http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 1 of 5  

CASE NO.: Appeal (civil) 10202-04  of  1995

PETITIONER: M/S. VIKRANT TYRES LTD.

       Vs.

RESPONDENT: THE FIRST INCOME TAX OFFICER, MYSORE

DATE OF JUDGMENT:       09/02/2001

BENCH: S.P. Bharucha, N. Santosh Hegde & Y.K. Sabharwal.

JUDGMENT:

L...I...T.......T.......T.......T.......T.......T.......T..J SANTOSH HEGDE, J.

   Being  aggrieved by an order made by the Division  Bench of the High Court of Karnataka in Writ Petition Nos.17068-70 of 1988, the appellant is before us in these appeals.

   In  respect  of  assessment years 1977-78,  1978-79  and 1980-81,  assessment  orders  were served on  the  assessee- appellant  and  demand notices were issued.   The  appellant complied  with  the  demands  by paying the  tax  due.   The appellate authority on an appeal preferred by the appellant, allowed  the  same and the taxes paid were refunded  to  the appellant.   The  appellate  tribunal dismissed  the  appeal filed  by  the Revenue and on a Reference made to  the  High Court, the same came to be allowed thereby upholding all the assessment  orders.   Thereafter,  the  Revenue  made  fresh demands  and the assessee re-paid the taxes as assessed  and demanded.   However,  the Revenue invoked Section 220(2)  of the  Income Tax Act, 1961 (the Act) and demanded interest in respect  of the tax assessed for the period commencing  with refund  of the tax consequent upon the first appellate order till  the  taxes  were  finally   paid  after  disposal   of References.

   The  appellant challenged the said demand of interest in the  above-mentioned  writ petitions before the High  Court, inter  alia,  contending that it was not at all  in  default because  it  had  paid  the taxes  in  compliance  with  the demands, hence, the original demands did not survive so this was not a case where it had failed to comply with the demand made  under  Section 156 of the Act.  The Revenue  contended that  the order of assessment, the appellate orders and  the order made on reference resulting in consequential order are only different steps in the same proceeding and the ultimate order  relates  back to the original order itself  and  that also in view of Section 3 of the Taxation Laws (Continuation and Validation of Recovery Proceedings) Act, 1964 (for short the  Validation  Act)  the  original  demand  notices  got revived  by operation of law and due effect had to be  given to  such  revival.   The  High  Court,  however,  held  that sub-section  (2)  of  Section 3 of the Validation  Act  kept

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 2 of 5  

alive  the earlier demand notice even though payment in full was made pursuant to that demand and treated the same as due notice  having been kept alive all along till the assessment order  was  upheld  by  the  higher  forum.   On  the  above foundation, the writ petitions came to be dismissed.

   In  these  appeals,  it is contended on  behalf  of  the appellant that Section 220(2) does not apply to the facts of the case in view of the admitted fact that when the original notice  of  demand  was issued, the same was  complied  with without delay and, subsequently, when the appellant lost its case before the High Court, a fresh demand notice was issued which was also satisfied by the appellant.  According to the appellant,  once the payment as demanded, has been made, the notice  ceases  to  have any statutory force  and  does  not survive  thereafter.  It is also contended that Section 3(2) of  the  Validation Act does not revive or bring  back  into existence  a  notice of demand which has ceased to have  any statutory  force by virtue of payment of tax demanded within the  time stipulated in the notice.  It is also argued  that Section  3(2) of the Validation Act only stipulates that  no fresh  demand notice is required to be issued as a result of there  being  a  variation in the orders  of  the  different appellate  forums  with a view to see that the  recovery  of revenue due to the State is not hampered.

   On  behalf  of the Revenue, it is contended  that  under Section  220(2)  of  the  Act, the Revenue  is  entitled  to collect  interest on that part of tax which is due to it and retained  by the assessee, and the High Court was  justified in  coming to the conclusion that since on the facts and the circumstances  of this case, the Revenue was a creditor  and the  tax-payer  a debtor, the debtor should  compensate  the creditor by paying interest on the amount due.

   Based on the above pleadings, the point emerging for our consideration  is:   does  the   Act  under  Section  220(2) contemplate  payment  of  interest on any sum of  money  due under  a  demand  notice  even  after  the  said  demand  is satisfied ?

   For  the sake of convenience, it is necessary for us  to extract  the relevant part of that Section which is in terms following :

   220 (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 and one-half per cent for every month or  part of a month comprised in the period commencing  from the  day  immediately  following  the   end  of  the  period mentioned  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 262, 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.

