http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 1 of 8  

PETITIONER: INCOME TAX OFFICER ’A’ WARD, INDORE

       Vs.

RESPONDENT: GWALlOR RAYON SILK MANUFACTURING (WEAVING) co.LTD., BIRLAGRA

DATE OF JUDGMENT18/09/1975

BENCH: FAZALALI, SYED MURTAZA BENCH: FAZALALI, SYED MURTAZA KRISHNAIYER, V.R.

CITATION:  1976 AIR   43            1976 SCR  (1) 855

ACT:      Income tax  Act, 1961-Section  220(2) and (3)-Scope of- Rate of interest on arrears of tax fixed by the Act-Assessee agrees to  pay higher  rate of  interest-Whether Income  tax officer had  power to  accept-Upward  revision  of  rate  of interest by  the Finance  Act-If assessee could claim to pay only the  rate agreed  but not the rate fixed by the Finance Act.

HEADNOTE:      Sub-section (2)  of 9.  220 of the Income-tax Act. 1961 makes an  assessee liable  to pay simple interest at 4% p.a. if the amount specified in any notice of demand under s. 156 was not  paid within  the period  limited under  sub-s. (1). Sub-section  (3)   states  that  without  prejudice  to  the provisions contained in sub-s. (2) on an application made by the assessee  before the expiry of the due date under sub-s. (1) the  Income-tax officer  may extend the time for payment or allow  payment by instalments, subject to such conditions as he  may think  fit to  impose in the circumstances of the case.      Out of a large sum of money which became payable by the respondent as  income-tax, half  the amount  was paid and in respect of  the remaining  half which was allowed to be paid in three  instalments, the respondent had under taken to pay interest at the rate of 5% p.a. even though s. 220(2) of the Income-tax Act,  1961 prescribed  4% as the rate of interest payable on such arrears. The Income-tax Officer accepted the term. By  the Finance Act, 1965 the rate of interest payable under this  section was raised from 4% to 6% p.a. On receipt of a  notice from the Income-tax officer, that on the unpaid balance of  the tax  arrears the  company was  liable to pay interest at  6% p.a.,  the respondent  moved the  high Court contending that it was not open to the Income-tax officer to vary the rate from 5% to 6% even in spite of the change made by the  Finance Act,  1965, in that a vested right could not be  taken   away  by   a  statute   which  did   not   apply retrospectively. The High Court allowed the writ petition.      On appeal  to  this  Court  it  was  contended  by  the respondent  that   sub-ss.  (2)  and  (3)  of  s.  220  were independent provisions  which operated  in fields  of  their own.      Allowing the appeal to this Court,

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 2 of 8  

^      HELD: (1)  Sub-sections (2)  and (3)  form part  of the same section namely, s. 220 and are therefore closely allied to each  other. It  is true  that the  two sub-sections deal with separate  issues but  the non-obstante clause of sub s. (3) clearly  restricts the  order passed under sub-s. (3) to the conditions mentioned in sub-s. (2) of s. 220 of the Act. [860 B]      (2) It  is the  Finance Act  which fixes  the  rate  of interest payable  under sub-s.  (2) of  s. 220.  It  is  not within the  competence of the Income-tax officer to vary the rate of interest fixed by the Finance Act under subs. (2) of s. 220 from time to time. [860C-D]      Esthuri Aswathaiah v. Commissioner of Income fax Mysore 60 I.T.R. 411 and 416, followed.      (3) Sub-section  (3) of  s. 220  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 856 in sub-s.  (2). Any  order which  is passed under sub-s. (3) would be  subject  to the rate of interest mentioned in sub- s. (2)  and as  soon as  the rate mentioned in sub-s. (2) is varied or  enhanced by  the legislature  it would have to be read into  sub-s. (2) from the date of the amendment and any order passed  under sub-s. (3 ) would be subject to the rate so fixed.  If this is not the position then the order passed under sub-s.  (3) being  prejudicial to  sub-s. (2)  becomes illegal and  invalid and  the Income-tax officer exceeds the limits of  his jurisdiction in passing such an order. [860F- H]      In the  instant case  there  was  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 the order of the Income- tax officer  under sub-s.  (3) of  s. 220 does not amount to any final  settlement or  agreement. The  notice had  merely given effect  to the  legal provisions  of the  Finance Act. [861 B]      (4) In  is manifest  that the  Income-tax officer could not have  passed any  order against the statutory provisions of sub-s. ( 2)  of s. 220 either with or without the consent of’ the  assessee. Even  the order of the Income-tax officer accepting the  Offer. Of  the assesse to pay interest at the rate of  5% p.a.  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 which the  assessee could get was to pay interest at 4% p.a. prior to  the Finance  Act, 1965  and at 6% after 1st April, 1965. [861D-E]      Biswanath Ghosh  v. Income-tax  officer, Ward,  B.  and Another 95 I.T.R. 372, 374, approved.

