SCA/8976/1995 1/37 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD SPECIAL CIVIL APPLICATION No. 8976 of 1995 For Approval and Signature: HONOURABLE MR.JUSTICE D.A.MEHTA Sd/- HONOURABLE MR.JUSTICE BANKIM.N.MEHTA Sd/- ========================================================= 1 Whether Reporters of Local Papers may be allowed to see the judgment ? YES 2 To be referred to the Reporter or not ? YES 3 Whether their Lordships wish to see the fair copy of the judgment ? NO 4 Whether this case involves a substantial question of law as to the interpretation of the constitution of India, 1950 or any order made thereunder ? NO 5 Whether it is to be circulated to the civil judge ? NO ========================================================= ROSHANLAL S JAIN & OTHERS (A O P) - Petitioner(s) Versus DEPUTY COMMISSIONER OF INCOME-TAX (ASSESSMENT) & 1 - Respondent(s) ========================================================= Appearance : MR JP SHAH for Petitioner(s) : 1, NOTICE SERVED BY DS for Respondent(s) : 1, MR MANISH R BHATT for Respondent(s) : 1, SERVED BY RPAD - (R) for Respondent(s) : 2, MR KETAN A DAVE for Respondent(s) : 2, ========================================================= CORAM : HONOURABLE MR.JUSTICE D.A.MEHTA and HONOURABLE MR.JUSTICE BANKIM.N.MEHTA Date : 23/09/2008 ORAL JUDGMENT SCA/8976/1995 2/37 JUDGMENT (Per : HONOURABLE MR.JUSTICE D.A.MEHTA) SYNOPSIS. Sr.No. CONTENTS Paragraph No. 1 to 26 01 FACTS 1 - 3 02 CONTENTIONS : (a) Petitioner (b) Respondent 4 – 7.4 8 - 8.4 03 REASONING 9 - 25 04 CONCLUSION 26 1. The petitioner, an Association of persons, has preferred this petition challenging :[i] the calculation of interest and the notice of demand for the three Assessment Years under consideration as bad in law to the extent there is an overcharging of interest; [ii] Section 234A of the Income Tax Act,1961 (the Act) is ultravires to the extent the said section provides for charging of interest evenafter the payment of tax; [iii] Sections 234A and 234B of the Act of the Act are ultravires to the extent both the provisions charge interest for the same period making the petitioner liable to interest @ 48%. 2. Assessment Years in question are 1991-92, 1992- SCA/8976/1995 3/37 JUDGMENT 93 and 1993-94, the respective accounting periods being financial years ended on 31.3.1991, 31.3.1992 and 31.3.1993 respectively. Respondent No.1 (hereinafter referred to as 'the respondent authority') is the Assessing Officer having jurisdiction over the petitioner assessee. Assessment orders for the three years in question were passed by the Assessing Officer and while calculating total amount payable by the petitioner assessee interest under sections 234A, 234B and 234C of the Act was charged by the respondent authority. Pursuant to assessments framed on 14.3.1995 for the three years under consideration notices of demand at Exhibits E1, E2, and E3 were issued on 28.3.1985. It is these notices of demand which are under challenge on merits apart from the challenge to constitutional validity of provisions of sections 234A and 234B of the Act. 3. The prayers made in the petition read as under: “12.In the premises aforesaid, the petitioner prays that : (1)this Hon'ble Court be pleased to call for the records SCA/8976/1995 4/37 JUDGMENT of the proceedings, look into them and issue a writ of certiorari or any other appropriate writ, order or direction quashing the demand notices at Exhibits E1, E2 and E3. (2)this Hon'ble Court be pleased to issue a writ of mandamus or any other appropriate writ, order or direction, directing the respondent not to collect the interest as charged in the above demand notices; (3)this Hon'ble Court be pleased to declare that section 234A is ultra vires to the extent it provides for charging of interest even after the payment of taxes and that both sections 234A and 234B are ultra vires to the extent both of them charge interest for the same period making the assessee liable to 48% rate of interest for that period; (4)this Hon'ble Court be pleased to instruct the department to adjust payments made before filing the return first against Income Tax payable and not against the interest as has been done by the department while calculating the interest payable under section 234B of the Act. (5)that pending the hearing and final disposal of this application this Hon'ble Court be pleased to ask Respondent No.1 to maintain status quo in the matter of recovery of interest calculated and demanded in the demand notices at Exhibits E1, E2 & E3; (6)that this Hon'ble Court be pleased to grant any further or other relief as this Hon'ble Court deems just and proper in the circumstances of the case; (7)that this Hon'ble Court be pleased to allow