INCOME TAX OFFICER 'A' WARD, INDORE v. GWALIOR RAYON SILK MANUFACTURING (WEAVING) CO

The respondent firm carries .on the business of manufacturing cloth. In 1947 the then Mahara.ja of Gwalior granted to the firm exemption from tax for a period of twelve years from the date w~en the firm started its factories. Under the Part B States (Taxation Concessions) Order, 1950 the Commissioner of Income-tax of !he the weavmg region concerned approved of the exemption only division of the respondent for ten years, but deferred decision regard- ing the staple fibre division until thel factory started 1954. The Commissioner was appproached again for granting eXemp- tion but he refused to do so. The respondent thereafter moved the High . Court of Madhya Pradesh for cancelling the order of functioning c;; H .... ) A B c D E F G H !,T.O. v. GWALIOR RAYON SILK co. (Fazal Ali, I.)

857.' Commissioner- refusing exemption. The writ petition before the High. Court succeeded anl:l the respondent's right to exemption was upheld by the High Court. Thereafter the Revenue filed an appeal to this Court which was al!Ol\Ved and by its order dated April 28, 1964 [reported in (1964!) 53 I. T .R. 466] this Court reversed the de cision of the High Court and maintained the order of the Commis- sioner refusing exemption. As a result of the cancellation of exemption, a huge amount of income-tax became due the years respondent, anti the provisional assessments made for 1959-60 to 1964-65 reached the aggregate amount of over Rs. 6.60· crores which was payable by the firm was actually demanded from In fact the efl"-ct of the order of this Court was the respondent. that the amount exempted became payable at once and was accord-· ingly demanded from the respondent but the respondent instead of paying the amount tried to rn~gotiate with the Revenue for certain In this connection a series of correspondence followed concessions. 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 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, thd Income-tax Officer acceded to its request by his letter \:lated 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. increased In view of this amendment, Soon after the request of the· assessee was granted by the Income-tar Officer, sub-s. (2) of s. 220 of the Act was amended by the Finance from 4% Act, 1965 by which the rate of interest was Income-tax to 6% per annnm. Officer by his letter dated January 10, 1966 informed the assessde 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 frbm April 1, 1965 instead of 5% as agreed to by the Incom~tax Officer in his previous letter.

The Income-tax Officer pointed out that this course was necessitated in view of the amendment made by Finance Act, 1965. Consequently a notice of demand under s. 156 of the Act was served on the resJ)ondeut 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 bv · the respondent was that the Income-tax Officer havill,I! acceded to the request of the assessee a settlement between !Pe oarties was arrived at to pay the bala)J.ce of arrears at the rate of interest at 5% oer annum and it was not open. to the Incom~~tax Officer to vary that 858 SUPREME COURT REPORTS [1976] 1 s.c.R. to pay 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 coul\:i not be taken away by a statute which in terms did not apply retrospectively .. This plea appears to have found favour with High Court, though not on the ground expressly taken by the res the notice of pondent.

The High Court found that in view of demand the liability of the assessee the arrears arose only 11fter the expiry of 35 days and this period had expired before Finance Act, 1965 amending s. 220(2) of the Act and therefore the Revenue had no jurisdiction to demanld 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 Iespondent in his petition but after making out a new case made out .at the time of arguments and without giving any opportunity to Revenue to rebut the same. The High Court has written a detailed judgment regarding the time as to when the liability of the assesse·e where a notice of demanld under s. 156 of the Act is issued would It is, hbwever, not necessary for us to consider the reasons arise. ·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 ihe issue that was It was not a case of a notice of demand under s.

