Karnataka H.C : interest on the tax amount is chargeable for the delayed filing of the return under section 158BFA(1)

High Court Of Karnataka

CIT vs. K.L. Srihari

Assessment Year : 1991-92 to 2001-02

Section : 158BB, 36(1)(iii), 158BFA, 140A, 158BC

D.V. Shylendra Kumar And Aravind Kumar, JJ.

IT Appeal Nos. 277 And 281of 2004

July 30/31, 2009

JUDGMENT

D.V. Shylendra Kumar, J.: ‑ These two appeals are by the Revenue under section 260A of the IT Act, 1961 (for short, ‘the Act’) against two orders dated 15-12-2003 passed by the Tribunal, Bangalore in IT(SS)A No. 23/Bang./1999 and IT(SS)A No. 22/Bang./1999 respectively. The Revenue is aggrieved that the Tribunal allowed the appeals of the assessees in both the cases and have approached this Court for correction of the orders passed by the Tribunal, posing the following substantial questions of law for answer in the two appeals :

In IT Appeal No. 277 of 2004

“(1) Whether, the Tribunal was correct in holding that if the assessee has incurred expenditure towards part of the income which is taxable and part of the income which is exempt then the entire expenditure can be disallowed ?

(2) Whether the assessee is liable to pay interest under section 158BFA(1) of the Act in view of the mandatory provision for belatedly filing the return of income for the block period ?”

In IT Appeal No. 281 of 2004

“(1) Whether the Tribunal was correct in holding that no surcharge for the block period 1st April, 1990 to 10th Nov., 2000 i.e., assessment years 1991-92 to 2001-02 could be levied as proviso to section 113 of the Act came into effect from 1st June, 2002 and as the search in the present case had taken place on 10th Nov., 2000 before the proviso was introduced ?

(2) Whether the proviso to section 113 of the Act should be read along with the Finance Act for each of the earlier assessment years for the entire block period and surcharge should be levied from the inception of Chapter XIV-B of the Act?

(3) Whether the Tribunal was correct in holding that interest under section 158BFA1) of the Act is charged for non-payment of tax by the assessee to the Department ?

(4) Whether the mandatory interest under section 158BFA(1) of the Act was correctly levied by the AO on account of the failure of the assessee to file the return of income which was filed belatedly on 22nd Feb., 1999 after the notice was issued on 27th Nov., 1997 and the due date for filing the return was 12th Jan., 1998 ?

(5) Whether the Tribunal was correct in holding that no interest under section 158BFA(1) of the Act can be levied as the Finance Bill, 1999 had proposed extension of payment of self-assessment tax to the liability under section 158BC only prospectively w.e.f. 1st June, 1999?”

2. Insofar as the assessee in IT Appeal No. 274 of 2004 is concerned, the assessee is an individual, who incidentally happens to be a director of the company assessee in the other case viz., IT Appeal No. 281 of 2004 and which assessee is a company. The assessment period involved in the case of individual assessee relates to block period 1987-88 to 1997-98, assessed to tax invoking the provisions of section 158BD of the Act and insofar as the assessee in IT Appeal No. 281 of 2004 is concerned, it is a company, which is also assessed to tax following issue of notice under section 158BCof the Act.

3. The assessments and the action preceded to it were triggered pursuant to a search conducted on 13th Feb., 1997 at the premises of the company-assessee, wherein the officials of the IT Department found a large amount of undisclosed income and considerable discrepancies in the books of account of the company.

4. The AO, found in the personal custody of the individual assessee, a director of the assessee-company, several documents evidencing purchase of immovable properties, particularly an extent of 424 acres of land at Manvarthakaval/Talagatpura Village and the source of this investment had not been properly explained and at any rate some part of the purchase price having been paid in cash, which had not been properly accounted, etc.

5. While the assessee had indicated that there was an undisclosed income to the tune of Rs. 19 lakhs at the time of the search and as a follow-up action, a notice under section 158BD of the Act had been issued by the officials of the Department on 28th Nov., 1997, the assessee appears to have filed a return of income for the block period on 19th Jan., 1999, offering undisclosed income of Rs. 45 lakhs for the block period and had also claimed a deduction towards interest by way of expenditure incurred for earning the income in a sum of Rs. 66,000 in the very return, which had come to be disallowed by the AO, which has formed the subject-matter of questions in this appeal, as the finding of the AO was affirmed by the appellate CIT on this aspect, but the Tribunal has reversed it and has allowed the deduction for the block period in question.