this petition with costs against the Respondent.” SCA/8976/1995 5/37 JUDGMENT 4. The learned Counsel for the petitioner has submitted that the calculation of interest and notices of demand are bad in law to the extent there is overcharging of interest in each of the years under consideration which is to the extent of following amounts : “A.Y. 1991-92 5,93,316/- A.Y. 1992-93 75,582/- A.Y. 1993-94 16,04,423/- ----------- Total 22,73,321/- ----------- “ In regard to the challenge raised, the petitioner has summarised difference of opinion between the petitioner and the respondent in the following words : “(i) Regarding interest u/s 234A, according to the petitioner interest can be charged on tax payable from the due date of filing of the return of income to the date of payment of tax but according to the department the interest is payable not upto the date of paying off of the tax but even thereafter till the date of filing of the return of income. (ii) In respect of charging of interest u/s SCA/8976/1995 6/37 JUDGMENT 234B, the department has charged the interest on interest whereas the petitioner contends to the contrary. (iii)According to the department for some part of common period 48% interest is payable under the Act which means interest becomes chargeable for some part of the period both u/s 234A and u/s 234B whereas according to the petitioner, the interest is not to be charged for any part of the period under both these sections simultaneously, which means no part of the dues will suffer more than 24% of interest”. 5. In relation to the challenge to constitutional validity of the two sections the submission, in the alternative, is that in the event the interpretation placed by the petitioner on the provisions of Sections 234A and 234B of the Act is not accepted, then the provision of section 234A of the Act to the extent the interest runs evenafter payment of tax falls foul of Article 14 of the Constitution of India as being irrational, arbitrary and the provision cannot be justified for any imaginable reasons. Similarly in relation to section 234B of the Act it was submitted by the learned Counsel, again in the alternative, that where the interest is payable under SCA/8976/1995 7/37 JUDGMENT both the provisions viz. sections 234A and 234B of the Act there would be double charging of interest and hence section 234B of the Act should be read down to save the provision from the very same charge of irrationality and unconstitutionality, or either both the provisions or any one of them be declared as ultavires the Constitution to the extent the provisions impose liability of paying interest over again for the same period amounting to interest being charged at the rate of 48%. 6. The contentions raised on behalf of the petitioner can be broadly divided into two categories : the first being on the interpretation of provisions and the second being on the basis of validity of the provisions. 7. In relation to the first contention the learned Advocate placed great emphasis on Delhi High Court judgment in the case of Dr. Prannoy Roy and Anr. Vs. CIT (2002) 254 ITR 755 to contend that interest under section 234A would be payable only in a case where SCA/8976/1995 8/37 JUDGMENT tax had not been deposited prior to the due date of the filing of the return. It was submitted that the said decision dealt with all the issues relating to operation of section 234A of the Act and was a complete answer to the stand of the department. That the Court should therefore hold that in sofaras interest charged u/s. 234A of the Act is concerned, once it is found that prior to the date of filing of return of income the entire tax had been paid no interest could be charged. It was submitted that as held by the following two decisions of the Apex Court and the decision of Karnataka High Court payment of interest was compensatory in nature and therefore also no interest should be levied and collected in relation to the amount which had already paid to the Revenue. (1986)160 ITR 961 – Central Provinces Manganese Ore. Co. Ltd. Vs. CIT, - with special reference to observations at page No.966 of the report. (1988)169 ITR 221 – Ganesh Dass Sreeram Vs. Income Tax Officer,-with special emphasis as to observations at page No.230 of the report. SCA/8976/1995 9/37 JUDGMENT (1998)232 ITR 62 – Dr.S.Reddappa And Ors. Vs. Union of India and ors,- with special reference to observations at page No. 71 of the report. 