IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE C.N.RAMACHANDRAN NAIR & THE HONOURABLE MR. JUSTICE V.K.MOHANAN MONDAY, THE 14TH DECEMBER 2009 / 23RD AGRAHAYANA 1931 ITA.No. 1022 of 2009() ---------------------- ITA.489/COCH/2007 of I.T.A.TRIBUNAL,COCHIN BENCH .................... APPELLANT/RESPONDENT ---------------------------------------- THE COMMISSIONER OF INCOME TAX,THRISSUR. BY ADV. SRI.JOSE JOSEPH, SC, FOR INCOME TAX RESPONDENT(S): APPELLANT ------------------------ M/S.SEGO RESTAURANT & AIRLAND LODGINGS, ROUND NORTH,TRICHUR. ADV. SRI.P.BALAKRISHNAN (E) FOR R1 THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 14/12/2009, THE COURT ON 14/12/2009 DELIVERED THE FOLLOWING: C.R. C.N.RAMACHANDRAN NAIR & V.K.MOHANAN, JJ. .................................................................... I.T. Appeal No.1022 of 2009 .................................................................... Dated this the 14th day of December, 2009. JUDGMENT Ramachandran Nair, J. This is an appeal filed by the Revenue challenging the order of the Tribunal cancelling demand of interest under Section 234B(3) of the Income Tax Act (hereinafter called “the Act”) in proceedings completed by the Assessing Officer under Section 154 of the Act. We have heard Senior Standing counsel appearing for the appellant and Adv.Sri.P.Balakrishnan appearing for the respondent-assessee. 2. When the return of the assessee filed for the year 1995-96 was processed under Section 143(1), the Assessing Officer found that the assessee had paid over 90% of the assessed tax as advance tax which included tax deducted at source as well. Even though the assessment was taken up for scrutiny and regular assessment under Section 143(3) was completed on 2.12.1997, the demand of tax remained the same and consequently there was no shortage of advance tax and so much so, 2 interest was not levied under Section 234B(1) of the Act. However, the assessment was modified under Section 147 on 18.2.2002 which led to an additional demand of Rs.84,824/-. Even though no interest was levied under Section 234B in the reassessment proceedings completed under Section 147, the Assessing Officer later rectified the reassessment under Section 154 levying interest under Section 234B(3) on the additional demand of tax. Even though first appeal was unsuccessful, the Tribunal on second appeal filed by the assessee, cancelled the demand of interest for the reason that interest under Section 234B(3) can be levied only if there was original levy of interest in first assessment under Section 234B(1) of the Act. The question raised by the Revenue is whether the Tribunal was justified in holding that interest under Section 234B(3) can be levied only if there was a levy of interest under Section 234B(1) of the Act. Since the question to be considered is on the interpretatio of Section 234B(3), we have to necessarily refer to the said provision and for easy reference we extract it hereunder: 3 “Where, as a result of an order of re-assessment or re- computation under section 147 or section 153A, the amount on which interest was payable under sub-section (1) is increased, the assessee shall be liable to pay simple interest at the rate of one per cent for every month or part of a month comprised in the period commencing on the day following the date of determination of total income under sub-section (1) of section 143 and where a regular assessment is made as is referred to in sub-section (1) following the date of such regular assessment and ending on the date of the re-assessment or re-computation under section 147 or section 153A, on the amount by which the tax on the total income determined on the basis of the re- assessment or re-computation exceeds the tax on the total income determined under sub-section (1) of section 143 or on the basis of the regular assessment aforesaid.” 3. The question to be considered is whether the above sub-section is attracted only if there is levy of interest under Section 234B(1) in the intimation issued under Section 143(1) or in the regular assessment completed under Section 143(3) as held by the Tribunal. Admittedly in this case in the determination of total income under sub-section (1) of Section 143 and in the regular assessment completed under Section 143 (3), the Assessing Officer found that the advance tax paid is 90% and above of the assessed tax and consequently there was no liability for 4 the assessee to pay any interest under Section 234B(1) of the Act which provides for interest only if payment of advance tax is less than 90% of the assessed tax. However, when assessment was revised under Section 147 to bring to tax escaped income, the tax demand went up leading to shortfall of advance tax payable under Section 234B(1) of the Act. In other words, the advance tax paid was less than 90% of the tax finally assessed and found payable in the income escaping assessment completed under Section 147 of the Act. The contention of the assessee is that the words “the amount on which interest was payable under sub-section(1) is increased” referred to in sub-section (3) happens only when there was a shortfall in payment of advance tax in the original assessment itself leading to levy of interest under Section 234B(1) so that when reassessment leads to further shortfall in payment of advance tax, interest liability arises under Section 234B(3) of the Act. Standing Counsel on the other hand submitted that for levy of interest under Section 234B(3), it is immaterial whether there was shortfall in advance tax in the regular assessment or not and according 5 to him, even if the first assessment led to refund of excess tax paid, still interest could be demanded under Section 234B(3) if on reassessment completed under Section 147 advance tax paid is found less than 90% of the tax assessed in reassessment