I.T.R No.12 of 2002 -1- *** IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH I.T.R No.12 of 2002 Date of decision: 24.9.2010 Haryana Financial Corporation, Chandigarh ...Petitioner Versus The Commissioner of Income-tax, Haryana, Rohtak ...Respondent CORAM: HON'BLE MR.JUSTICE ADARSH KUMAR GOEL HON'BLE MR.JUSTICE AJAY KUMAR MITTAL Present: Mr. Kamal Sehgal, Advocate for the petitioner. Mr. Yogesh Putney, Advocate for the respondent. **** ADARSH KUMAR GOEL, J ( Oral) 1. The Income Tax Appellate Tribunal, Chandigarh Bench (hereinafter referred to as “the Tribunal”) has referred the following questions of law for opinion of this Court under Section 256 (1) of the Income Tax Act, 1961 ( for short “the Act') arising out of its consolidated order dated 9.4.2001 in I.T.A.Nos.3786 & 3787/Del/ 1990, in respect of the assessment years 1978-79 and 1980-81:- “1. Whether on the facts and in the circumstance of the case, the Tribunal was right in law in confirming the order passed by CIT (A) of rejecting application u/s 154 and impliedly confirming the order of levy of interest u/s 220(2) for period commencing from expiry of period I.T.R No.12 of 2002 -2- *** stipulated in first demand notice served till the demand was revived by the Tribunal's order of rectification? 2. Whether before levying of interest u/s 220(2), as above, the assessee is entitled to opportunity of being heard from the AO?” 2. The assessee-Corporation is a financial institution set up by the State of Haryana under the provisions of State Financial Corporation Act, 1951. It derives income from interest on loans advanced. The Assessing Officer disallowed certain deductions and thus made addition to the declared income. On that basis, demand for tax was created under Section 220(2) of the Act. On appeal, the demand was reduced but thereafter on further appeal, the addition made by the Assessing Officer was sustained. After the assessment by the Assessing Officer, the assessee did not pay the tax due for which notice under section 220(2) was duly served on it. On appeal, the assessee having succeeded which order was reversed by Tribunal, question was whether a fresh notice was required after the order of Tribunal and whether in view of appellate order in favour of the assessee, earlier demand notice based on order of assessment by the Assessing Officer could be enforced; whether interest liability continued for the period between appellate order in favour of the assessee and order of Tribunal restoring the order of Assessing officer against the assessee. The assessee made an application under Section 154 of the Act seeking rectification of the order creating interest liability, which was rejected by the Assessing Officer which I.T.R No.12 of 2002 -3- *** order was affirmed on further appeal by the CIT as well as the Tribunal. 3. Observations recorded by the Tribunal to the extent relevant for determining the questions referred are as under:- “We have heard the rival submissions, perused the record and carefully gone through the case law cited before us and as recorded on the orders of the authorities below. We find that, in order to treat the assessee in default and liable to interest u/s 220(2) of the IT Act, it should have defaulted in making payment of demand within the stipulated time. In this case, demand was payable after completion of assessment and service of first demand notice, in pursuance of order of assessment dated 11.10.1983 and, as per order u/s 220(2), interest was charged w.e.f. 16.11.1983 onwards. This action of the A.O. to us, appears to be in line with decisions of various High Courts including that of the Karnataka High Court in the case of Vikrant Tyres Ltd. V. First ITO (1993) 202 I.T.R. 454 and also Board's circular No.334 dated 3.4.1982. In view of the entire facts and circumstances of the case, we are of the considered view that interest u/s 220 (2) has rightly been charged for both the years under consideration and no rectification is required against such orders. We uphold the impugned orders and find no merit in the appeals of the assessee. I.T.R No.12 of 2002 -4- *** 4. We have heard learned counsel for the parties. 5. Learned counsel for the assessee submits that plain interpretation of Section 220(2) of the Act is that if amount of tax liability is reduced as a result of appellate order, the interest has to be reduced accordingly. Thus, for the period during which the appellate order remained in operation, liability on the assessee to pay interest will be as per the said order. Even if original demand is revived as a result of later order of higher appellate authority, there is no provision for charging interest for the entire period on the amount which is finally found out. The Tribunal followed the judgment of Karnataka High Court in the case of Vikrant Tyres Ltd. V. First ITO (1993) 202 I.T.R. 454, which stands reversed by Hon'ble Supreme Court in Vikrant Tyres Ltd. Vs. First Income Tax Officer (2001) 247 I.T.R. 821 holding:- “It is settled principle in law that the courts while construing revenue Acts have to give a fair and reasonable construction to the language of a statute without leaning to one side or the other, meaning thereby that no tax or levy can be imposed on a subject by an Act of Parliament without the words of the statute clearly showing an intention to lay the burden on the subject. In this process, the courts must adhere to the words of the statute and the so-called equitable construction of those words of the statute is not permissible. The task of the court is to construe the provisions of the taxing I.T.R No.12 of 2002 -5- *** enactments according to the ordinary and natural meaning of the language used and then to apply that meaning to the facts of the case and in that process if the taxpayer is brought within the net he is caught, otherwise he has to go free. This principle in law is settled by this court in India Carbon Ltd. V. State