7.1 It was further submitted that once one High Court had interpreted a provision the said judgment must normally be followed by other High Courts considering that Income Tax Act is an All India Statute. For this purpose reliance was placed on a decision of this Court in case of CIT Vs. Deepak Family Trust, (1995) 211 ITR 575, wherein earlier decisions of Bombay High Court were referred to. Emphasis was laid on the case of Maneklal Chunilal (1953) 24 ITR 375 (Bom.) to contend that so far this principle was consistently followed by this High Court holding that it would be a wise judicial policy and practice not to take a different view even if the High Court is of the opinion that a different view of the matter should be taken. 7.2 In support of the submissions made as to why provisions of sections 234A and 234B of the Act should be read as contended by the petitioner SCA/8976/1995 10/37 JUDGMENT following decisions were cited to emphasise the principles of interpretation laid down by the Apex Court. [i] (1971)82 ITR 570 R.B.Jodha Mal Kuthiala Vs. CIT. [ii] (1981)131 ITR 597 K.P. Varghese Vs. Income Tax Officer. [iii](1965) 57 ITR 176 CIT Vs. Gangadhar Banerjee And Co. (Pvt.)Ltd. [iv] (1985)156 ITR 323 CIT Vs. J.H.Gotia. [v] (1996)220 ITR 50 Commissioner of Gift Tax Vs. Smt. C.D.R.Laxmidevi. The propositions canvassed on basis of the aforesaid decisions were that while interpreting a taxing statute the provision has to be interpreted reasonably and in consonance with justice even though it may be true that equitable considerations are irrelevant in interpreting tax laws. That where required, the Court must construe the statutory provisions so as to avoid absurdity and mischief; where the plain literal interpretation of a statutory provision produces a manifestly unjust result which could never have been intended by the Legislature, SCA/8976/1995 11/37 JUDGMENT the Court is entitled to modify the language used by the Legislature or even do some violence so as to achieve the intention of the Legislature and produce a rational construction. That attempt should be made to ensure that equity and taxation do not always remain strangers and construction which results in equity rather than injustice, should be preferred to the literal construction. That Court would not adopt such an interpretation which would expose the statute to the vice of being ultravires the Constitution. 7.3 As regards the contention based on challenge to constitutional validity of the provisions attention was invited to the following decisions : [1] AIR 1974 SC 555 E.P.Royappa Vs. State of Tamil Nadu - with special reference to paragraph Nos. 85 and 86 of the judgment. [2] AIR 1978 SC 597 P.K. Varghese Vs. Income Tax Officer – with special reference to paragraph No.56 of the judgment. [3] 1995(1) SCC 519 State of T.N. & Ors Vs. Ananthiammal & Ors. with special reference to paragraph No.7 of the judgment. [4] 2007(6) SCC 668 Bidhannagar (Saltlake) Welfare Assn. Vs. Central SCA/8976/1995 12/37 JUDGMENT Valuation Board & Ors. with special reference to paragraph No.37 and other paragraphs dealing with interpretation of statutes. It was submitted, based on these decisions that even in taxing statutes reasonableness of the provision has to be considered in context of rights of a person vis-a-vis other similarly situated persons and if the provision is found to be arbitrary and/or irrational the same should be either read down or should be held to be ultravires the Constitution. That in the instant case insofar as section 234A of the Act is concerned the same be held to be ultravires the Constitution to the extent the provision requires an assessee to pay interest even after the tax has been paid before filing of the return. Similarly in relation to section 234B of the Act, it was submitted that when the said provision, as read by respondent authority, charges interest for the same period for which interest had already been charged u/s. 234A of the Act, the said provision was unreasonable and had to be struck down. Alternatively, the provision be read down so as to ensure that an assessee is not called upon to pay SCA/8976/1995 13/37 JUDGMENT double interest for the same period. 7.4 It was therefore urged that the interest charged under the two provisions to the extent there was overcharging in each year be held to be bad in law and/or ultravires the Constitution. 