proceedings. Counsel for the assessee brought to our notice Section 234D which was introduced by Finance Act 2003 with effect from 1.6.2003, which provides for levy of interest in the course of regular assesment on excess tax refunded in proceedings completed under Section 143(1) of the Act. According to assessee's counsel, Section 234B(3) could be invoked only for increasing the demand of interest levied in original assessment under Section 234B(1) and when no interest is demanded under the said provision in the original assessment, the Assessing Officer cannot invoke Section 234B(3) for levying interest for the first time after revision of assessment under Section 147 of the Act. We are unable to uphold the finding of the Tribunal and the contention of the counsel for the assessee because scheme of levy of interest for non-payment or short-payment of advance tax under various provisions of Section 6 234B is in stages. Interest under Section 234B(1) is attracted when the advance tax paid is found to be less than 90% of the assessed tax. While the advance tax paid remains a static amount, assessed tax will keep on changing depending on modifications made in assessment. The proceedings completed under Section 143(1) could be modified in a regular assessment under Section 143(3) which may lead to increase in demand of tax. Similarly when a regular assessment completed under Section 143(3) is revised under Section 147 and such a revised assessment leads to higher demand of tax, then the shortfall in advance tax naturally increases. Sub-section (1) and sub-section (3) provide for levy of interest for non-payment or short-payment of advance tax in stages. While in the regular assessment interest under Section 234B(1) is levied to the extent of shortfall in payment of advance tax upto date of such regular assessment, interest could be later levied if the assessment so completed is revised under Section 147 leading to higher demand of tax, thereby increasing the shortfall in payment of advance tax. However, it is specifically provided in sub-section (3) of Section 7 234B that the additional demand of interest under the said provision should be from the date following the date on which regular assessment was completed either under Section 143(1) or 143(3) of the Act. The only condition for levying interest under Section 234B(3) is increase in the shortfall in advance tax as a consequence of revision of assessment under Section 147 of the Act. While interest on shortfall in payment of advance tax is levied in the regular assessment under Section 234B(1) upto the date of completion of assessment, interest on further shortfall in advance tax with reference to tax determined on reassessment under Section 147 is levied under sub-section (3) of Section 234B. Increase in shortfall of advance tax on reassessment leads to levy of interest under Section 23B(3) and this Section does not require that in order to attract liability under it there should be a levy of interest in regular assessment under Section 234B(1) of the Act. In our view, even if the assessee is found to have paid full advance tax with reference to the income assessed in regular assessment and there was no occasion to levy any interest under Section 234B(1) of the Act, still assessee will 8 be liable to pay interest under Section 234B(3) if there is a shortfall in payment of advance tax with reference to the tax finally determined in reassessment completed under Section 147 of the Act. The scheme of various provisions of Section 234B is that interest for shortfall in advance tax is based on the tax finally determined under the provisions of the Act. Therefore, we hold that the assessee who was not liable to pay interest under Section 234B(1) of the Act in the regular assessment, is liable to pay interest under Section 234B(3) on the shortpayment of advance tax with reference to the tax assessed under Section 147 from the date following the regular assessment till date of completion of the revised assessment under Section 147. 4. The next contention to be considered is whether the Assessing Officer who did not levy interest under Section 234B(3) of the Act in reassessment, could levy interest in rectification proceedings completed under Section 154 of the Act. Here again, we are unable to accept the contention of the assessee that interest could not be levied in rectification proceedings under Section 154 because so long as interest 9 under Section 234B(3) is mandatory, omission in the reassessment completed under Section 147 will make it defective warranting it's rectification under Section 154 for levy of interest under Section 234B (3) of the Act. We, therefore, hold that the omission to levy interest under Section 234B(3) in reassessment completed under Section 147 could be made up in rectification proceedings under Section 154 of the Act. 5. In view of the above findings, we allow the appeal by reversing the order of the Tribunal and by restoring in principle the levy of interest under Section 234B(3) of the Act. However, we notice that interest is demanded under Section 234B(3) on the entire balance demand of tax raised in reassessment proceedings. Interest could be demanded under Section 234B(3) on the shortfall of advance tax paid. In other words, advance tax payable should be first determined based on reassessment and reduce therefrom actual amount of advance tax paid and interest should be demanded only on the differential amount, that too, from the date following the regular assessment till date of 10 completion of the assessment under Section 147. If there is mistake in the calculation of interest under Section 234B(3), there will be direction to the officer to correct the same in tune with the scheme of the Section as stated above. C.N.RAMACHANDRAN NAIR Judge V.K.MOHANAN Judge pms