance in instalments and Persuaded the Income tax officer to accept the request even by agreeing to pay a higher rate of interest of 5 than the rate prescribed under section 222 of the Act
The liability to pay the arrears was never disputed and the only dispute between the parties was as to rate of interest that was payable
Section 22n sub sections
 2 and 3 run thus 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 four 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 inter st was payable under this section had been reduced
the interest shall be reduced accordingly and the excess interest paid if any shall be refunded
3 Without prejudice to the provisions contained in sub section 2 on an application made by the assessee before 859 the expiry of the due date under sub section 1 the Income tax officer may extend the time for payment or allow payment by instalments subject to such conditions as he may think fit to impose in the circumstances of the case
 The fact that the arrears were demanded from the assessee is not disputed as would appear from the statement made by the respondent in paragraph 2 of the writ petition filed before the High Court where it was averred thus Subsequently when assessments for the assessment years 1959 60 to 1964 65 were provisionally made a huge amount aggregating to over Rupees six and a half crores became payable and was demanded from the petitioner
 In these circumstances therefore the conditions precedent to the application of subs
2 of section 220 of the Act were undoubtedly fulfilled in this case
It would be seen that before the assessee entered into correspondence with the Revenue the rate of interest prescribed under sub section
2 of section 220 was only four per cent and yet the assessee offered to pay a higher rate namely 5 per annum is he was allowed to pay the arrears in instalments
This request of the assessee was accepted by the Income tax officer on January 16 1965 when there was no amendment in the provisions contained in section 2202 of the Act and the order passed by the Income tax officer must be construed as one made under sub section
3 of section 220 of the Act
It was suggested before the High Court that the order of the Income tax officer amounted to an irrevocable agreement which could not be varied merely because the rate of interest contained in sub section
2 of section 220 of the Act was enhanced
Mr section C Choudhry learned counsel for the respondent however has fairly conceded that there was no question of an agreement or settlement because section 2203 does not empower the Income tax officer to enter into agreement or settlement in order to bind the Revenue
We find ourselves in complete agreement with this view
Section 2203 merely empowers the Income tax officer to extend the time for payment or allow payment by instalments on such conditions as he may impose
In the instant case the Income tax officer merely exercised his powers under sub section
3 of section 220 by imposing the condition that the assessee shall be allowed to pay the arrears by instalments if he paid interest at the rate of 5 per annum offered by him
What is important however is that sub section
3 is not independent of sub section
2 but is inter connected with it
The words without prejudice to the provisions contained in sub section 2  clearly show that any order passed by the Income Tax officer under sub section
3 must neither be inconsistent with nor prejudicial to the provisions contained in sub section
In other words the Position is that although sub section
3 is an independent provision the power under this sub section has to be exercised subject to the terms and conditions mentioned in sub section
2 so far as they apply to the facts mentioned in sub section
Thus if sub section
2 of section 220 provided that the rate of interest chargeable would be 860 four per cent per annum any order passed under sub section 3 could not vary that rate and if it did then the order to that extent would stand superseded
The argument o the assessee
is that sub sections
2 and 3 of section 220 were independent provisions which operated in fields of their own
We are however unable to accept this somewhat broad proposition of law
Sub sections 2 and 3 form part of the same section namely section 220 and are therefore closely allied to each other
It is no doubt true that the two sub sections deal with separate issues but the non obstante clause of sub section
3 clearly restricts the order passed under sub section
3 to the conditions mentioned in sub section
2 of section 220 of the Act
Further more it is the Finance Act which fixes the rate of interest payable under sub section
2 of section 220 and it is common knowledge that every year the Finance Act makes important amendments in the rates payable under the various provisions of the Income tax Act
In these circumstances therefore it is not within the competence of the Income tax officer to vary the rate of interest fixed by the Finance Act under sub section
2 of section 220 from time to time