7.5 An incidental contention was also raised based on provisions of sections 59 to 61 of the Indian Contract Act, 1872 to submit that the respondent authority had erred in law in not treating the amount of tax paid as tax and appropriating the same towards interest and thus charging interest on an amount which in fact had already been paid as tax. For this purpose attention was invited to certain challans of payment to point out that the said challans specifically denoted that the amount paid under the said challans was towards tax and not interest. That in fact both the respondent authority and the assessee had understood the said aspect of the matter in same sense as could be seen from the final part of the respective assessment orders where the SCA/8976/1995 14/37 JUDGMENT respondent authority had directed to give credit for prepaid taxes but it was only while calculating interest that such credit was denied. That the said practice adopted by the assessee was in consonance with provisions of section 139(9) of the Act and the Explanation thereunder which required an assessee to attach proof of payment of taxes before filing return of income as otherwise the return of income would be treated as a defective return. 8. On behalf of the respondent authority learned Senior Standing Counsel submitted that the petitioner could not be given credit for the tax paid after the end of the Financial Year but before the date of filing of the return considering the statutory scheme commencing from section 207 of the Act relating to advance tax. For this purpose, reliance was placed on decision of this Court in the case of Life Bond Fabric Pvt. Ltd. Vs. CIT, (1995)216 ITR 529 to contend that the interest which was leviable had to be calculated in terms of the statutory scheme of the Act and there was no discretion vested in the SCA/8976/1995 15/37 JUDGMENT Assessing Authority, as well as Apex Court decision in case of CIT vs. Hindustan Bulk Carriers (2003) 259 ITR 449 with special reference to observation at page No.458 of the report. 8.1 Responding to the contention raised on behalf of the petitioner based on consistent practice to follow a judgment of another High Court even in case where the Court was otherwise not agreeable with the view expressed it was submitted that in fact, this High Court had already explained the circumstances in which a different view could be adopted as laid down in the case of N.R.Paper And Board Limited and Ors. Vs. Deputy Commissioner of Income Tax, (1998) 234 ITR 733. 8.2 As regards the challenge to constitutional validity of the provisions attention was invited to the decision of Karnataka High Court in the case of Dr.S.Reddappa and Ors. Vs. Union of India and Ors.(supra) with special reference to observations at page Nos. 70 and 71, as well as judgment of Bombay High Court in the case of Umesh S. Bangera Vs. Union of India & Ors. SCA/8976/1995 16/37 JUDGMENT (2004) 268 ITR 405 with special reference to observations at page Nos. 409, 410 and 411. It was submitted that the provisions of sections 234A and 234B of the Act being compensatory in nature for breach of civil obligation cannot be termed to be unreasonable as the provisions accord uniform treatment to similarly situated persons and have eliminated the subjective discretion of the Taxing Authority and thus obviated arbitrariness. That the safeguard provided in the statute itself cannot be termed to be penal in nature and thereby unconstitutional. 8.3 Responding to the contention that interest was being charged for the same period over again, the learned Counsel pointed out that both the defaults u/Ss. 234A and 234B of the Act are in respect of separate civil obligations and therefore cannot be held to be either bad in law or unconstitutional. 8.4 Lastly, it was contended that in absence of any contract between the petitioner and the respondent SCA/8976/1995 17/37 JUDGMENT authority, the provisions of Indian Contract Act cannot be pressed into service by the petitioner and even otherwise as held by the Apex Court in the case of I.C.D.S. Ltd. Vs. Smithaben H.Patel & Ors. AIR 1999 SC 1036, the provisions can apply only in a case where there are different debts whereas in the present case there are no different debts. 9. For the purpose of appreciating the contentions raised it is necessary to consider the provisions of sections 234A and 234B of the Act. The relevant extracts relatable to the Assessment Years in question read as under: “Interest for defaults in furnishing return of income. 234A.(1) Where the return of income for any assessment year under sub-section (1) or sub-section (4) of section 139, or in response to a notice under sub-section (1) of section 142, is furnished after the due date, or is not furnished, the assessee shall be liable to pay simple interest at the rte of two percent for every month or part of a month comprised in the period commencing on the date immediately following SCA/8976/1995 18/37 JUDGMENT the due date, and,- (a) where the return is furnished after the due date, ending on the date of furnishing of the return; or (b) where no return has been furnished, ending on the date of completion of the assessment under section 144, on the amount of [the tax on the total income as determined under sub-section (1) of section 143 or on regular assessment as reduced by the advance tax, if any, paid an any tax deducted or collected at source]” xxx xxx xxx “Interest for defaults in payment of advance tax. 234B.