6. One another question that arises in respect of the individual assessee for the block period is as to the legality of the levy of interest under section 158BFA(1) of the Act for the period between 15 days after the receipt of notice under section 158BD of the Act and the date of filing of the return, which is at 1 per cent per month on the amount of tax found due on the assessment as determined by the AO pursuant to the return filed by the assessee.

7. In the case of the assessee-company, the search being of the premises of the company and notice having been issued under section 158BC of the Act on 27th Nov., 1997 and the assessee having responded by offering an undisclosed income of Rs. 60 lakhs for the block period in question, and filed a return on 22nd Feb., 1999, it resulted in the assessment order dt. 26th Feb., 1999.

8. Insofar as this assessee and the questions in IT Appeal No. 281 of 2004 are concerned, they are ones relating to the levy of interest under section 158BFA, as in the case of individual assessee and also the question of levy of tax including surcharge on the tax liability over and above 60 per cent rate of tax as indicated in section 113 of the Act.

9. We have heard Sri Seshachala, learned standing counsel for the appellant and the learned counsel appearing for the assessee in both the appeals.

10. Submission of Sri Seshachala, learned counsel for the Revenue, by pointing out to the provisions of section 158BFA(1) is that the statute in terms of the section has indicated that occasion arises for levy of interest in a situation where the assessee does not respond or file return of the undisclosed income as detected offering the amount to tax; that a return is required to be filed within 15 days from the date of receipt of the notice under section 158BC of the Act; that in the case of the assessee-company the notice under section 158BD had been issued on 28th Nov., 1997 but the assessee had filed the return only on 22nd Feb., 1999 and therefore the assessee is liable to pay interest on the tax liability as determined under the assessment order for the period between 22nd Feb., 1999 and 15 days after 28th Nov., 1997.

11. It is submitted in the case of the individual also there is likewise delay in filing of the return in the sense the individual assessee had also not filed the return within 15 days from the date of receipt of the notice. Though the notice was characterized as notice under section 158BD of the Act the procedure for computation of tax liability even in terms of section 158BD of the Act is only as provided for under section 158BC of the Act in the very chapter namely Chapter XIV-B and is no way different from a notice issued under section 158BC of the Act.

12. It is also the submission of Sri Seshachala in this regard that the provisions of section 158BFA(1) of the Act operates on its own and is not related to or linked to any other provisions of the Act but is only linked to the extent of delay in filing a return by the assessee while computing the liability in terms of a block assessment order. This submission is made to drive home the point that the levy of interest under section 158BFA(1) is attracted, irrespective of compliance or non-compliance with other provisions of the Act, in the context of a regular assessment or a reopened assessment and also of the requirement of payment of advance taxes etc.

13. It is submitted in this regard that the Tribunal has on a very erroneous assumption made references to the series of occasions wherein the Supreme Court and High Court had occasion to characterise the levy of interest as compensatory and therefore unless the Revenue had suffered a loss in the sense that certain amount had been quantified and called upon to be paid to the assessee and only on the non-payment of amount within the stipulated time, there can be scope of payment of interest and such line of reasoning is not applicable as the Tribunal has neither examined the validity of the levy nor the question examined on the premise of the circumstances not warranting the levy. It is therefore submitted that the Tribunal is clearly in error in deleting the interest which had been included by the AO and as affirmed in appeal by the appellate authority.

14. Insofar as levy of tax inclusive of surcharge is concerned, it is a question which arises only in the case of company assessment. Submission of Sri Seshachala is that the question is no more res integra and it is covered by the decision of the Supreme Court in the case of CIT v. Suresh N. Gupta [2008] 297 ITR 322 / 166 Taxman 313 .