of Assam [1997] 106 STC 460; [1997] 6 SCC 479 wherein this court held (page 464) “Interest can be levied and charged on delayed payment of tax only if the statute that levies and charges the tax makes a substantive provision in this behalf. “ A Constitution Bench of this court speaking through one of us (S.P. Bharucha J.) in the case of V.V.S. Sugars V. Government of A.P. [1999] 114 STC 47; [1999] 4 SCC 192 reiterated the proposition laid down in the India Carbon Ltd.'s case [1997] 106 STC 460 in the following words (headnote of [1999] 4 SCC): “The Act in question is a taxing statute and, therefore, must be interpreted as it reads, with no additions and no subtractions, on the ground of legislative intendment or otherwise.” If we apply this principle in interpreting section 220 of the Act, we find that the condition precedent for invoking the said section is only if there is a default in payment of the amount demanded under a notice by the Revenue within the time stipulated therein and if such a demand is not satisfied then section 220(2) I.T.R No.12 of 2002 -6- *** can be invoked.” 6. Learned counsel for the revenue on the other hand submits that judgment of the Hon'ble Supreme Court in Vikrant Tyres Ltd.'s (supra) does not apply to the present case as therein the assessee paid the amount as per demand which was refunded in pursuance of the appellate order and again paid after fresh demand was made. On the facts in that case Section 3 of the Taxation Laws (Continuation and Validation of Recovery Proceedings) Act, 1964 ( hereinafter referred to as “Validation Act”) was held not to be applicable. Thus, even if plain language of provisions of Section 220 (2) of the Act is taken into account, Section 3 of the Validation Act could not be ignored. He relies on judgment of Madras High Court in Super Spinning Mills Ltd. Vs. Commissioner of Income Tax and another (2000) 244 ITR 814. 7. Before dealing with the questions referred, it will be appropriate to refer to relevant provision of Section 220(2) of the Act and Section 3 of the Validation Act, which are extracted below:- Section 220(2) of the Act:- “220 (1) XXX XXX XXX (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 one percent for every month or part of a month comprised in the period commencing from the day immediately following the end of the period mentioned I.T.R No.12 of 2002 -7- *** in sub-section (1) and ending with the day on which the amount is paid. 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 264 [or an order of the Settlement Commission under sub-section (4) of section 245D], the amount on which interest was payable under this section had been reduced, the interest shall be reduced accordingly and the excess interest paid, if any, shall be refunded. Provided further that in respect of any period commencing on or before the 31st day of March, 1989 and ending after that date, such interest shall, in respect of so much of such period as falls after that date, be calculated at the rate of one and one-half per cent for every month or part of a month.” Section 3 of the Validation Act:- “3. Continuation and validation of certain proceedings.—(1) Where any notice of demand in respect of any Government dues is served upon an assessee by a Taxing Authority under any scheduled Act, and any appeal or other proceeding is filed or taken in respect of such Government dues, then,— (a) where such Government dues are enhanced in such appeal or proceeding, the Taxing Authority shall serve upon the I.T.R No.12 of 2002 -8- *** assessee another notice of demand only in respect of the amount by which such Government dues are enhanced and any proceedings in relation to such Government dues as are covered by the notice or notices of demand served upon him before the disposal of such appeal or proceeding may, without the service of any fresh notice of demand, be continued from the stage at which such proceedings stood immediately before such disposal; (underlining supplied). Xx xx xxx xxxx xxxx” 8. A perusal of the above shows that where any notice of demand has already been served, it could continue for demand created thereby. This interpretation is supported by principle of restitution enacted in Section 144 of the Code of Civil Procedure which is as under:- “144. Application for restitution:- (1) Where and in so far as a degree or an order is varied or reversed in any appeal, revision or other proceeding or is set aside or modified in any suit instituted for the purpose, the Court which passed the decree or order shall, on the application of any party entitled to any benefit by way of restitution or otherwise, cause such restitution to be made as well, so far as may be, place the parties in the position which they would have occupied but for such decree or order or such part thereof as has been varied, reversed, set aside or modified and, for this purpose, the Court may make any orders, including orders for the refund or costs and for the payment of interest, damages, compensation and I.T.R No.12 of 2002 -9- *** mesne profits, which are property consequential on such variation, reversal, setting aside or modification of the decree or order.” 