JUDGMENT:      CIVIL APPELLATE  JURISDICTION: Civil Appeals Nos. 76 to 80 of 1971      From the  Judgment and  orders dated  the 17th October, 1968 of the Madhya Pradesh High Court in Misc. Petitions No. 277, 279 to 282 of 1966.      G. C.  Sharma, P.  L. Juneja  and S.  P. Nayar, for the appellant.      S,  Chowdhury,  Leila  Seth  and  U.  K.  Khaitan,  for

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 3 of 8  

respondent.      The Judgment of the Court was delivered by      FAZAL ALI,  J. These appeals are by Income-tax officer, ’A’ Ward, Indore, against the judgment of the Madhya Pradesh High Court  and involve  a question  of  law  regarding  the interpretation of  s. 220 sub-ss. (2) and (3) of the Income- tax Act, 1961. In order to understand the scope and ambit of the question  involved, it may be necessary to mention a few facts leading to these appeals.      The  respondent   firm  carries   on  the  business  of manufacturing cloth.  In 1947  the then  Maharaja of Gwalior granted to  the firm  exemption from  tax for  a  period  of twelve years  from  the  date  when  the  firm  started  its factories. Under  the  Part  States  (Taxation  Concessions) Order, 1950  the Commissioner  of Income-tax  of the  region concerned approved  of the  exemption only  to  the  weaving division of  the respondent  for  ten  years,  but  deferred decision regarding  the staple  fibre  division  until  the’ factory started  functioning in  1954. The  Commissioner was approached again for granting exemption but he refused to do so. The respondent thereafter moved the Hi h Court of Madhya Pradesh for cancelling the order of the 857 Commissioner refusing  exemption. The  writ petition  before the High  Court succeeded  and  the  respondent’s  right  to exemption was  upheld by  the  High  Court.  Thereafter  the Revenue filed  an appeal to this Court which was allowed and by its  order dated  April 28,  1964 reported  in (1964)  53 I.T.R. 466  this Court  reversed the  decision of  the  High Court and  maintained the order of the Commissioner refusing exemption.  As   a  result   of  the  cancellation  of;  the exemption, a  huge amount  of income-tax became due from the respondent, and  the provisional  assessments made  for  the years 1959-60  to 1965-65  reached the  aggregate amount  of over Rs.  6.60 crores  which was  payable by  the  firm  was actually demanded from the respondent. In fact the effect of the order  of this Court was that the amount exempted became payable  at   once  and  was  according  demanded  from  the respondent but  the respondent  instead of paying the amount tried to negotiate with the Revenue for certain concessions. In this  connection  a  series  of  correspondence  followed between  the   respondent  and  the  Income-tax  ‘Department including a  letter which  was written  by the  assessee  on December 26,  1964 by which the assessee paid a sum of Rs. 3 crores and  wanted the balance of Rs. 3.60 crores to be paid in  instalments.  The  assessee  further  undertook  to  pay interest on  the arrears  at the rate’ of 5% per annum, even though under sub-s (2) of s. 220 of the Income tax Act, 1961 hereinafter referred  to as ’the Act he was required‘ to pay interest at the rate of 4% only. In view of these favourable terms  offered  by  the  assessee,  the  Income-tax  officer acceded to  its request  by his  letter ‘dated  January  16, 1965. The  assessee had  agreed to  pay the  arrears in  the following manner:      Rs.   1,00,00,000 by March 15, 1966.      Rs. 1,20,00,000 by March 15, 1967.      Rs. 1,34,76,000 by March 15, 1968. Soon after  the request  of the  assessee was granted by the Income-tax officer,  sub-s. (2)  of s.  220 of  the Act  was amended by  the Finance  Act, 1965  by  which  the  rate  of interest was  increased from  4 to  6% per annum. In view of this amendment,  the Income-tax  Officer by his letter dated January 10,1966  informed the  assessee that  on the  unpaid balance of tax arrears the respondent would be liable to pay interest at  the rate of 6% per annum with effect from April