We are fortified in this view by a decision of this Court in Esthuri Aswathaiah vs Commissioner of Income tax Mysore1 where this Court observed thus The Income tax officer has no power to vary the rate on which the income of the previous year is to be assessed
The rate of tax is fixed by the Finance Act every year
By section 3 the tax is levied at that rate for an assessment year in respect of the income of the previous year
Once the length of the previous year is fixed and the income of the previous year is determined that income must be charged at the rate specified in the Finance Act and at no other rate
 As we have already pointed out sub section
3 of section 220 of the Act does not empower the officer to enter into and indefeasible settlement with the assessee or to clothe the Income tax officer with any such power so as to vary the statutory inhibition contained in sub section
Any order which is passed under sub section
3 would be subject to the rate of interest mentioned in sub section
2 and as soon as the rate mentioned in sub section
2 is varied or enhanced by the Legislature it would have to be read into sub section
2 from the date of the amendment and any order passed under sub section
3 would be subject to the rate so fixed
In fact if this is not the position then the order passed under sub section
3 being prejudicial to sub section
2 becomes illegal and invalid and the Income tax officer exceeds the limits of his jurisdiction in passing such an order
In the instant case the Finance Act of 1965 became effective form April 1 1965 and the Income tax officer in his letter dated 1 416
861 January 10 1966 to the assessee had merely given effect to the legal provisions of the Finance Act by insisting that in view of the variation in the rate of interest under sub s 2 of section 220 the assessee would have to pay interest at the rate of 6 per annum only from April 1 1965
There was absolutely no question of the Finance Act operating retrospectively near there was any question of the Finance Act taking away a vested right which had accrued to the assessee because we have already held that the order of the Income tax officer under sub section
3 of section 220 does not amount to any final settlement or agreement
There is yet another view of the matter
In the present case the assessee himself wanted extension of time for being allowed to pay the arrears by instalments
The assessee could be permitted to seek this indulgence under sub section
3 of section 220 only within the four corners of the law and not outside the same
The moment the Finance Act 1965 came into operation and the rate of interest in sub section
2 of section 220 was increased from 4 to 6 per annum any order passed by the Income tax officer would automatically operate in accordance with the Finance Act with effect from April 1 1965
This is what has happened in the present case
Thus it is manifest that the Income tax Officer could not have passed any order against the statutory provisions of sub section
2 of section 220 either with or without the consent of the assessee
Even the order of the Income tax officer dated January 16 1965 accepting the offer of the assessee to pay interest at the rate of 5 per annum was legally invalid because if the rate of interest fixed by the statute was 4 the parties could not be allowed to contract out of the statute
The only relief therefore which the assessee could get is that it was liable to pay interest at the rate of 4 and not 5 per annum for the period January to march 1965
But from April 1 1965 it was bound to pay interest at the rate of 6 per annum as found by the income tax officer
Reliance was placed by Mr G C Sharma appearing for me Revenue on a decision of the Orissa High Court in Biswanath Ghosh vs Income tax Officer Ward and Another1 where a Division Bench of that Court observed as follows As we find the Income tax officer has charged interest at 6 per cent until the provision was amended to enhance the rate of interest at 9 per cent
In fact in the counter affidavit given by the Income tax officer in OJC No 195 of 1972 that position has been clarified
Mr Pasayat for the petitioner claims that the rate of interest must he only at 6 per cent in view of the fact that default in this case had occurred prior to the amendment
It is only here that he relies upon the decision of the Madhya Pradesh High Court in Gwalior Rayon Silk Manufacturing Weaving Co vs Income tax Officer 1  374
862 That was a case in respect of penalty under section 2202 of the Act and the court took the view that the rate of interest as provided on the date when default occurred would apply to the facts of the case
We do not agree with the view expressed in the said decision
It is true that central Act 27 of 1967 has no retrospective effect but in respect of continuing default after the amendment in our view the rate of interest as provided thereunder would apply The Orissa High court expressly dissented from the view taken by the Madhya Pradesh High Court in the present judgment under appeal and we find ourselves in complete agreement with the view taken by the orissa High court