9. It appears that before the Hon'ble Supreme Court in Income- tax Officer, Kolar and another Vs. Seghu Buchiah Setty (1964) 7 SCR 148, an interpretation was taken that if a demand is reduced by the appellate authority, steps taken for recovery of the original demand become null and void unless fresh demand is raised in pursuance of appellate order. This interpretation was superseded by Parliament by enacting the Validation Act. 10. In Mohan Wahi v. CIT, (2001) 4 SCC 362, the position was noticed thus:- “16. The provision corresponding with Section 156 of the Income Tax Act, 1961 contained in Section 29 of the Income Tax Act, 1922 came up for the consideration of this Court in ITO v. Seghu Buchiah Setty, AIR 1964 SC 1473 Hidayatullah, J. (as his Lordship then was) held that it is after the demand is made, the tax penalty and interest become a debt due to the Government — “The notice of demand is a vital document in many respects.” Disobedience to it makes the assessee a defaulter. It is a condition precedent to the treatment of the tax as an arrear of land revenue. His Lordship emphasised that the service of notice of demand has a few vital impacts amongst others: (i) when the notice of demand is not complied with, the assessee can be treated as a person in default; (ii) on the failure of the assessee to pay after a notice of demand is issued, the recovery proceedings can be started and the amount of tax can be treated as an I.T.R No.12 of 2002 -10- *** arrear of land revenue. However, in this case Hidayatullah, J. went on to hold that if an assessment made by the Income Tax Officer is altered, reduced or increased — by reason of any order under the Act, it is the duty of the Income Tax Officer to issue a fresh notice of demand in the prescribed form and serve upon the assessee. This particular finding of Hidayatullah, J. created serious complications and resulted in nullifying several recovery proceedings, as also creating bottlenecks in the recoveries of outstanding demands. Parliament, therefore, enacted the Taxation Laws (Continuation and Validation of Recovery Proceedings) Act, 1964 which was given a retrospective effect. Section 3 of this Act provides that in the event of government demand being reduced by an order in appeal or other proceedings it shall not be necessary for the taxing authority to serve upon the assessee a fresh notice of demand, it would suffice if the taxation authority intimated of reduction to the assessee and the Tax Recovery Officer to scale down the amount of recovery and the proceedings initiated on the basis of the previous notice of demand shall continue to be valid. To this extent the decision of this Court in Seghu Buchiah Setty was superseded.” 11. In Kerala SEB v. M.R.F. Limited, (1996) 1 SCC 597, it was observed:- “24. The principle of restitution as enunciated by the Privy Council in Rodger Comptoir D’Escompte de Paris (1871) 3 PC 465, has been followed by the Privy Council in later decisions and such principle being in conformity to justice and fair play be followed. It should, however, I.T.R No.12 of 2002 -11- *** be noted that in an action by way of restitution, no inflexible rule can be laid down. It will be the endeavour of the court to ensure that a party who had suffered on account of decision of the court, since finally reversed, should be put back to the position, as far as practicable, in which he would have been if the decision of the court adversely affecting him had not been passed. In giving full and complete relief in an action for restitution, the court has not only power but also a duty to order for mesne profits, damages, costs, interest etc. as may deem expedient and fair conforming to justice to be done in the facts of the case. But in giving such relief, the court should not be oblivious of any unmerited hardship to be suffered by the party against whom action by way of restitution is taken. In deciding appropriate action by way of restitution, the court should take a pragmatic view and frame relief in such a manner as may be reasonable, fair and practicable and does not bring about unmerited hardship to either of the parties.” 12. By virtue of principle of restitution, liability will be as per final order. However, where payment is made as per original demand which is set aside and later restored, it is possible to say that the assessee is not liable to pay interest under Section 220 for the period demand remained set aside. Even if demand is restored during the period it was set aside, assessee was not in default, having complied with the demand notice. The situation has been dealt with by the Hon'ble Supreme Court in Vikrant Tyres Ltd.'s case (supra). 13. We now come to the contention raised on behalf of the assessee I.T.R No.12 of 2002 -12- *** that interest liability did not accrue from the order of the Tribunal passed in appeal but from a subsequent order passed under Section 254 (2) of the Act in view of the judgment of Hon'ble Supreme Court in State Bank of Travancore V. CIT 158 I.T.R. 102 and in such a case fresh demand was required to be raised in view of Section 154 (6) of the Act as interpreted by Delhi High Court in Bharat Commerce and Industries Ltd. Vs. Commissioner of Income-tax and another (1994) 210 ITR 13 Delhi. 14. Learned counsel for the revenue submits that the argument overlooks the Validation Act which being the latter Act may override the original provision in Section 154 (6) of the Act if there was conflict in the two provisions. It was also submitted that Section 154(6) of the Act applies only when there is a further enhancement and not where original demand is restored. We find that validity of the order under Section 154 of the Act has not been put in issue and no question has been referred in that behalf. 15. After considering the rival submissions, we are unable to accept the submission made on behalf of the assessee. In our view, Section 154 (6) will not be attracted where the original demand has been restored. Moreover, the Validation Act being latter Act will prevail and there will be no requirement for issuance of any fresh notice of demand. The view taken by the Tribunal that interest will be liable to be paid for the entire period is, thus, correct. Question No.1 is, thus, answered against the assessee. 16. As regards question no.2, the same has been rendered academic as there is no requirement of giving any opportunity. Levy of interest would be automatic under Section 220(2) of the Act. The said question is also answered against the assessee. I.T.R No.12 of 2002 -13- *** 17. The Reference is disposed of accordingly. (Adarsh Kumar Goel) Judge September 24,2010 (Ajay Kumar Mittal) Pka/gs Judge