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 4 of 8  

1, 1965 instead of 5% as agreed to by the Income-tax officer in his  previous letter.  The Income-tax officer pointed out that this  course was  necessitated in view of the amendment made by  the Finance  Act, 1965.  Consequently a  notice  of demand under  s. 156 of the Act was served on the respondent which resulted  in his filing writ petitions before the High Court with the result mentioned above.      The main  point urged  in the petitions before the High Court by  the respondent  was that  the  Income-tax  officer having acceded  to the  request of the assessee a settlement between the  parties was  arrived at  to pay  the balance of arrears at  the rate  of interest at 5% per annum and it was not open to the Income-tax officer to vary that 858 rate to  the prejudice  of the  assessee even  in spite of a change in  the   rate of  interest by  the Finance Act 1965, because a  vested right could not be taken away by a statute which in  terms did  not apply  retrospectively.  This  plea appears to have found favour with the High Court, though not on the  ground expressly  taken by  the respondent. The High Court found  that in  view  of  the  notice  of  demand  the liability of  the assessee  to pay  the arrears  arose  only after the  expiry of  35 days  and this  period had  expired before the  Finance Act,  1965 amending s. 220(2) of the Act and therefore  the Revenue  had no  jurisdiction  to  demand payment of  the arrears  at the rate of 6% interest. Thus it would appear  that the  High Court actually decided the case on a  point which  was not  raised by  the respondent in his 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 assesse  to where a notice of demand under s. 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 s.  156 of  the  Act  simpliciter,  but  the  admitted position was  that in  view of  the decision  "f 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 s. 22()(2) of the Act. The liability to pay the arrears was never disputed and the  only dispute  between the parties was as to rate of interest that was payable.      Section 22n, sub-ss. (’2) and (3) run thus:           "(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  four per  cent  per      annum from  the day  commencing after  the end  of  the      period mentioned in sub-section (1).           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. the      amount on which inter st was  payable under  this section  had been  reduced.  the interest  shall   be  reduced  accordingly  and  the  excess interest paid, if any, shall be refunded.