We have already pointed out the Madhya Pradesh High Court did not at all go into the question which really arose in this case with respect to the payment of interest at the rate of 6 per cent in accordance with the Finance Act 1965 
For these reasons therefore the appeals are allowed and the order of the High Court is set aside with slight modification namely In that the assessee shall pay interest on the entire amount of arrears the rate of 4 per cent per annum only during the period January to March 1965
So far as rest of the period is concerned the order of the Income tax officer directing the assessee to pay interest at the rate of 6 per cent per annum is restored
In view of the peculiar circumstances of the case however we leave the parties to bear their own costs throughout
PBR Appeals allowed


Summary:
Sub section 2 of 9 220 of the Income tax Act
1961 makes an assessee liable to pay simple interest at 4 pa
if the amount specified in any notice of demand under section 156 was not paid within the period limited under sub section
Sub section 3 states that without prejudice to the provisions contained in sub section
2 on an application made by the assessee before the expiry of the due date under sub section
1 the Income tax officer may extend the time for payment or allow payment by instalments subject to such conditions as he may think fit to impose in the circumstances of the case
Out of a large sum of money which became payable by the respondent as income tax half the amount was paid and in respect of the remaining half which was allowed to be paid in three instalments the respondent had under taken to pay interest at the rate of 5 pa
even though section 2202 of the Income tax Act 1961 prescribed 4 as the rate of interest payable on such arrears
The Income tax Officer accepted the term
By the Finance Act 1965 the rate of interest payable under this section was raised from 4 to 6 pa
On receipt of a notice from the Income tax officer that on the unpaid balance of the tax arrears the company was liable to pay interest at 6 pa the respondent moved the high Court contending that it was not open to the Income tax officer to vary the rate from 5 to 6 even in spite of the change made by the Finance Act 1965 in that a vested right could not be taken away by a statute which did not apply retrospectively
The High Court allowed the writ petition
On appeal to this Court it was contended by the respondent that sub sections
2 and 3 of section 220 were independent provisions which operated in fields of their own
Allowing the appeal to this Court  HELD 1 Sub sections 2 and 3 form part of the same section namely section 220 and are therefore closely allied to each other
It is true that the two sub sections deal with separate issues but the non obstante clause of sub section 3 clearly restricts the order passed under sub section
3 to the conditions mentioned in sub section
2 of section 220 of the Act
860 B 2 It is the Finance Act which fixes the rate of interest payable under sub section
2 of section 220
It is not within the competence of the Income tax officer to vary the rate of interest fixed by the Finance Act under subs
2 of section 220 from time to time
860C D Esthuri Aswathaiah vs Commissioner of Income fax Mysore and 416 followed
3 Sub section 3 of section 220 does not empower the Income tax officer to enter into any indefeasible settlement with the assessee or to clothe the Income tax officer with any such power so as to vary the statutory inhibition contained 856 in sub section
Any order which is passed under sub section
3 would be subject to the rate of interest mentioned in sub section 2 and as soon as the rate mentioned in sub section
2 is varied or enhanced by the legislature it would have to be read into sub section
2 from the date of the amendment and any order passed under sub section
3  would be subject to the rate so fixed
If this is not the position then the order passed under sub section
3 being prejudicial to sub section
2 becomes illegal and invalid and the Income tax officer exceeds the limits of his jurisdiction in passing such an order
860F H In the instant case there was no question of the Finance Act operating retrospectively nor was there any question of the Finance Act taking away a vested right which had accrued to the assessee because the order of the Income tax officer under sub section
3 of section 220 does not amount to any final settlement or agreement
The notice had merely given effect to the legal provisions of the Finance Act
861 B 4 In is manifest that the Income tax officer could not have passed any order against the statutory provisions of sub section
 2 of section 220 either with or without the consent of  the assessee
Even the order of the Income tax officer accepting the Offer
Of the assesse to pay interest at the rate of 5 pa was legally invalid because if the rate of interest fixed by the statute was 4 the parties could not be allowed to contract out of the statute
The only relief which the assessee could get was to pay interest at 4 pa
prior to the Finance Act 1965 and at 6 after 1st April 1965
861D E Biswanath Ghosh vs Income tax officer Ward B and Another  374 approved