   A bare reading of this Section clearly indicates that if the assessee does not pay the amount demanded under a notice

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 3 of 5  

issued  under  Section  156  of  the  Act  within  the  time stipulated  under  sub-section  (1), the  said  assessee  is liable  to pay simple interest at one and one-half per  cent for  every month or part of a month comprised in the  period commencing from the day immediately following the end of the period mentioned in sub- section (1) and ending with the day on  which  the amount is paid, and therefore  the  condition precedent  under  this  Section is that there  should  be  a demand  notice  and  there should be a default  to  pay  the amount  so  demanded within the time stipulated in the  said notice.   Applying this Section to the facts of the case, it is  seen that immediately after the assessment was made  for the relevant years, demand notices were issued under Section 156(1) of the Act and admittedly the appellant satisfied the said demands and nothing was due pursuant to the said demand notices.   However,  after  the judgment  of  the  appellate authority  which went in favour of the assessee, the Revenue refunded  the  amount  due  as per the  said  order  of  the authority.   Thereafter,  when  the   matter  was  taken  up ultimately  in Reference to the High Court and the  assessee lost  the  case, fresh demand notices were issued and it  is also  an  admitted  fact that in satisfaction  of  the  said demand notices the appellant had paid the amount as demanded within   the  time  stipulated   therein.    The   question, therefore,  is:   whether the Revenue is entitled to  demand interest  in regard to the amount which was refunded to  the assessee  by  virtue  of  the   judgment  of  the  appellate authority  and  which  was  re-paid  to  the  Revenue  after decision  in the Reference by the High Court on fresh demand notices  being  issued to the assessee ?  Admittedly,  on  a literal  meaning of the provisions of Section 220(2) of  the Act,  such  a demand for interest cannot be made.  The  High Court  by  a liberal interpretation of the said Section  and relying  upon Section 3 of the Validation Act has held  that the  Revenue is entitled to invoke Section 220(2) of the Act for  the purpose of demanding interest on such retention  of money.

   We  are  not  in agreement with the High  Court  on  the interpretation  placed by it on Section 220(2) of the Act in regard  to the right of the Revenue to demand interest in  a situation  where  the  assessee has promptly  satisfied  the demand  made by the Revenue in regard to the tax  originally assessed.

   It  is a 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   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 tax-payer 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.  & Ors.   v. State  of  Assam [1997 (6) SCC 479] wherein this Court  held 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

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 4 of 5  

Constitution  Bench of this Court speaking through one of us (Hon.   Bharucha,  J.)  in  the case of  V.V.S.   Sugars  v. Government  of  A.P.  & Ors.  [1999 (4) SCC 192]  reiterated the  proposition  laid down in the India Carbon Ltd.s  case (supra)  in the following words :  The Act in question is a taxing  statute  and, therefore, must be interpreted  as  it reads, with no additions and no substractions, 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 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) can be invoked.

   The  High Court also fell in error in relying on Section 3  of  the Validation Act to construe Section 220(2) in  the manner  in  which  it  has done in  the  impugned  judgment. Section  3 of the Validation Act, in our opinion, cannot  be relied  upon  to  construe the authority of the  Revenue  to demand  interest  under  Section 220 of the Act.   The  said Section   was   enacted  to  cope   up  with   a   different fact-situation.   That  Section only revives the old  demand notice  which  had never been satisfied by the assessee  and which  notice got quashed during some stage of the challenge and  finally  the  said quashed notice gets restored  by  an order  of  a higher forum.  In such situation, Section 3  of the Validation Act restores the original demand notice which was  never  satisfied by the assessee and the  said  Section does  away  with the need to issue a fresh  notice.   Beyond that,  that  Section  cannot be resorted to for  reviving  a demand notice which is already fully satisfied.

   In  a  similar fact-situation, a Division Bench  of  the Kerala  High  Court  in I.T.O.  v.  A.V.  Thomas  &  Company (1986) 160 ITR 818 had held that the condition precedent for invoking  Section  220(2) is that even after the  notice  of demand  under  section 156 and after a further period of  35 days  as provided under section 220(1), the assessee  should continue  as  a  defaulter in the matter of payment  of  tax demanded.   It  further held that only in case the  assessee defaults  in  payment  of tax assessed, 35  days  after  the notice  of  demand under section 156, the liability  to  pay interest  accrues.   In  that  case  also,  admittedly,  the assessee had paid the tax when he received the demand notice under  section  156,  hence, the High Court  held  that  the requirements  under  section  220(2)   for  attracting   the liability to pay interest did not exist.

   We  are  in agreement with the said view of  the  Kerala High  Court.  Though this judgment was brought to the notice of  the  Karnataka High Court in the impugned judgment,  the said  High Court thought it fit not to place reliance on the same which, in our opinion, is erroneous.

   In  the  light of the above, we are of the opinion  that Section  220(2)  of the Act cannot be invoked to demand  any interest  from  the  appellant for the assessment  years  in question.   These  appeals,  therefore, stand  allowed,  the impugned  judgment is set aside and the demands made by  the Revenue  under  Section  220(2) of the Act  for  payment  of interest  on  the  tax  due for  assessment  years  1977-78, 1978-79 and 1980-81 stand quashed.

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 5 of 5