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 5 of 8  

         (3) Without  prejudice to the provisions contained      in sub  section (2),  on an  application  made  by  the      assessee before 859      the expiry  of the  due date under sub-section (1), the      Income-tax officer  may extend  the time for payment or      allow  payment   by  instalments,   subject   to   such      conditions as  he  may  think  fit  to  impose  in  the      circumstances of the case." The fact that the arrears were demanded from the assessee is not disputed  as would appear from the statement made by the respondent in  paragraph 2 of the writ petition filed before the High Court where it was averred thus:           "Subsequently when  assessments for the assessment      years 1959-60  to 1964-65  were provisionally  made,  a      huge amount  aggregating to  over Rupees six and a half      crores  became   payable  and  was  demanded  from  the      petitioner." In these  circumstances, therefore, the conditions precedent to the  application of  subs. (2)  of s. 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-s. (2) of s. 220  was only  four per cent and yet the assessee offered to pay  a higher  rate namely 5% per annum is 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  s. 220(2)  of the  Act and the order passed by the Income-tax  officer must  be construed as one made under sub-s. (3) of s. 220 of the Act.      It 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-s. (2) of s. 220 of the Act was enhanced.  Mr.  S.  C.  Choudhry  learned  counsel  for  the respondent, however,  has fairly  conceded that there was no question of  an agreement  or settlement  because s.  220(3) does not  empower  the  Income-tax  officer  to  enter  into agreement or  settlement in  order to  bind the  Revenue. We find 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-s. (3) of s. 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-s. (3) is not independent of sub-s.  (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-s.   (3)  must  neither  be inconsistent  with   nor  prejudicial   to  the   provisions contained in  sub-s. (2).  In other  words, the  Position is that although  sub-s. (3)  is an  independent provision  the power under  this sub-section has to be exercised subject to the terms  and conditions  mentioned in sub-s. (2) so far as they apply  to the  facts mentioned  in sub-s.  (3). Thus if sub-s. (2)  of s.  220 provided  that the  rate of  interest chargeable would be 860 four per  cent per  annum any  order passed under sub s. (3) could   not vary that rate, and if it did, then the order to that extent  would stand  superseded. The  argument  o  the

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 6 of 8  

assessee. is  that sub-ss.  (2)  and  (3)  of  s.  220  were independent provisions  which operated  in fields  of  their own. We  are, however,  unable to accept this somewhat broad proposition of  law. Sub-sections  (2) and  (3) form part of the same  section, namely  s. 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-s. (3)  clearly restricts  the  order  passed under sub-s.  (3) to  the conditions mentioned in sub-s. (2) of s. 220 of the Act.      Further more,  it is  the Finance  Act which  fixes the rate of  interest payable  under sub-s. (2) of s. 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 circumstances, 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-s. (2)  of s.  220 from  time to time. We are fortified in  this view  by a  decision  of  this  Court  in Esthuri Aswathaiah  v. Commissioner of Income tax, Mysore(1) 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."      As we  have already pointed out sub-s. (3) of s. 220 of the Act  does not  empower the   officer  to enter  into and 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-s.  (2).  Any  order which is  passed under  sub-s. (3)  would be  subject to the rate of  interest mentioned in sub-s. (2) and as soon as the rate mentioned  in sub-s.  (2) is  varied or enhanced by the Legislature it  would have  to be  read into sub-s. (2) from the date  of the amendment and any order passed under sub-s. (3) would  be subject  to the rate so fixed. In fact if this is not  the position, then the order passed under sub-s. (3) being prejudicial  to sub-s. (2) becomes illegal and invalid and  the  Income-tax  officer  exceeds  the  limits  of  his jurisdiction in passing such an order.      In the  instant case  the Finance  Act of  1965  became effective form  April 1,  1965 and the Income tax officer in his letter dated      (1) 60 I.T.R. 411,416. 861 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- s (2)  of s.  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, near  there was 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-s. (3)  of s.  220  does  not amount to any final settlement or agreement.      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-s. (3)

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 7 of 8  

of s.  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-s. (2) of s. 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-s. (2) of  s. 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 officer.      Reliance was  placed by  Mr. G. C. Sharma appearing for me Revenue  on a  decision  of  the  Orissa  High  Court  in Biswanath Ghosh  v. Income-tax  Officer, Ward and Another(1) 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 he 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 [1969] 73 I.T.R. 95 (M.P.). (1) 95 I.T.R. 372, 374. 862      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." 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.      We have  already pointed  out, 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 .      For these  reasons, therefore,  the appeals are allowed and the  order of  the High  Court is  set aside with slight modification, namely In that the assessee shall pay interest on the  entire amount of arrears  the rate of 4 per cent per annum only  during the  period January to March 1965. So far as rest of the period is concerned, the order of the Income- tax officer  directing the  assessee to  pay interest at the rate of  6 per  cent per  annum is  restored. In view of the peculiar circumstances  of the  case, however,  we leave the

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 8 of 8  

parties to bear their own costs throughout. P.B.R.                                      Appeals allowed. 863