Case: Income Tax Officer, A-Ward, Indore Vs. Gwalior Rayon Silk Manufacturing (Weaving) Company Limited

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 Aswathiah v. Commissioner of Income-tax 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."6. As we have already pointed out subsection (3) of section 220 of the Act 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 in sub-section (2). Any order which is passed under subsection (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 orderIn the instant case the Finance Act of 1965 became effective from April 1, 1965, and the Income-tax Officer in his letter dated 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-section (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, nor was there 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.7. 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 OfficerReliance was placed by Mr. G. C. Sharma appearing for the revenue on a decision of the Orissa High Court in Biswanath Ghosh v. Income-tax Officer 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 O. J. C. No. 195 of 1972 that position has been clarified. Mr. Pasayat for the petitioner claims that the rate of interest must be 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. v. Income-tax Officer. That was a case in respect of penalty under section 220(2) 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."8. 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.9. We have already pointed out that 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, 1965.10.

Decision (1 = appeal accepted, 0 = rejected): 1

Explanation:
1[ds]Thus, it would appear that the High Court actually decided the case on a point which was not raised by the respondent in its 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 assessee 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 of the Supreme Court the respondent was in arrears of tax and had to pay heavy amounts of over Rs. 6.6 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 220(2) of the Act. The liability to pay the arrears was never disputed and the only dispute between the parties was as to the rate of interest that was payableSectionthese circumstances, therefore, the conditions precedent to the application of sub-section (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, if 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 220(2) 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 ActIt 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 wasfind ourselves in complete agreement with this view. Section 220(3) 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 (2). 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 (3). Thus, if sub-section (2) of section 220 provided that the rate of interest chargeable would be 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 standare, 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 ActFurthermore, 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 circumstance, 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 towe have already pointed out subsection (3) of section 220 of the Act 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 in sub-section (2). Any order which is passed under subsection (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 orderIn the instant case the Finance Act of 1965 became effective from April 1, 1965, and the Income-tax Officer in his letter dated 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-section (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, nor was there 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 oris 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 momentthe 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-taxOrissa 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 Highhave already pointed out that 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 withthe Finance Act, 1965.