156 of involved. the Act simpliciter, but the admitted position was that in ,1ew of 1he decision of the Supreme Court the respon\:lent 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 request ·ed the Income-tax Officer to allow it to pay the balance in instalments and persuaded the Income-tax Officer ro accept the request even by agreeing to pay a higher rate of interest of 5% than the rate pres cribed under s. 220(2) of the Act. The liability to pay the arrears was never disputed and the oniv tlispute between the parties was as to rate of interest that was payable. Section 220, suh-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 commenc· ing after ihe end of the period mentione(i 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 interest was payable under this section bad been reduced, ihe interest shall be reduced accordin~y and the excess interest paid, if any, shall be refunded. (3) Without prejudice to ihe provisions contained in snb ~ection (2), on an application made by the assessee before A .,,.._ B c D E F G H l ·• A B c .j D E F G H J.T.o. v. GWALIOR RAYON SILK co. (Fazal. Ali, !.) 859 the expiry _of the due date under Income-tax Officer may eii:tend 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. " sub-soction (1), The fact that the arrears werd 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 Coutt where it was averred thus : "Subsequently when assessments 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.

" It would be seen. that before In these circumstances, therefore, the conditions precedent to application of sub-s. (2) of s. 220 of the Act were undoubtedly fulfillefl, in this case. the assessee entered into correspondence with the Revenue, the rate of intere\st 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 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 s. 220(2) of the Act and the order passed by the Income-tax Officer must be construed as one made urider sub-s. (3) of s. 220 of the Act. It was suggested before the High Court that the order of Income-tax Officer amounted to an irrevocable agreement which could not be varied mercly because the rate of interest contained in sub-s.

(2) of s. 220 of the Act was enhanced. Mr. S. C. Choudhry learned coµnsel for the respondent, however, has fairly conceded that there was no question of an agreement or settlement because s. 220(3) does not empowtlr the Income-tax Officer to enter into. agreement or settlement in ortler 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 aniium offered by him. What is important, however, is that sub-s. (3) is not independent of sub-s. (2) bnt is inter-connected with it. The words 'without prejudice to the provi that any order in sub-section (2)' clearly show sions contained passed by the Income-Tax Officer under sub-s.

(3) must neither be inconsistent with nor prejudicial 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 fhey ~ply 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 to · the provisions contained :B 60 SUPREME CotfRT REPORTS [1976] 1 s.c.R. Jour 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 of the assessee is that sub-ss. (2) and (3) of s. 220 were independent provisions which operated in fields somewhat -of their myn. We are, however, unable to accept broad prop~ition of law. Sub-sections (2) and (3) form part of the same section, namely s. 220, and are therefore closely allied to It is no doubt true that the two sub-sections deal with each other. 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. Fuqher more, it is the Finance Act which fixes the rate of interest sub-s. (2) of s. 220 and it is common knowledge ;payable under that every year the Finance Act makes important amendments in the rates payable under the various provisions of Income-tax In these circumstances, therefore, it is not within the compe Act. tence 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 in Esthuri .are fortified in this view by a decision of this Court 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 charg- ed 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 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-s. (2). Any order which is passed unXler sub-s. (3) would be subject to the rate of interest mentioned in sub-s. (2J 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 (3) date of the amendment and any order passed under would be subjeet to the rate so fixed. 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. sub-s.

In fact if this is not A • )<.. B c D E F G • . .. Jn the instant case the Finance Act of 1965 became effective from April 1, 1965 and the Income--tax Officer in his letter dated H (!) 60!.T.R. 411,416. A B c D E J.T.O. v. GWALIOR RAYON SILK co. {Faza/ Ali, J.) 861 January 10,, 1966, to the assessee had merely given effect legal prQvisions of the Finance Act by insisting that in view of the variation in the ra~ 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, no~ there was any question of Financ~ 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 aa; reement. • 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 arr.ears by instalments. The assessee could be permitted seek this indulgence u:nder sub-s. (3) of s. 220 only within four corners of the Jaw 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 automatica!Jy 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 O!ficer 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 asse'ssee. Even 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 it was only relief, therefore, which ·the assessee could get is that 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. the older of - F G H Reliance was placed by Mr. G. C. Sharma appearing Revenue on a decision of the Orissa High Court in Biswanath Ghosh v. Income-tax Officer, Ward B and Another(!) 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. Pasaya! 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 It is only here that had occurred prio.r to the amendment. he relies upon the de'cision of the Madhya Pradesh High Court in Gwalior Rayon Silk Manufacturinf!