(1) Subject to the other provisions of this section, where, in any financial year, an assessee who is liable to pay advance tax under section 208 has failed to pay such tax or, where the advance tax paid by such assessee under the provisions of section 210 is less than ninety per cent of the assessed tax, the assessee shall be liable to pay simple interest at the rate of two per cent for every month or part of a month comprised in the period from the 1st day of April next following such financial year [to the date of determination of total income under sub-section (1) of section 143 or regular assessment], on an amount equal to the assessed tax or, as the case may be, on the amount by which the advance tax paid as SCA/8976/1995 19/37 JUDGMENT aforesaid falls short of the assessed tax]”. 10. On a plain reading of the aforesaid two provisions, it is apparent that section 234A of the Act is in relation to liability to pay interest for default in late furnishing of return or non furnishing of return, while section 234B of the Act pertains to liability to pay interest for default in payment of advance tax. However, in both the provisions interest is payable on the amount which is the difference between the amount of tax payable on the total income as determined u/s. 143(1) of the Act or on regular assessment as reduced by the advance tax paid, deducted at source, or collected at source. 11. Therefore, one has to consider what is the meaning of advance tax, tax deducted at source and tax collected at source. The definition of the term 'advance tax' appears in section 2(1) to mean advance tax payable in accordance with provisions of Chapter XVIIC. Before adverting to Chapter XVIIC of the Act, a look at section 4 of the Act would be helpful. The said provision deals with Charge of SCA/8976/1995 20/37 JUDGMENT income tax and provides that income tax shall be charged for any Assessment Year at the prescribed rates in accordance with and subject to the provisions of the Act in respect of the total income of the previous year of every person. Sub-section (2) of Section 4 of the Act lays down that in respect of income chargeable under sub-section (1) income tax shall be deducted at source or paid in advance, where it is so deductible or payable under any provision of the Act. Therefore, the scheme that emerges is that income tax is chargeable for any Assessment year in relation to total income of the previous year and such income tax is payable by the mode of deduction at source or by the mode of payment in advance as prescribed. Previous year in relation to any Assessment Year has been defined under sub-section (2) of section 3 to mean the period which begins with the date immediately following the last day of the previous year relevant to the Assessment Year commencing on 1st April and ending on 31st March. 12. Chapter XVII relates to COLLECTION AND RECOVERY SCA/8976/1995 21/37 JUDGMENT OF TAX. Under part 'A' section 190 of the Act provides for Deduction at source and advance payment. Under sub-section (1) of section 190 of the Act, it is provided that notwithstanding that the regular assessment in respect of any income is to be made in a later assessment year, the tax on such income shall be payable by deduction or collection at source or by advance payment, as the case may be, in accordance with the provisions of Chapter XVII. Thus section 190 of the Act provides for the situation where even if the regular assessment is framed subsequently, viz. in later Assessment Year, even then in respect of any income for which such regular assessment is to be made the tax shall be payable either by deduction or collection at source or by advance payment in the mode and manner prescribed by the provisions of Chapter XVII of the Act. 13. Part 'C' of Chapter XVII deals with Advance payment of tax and under section 207 of the Act the Liability for payment of advance tax is prescribed. SCA/8976/1995 22/37 JUDGMENT The said provision stipulates that tax shall be payable in advance during any Financial Year in accordance with provisions of sections 208 to 219 in respect of total income of the assessee which would be chargeable to tax for the Assessment Year immediately following that Financial Year. Thus on a conjoint reading of section 4, section 2(1), section 190 and section 207 of the Act the scheme that emerges is that eventhough assessment of the total income may be made later in point of time the liability to pay income tax is relatable to the Financial Year immediately preceding the