15. In this regard Sri Seshachala has also brought to our notice a subsequent decision of the Supreme Court rendered in the case of CIT v. Rajiv Bhatara [2009] 310 ITR 105/ 178 Taxman 285  copy of which is placed before the Court, to submit that the Supreme Court having followed its earlier ruling in Suresh N. Gupta’s case (supra), this declaration of law is accepted to be the proper legal position, there is no way of Tribunal characterising that the levy is not surcharge. Therefore it is submitted that the decision of the Tribunal, impugned in this appeal is not sustainable applying the principle enunciated in Suresh N. Gupta’s case (supra) and the question raised by the Revenue on this aspect has to be answered in favour of the Revenue and in the negative.

16. Insofar as the question of deduction of claim by the individual assessee under the provisions of section 36(1)(iii) of the Act is concerned, the return filed for the purposes of block assessment during the period from 1986-87 to 1996-97, submission of Sri Seshachala is that the question of claiming a deduction which is a deduction in the nature of expenditure incurred in connection with the business and for earning profits, the question of allowing deduction arises only when the profits under the head ‘business and gains’ are taken and insofar as the assessee is concerned as income referable to assessee’s share on being a partner in a partnership firm came to be totally exempted from the purview of tax in terms of the provisions of section 10(2A) of the Act; even with effect from the assessment year 1993-94 onwards there is absolutely no need for action to compute the interest and profit attributable to the partnership firm for the previous year relevant for the block assessment period and when there is not even the exercise of computing the income under the head ‘profits and gains of business or profession’ attributable to the investment in the partnership firm and the extent claimed being in the nature of interest paid on the investment amount which the assessee had borrowed from outside, there is no occasion to allow this deduction in terms of section 36(1)(iii) of the Act.

17. It is submitted that the Tribunal has committed an error in not examining the scope for deduction under section 36(1)(iii) independently in the wake of there being no need to compute the income from the share of the profits of the assessee from the partnership firm but in trying to link it to the taxability of any amount received by the assessee as a partner in a partnership firm in the nature of salary/interest but also the receipt being treated as part of business income of the assessee in terms of section 28(v) of the Act. Submission is that provision of section 28(v) is in no way attracted for regular deduction under section 36(1)(iii) of the Act. There is no occasion for computation of the expenditure in terms of section 36(1)(iii) when only there is no profits attributable to the business and when there is no computation, such exercise having been done earlier under the provisions of section 10(2A) of the Act, the question of computing profit does not arise and so also allowing the deduction does not arise. Therefore it is submitted that the Tribunal is in error in allowing such deduction.

18. In this regard the further submission of Mr. Seshachala for the Revenue is that the Tribunal has also committed an error in applying the ratio of the judgment of the Supreme Court in the case of CIT v. Maharashtra Sugar Mills Ltd. [1971] 82 ITR 452  as neither the principle of law enunciated therein was applicable to the present case, nor attracted on the facts and circumstances. Submission is that the assessee though had in fact not claimed at any time earlier the factum of investment made for earning profits from the partnership as by way of assessee’s contribution, for which purpose the assessee had borrowed such amount and allowed in the earlier years while computing as deductible expenditure while computing the income of the assessee from his share of contribution to the firm is nevertheless claiming deduction as by way of expenditure in the nature of interest paid on the borrowing for investment in the firm by way of capital contribution, claim towards interest alone is not covered by the statutory provisions.

19. It is pointed out that nowhere assessee had claimed at any point of time earlier, this investment had been taken back from the firm and had been invested in the so-called moneylending business and on which premise the assessee had claimed deduction in the return filed for the purposes of block assessment and for the first time. It is pointed out that it was not a situation where either the assessee had allowed the factual foundation for claiming deduction as an expenditure incurred in the course of business of moneylending as the assessee had not any time earlier claimed any investment having been made in the moneylending business for earning interest from this activity but also, that the assessee did not claim any part of the deduction as attributable to the moneylending and some part attributable in the investment in partnership. It is pointed out that all along assessee had claimed the entire investment to be for partnership for which purpose he had borrowed and paying interest and claimed as deductible expenditure and in the return filed for the block assessment year but it was now claimed the other way i.e., deduction was by expenditure incurred for investment in the moneylending business for which no factual foundation has been laid and not any part over the income of the assessee under the head ‘business and profession’. It is on such premise Sri Seshachala would submit that the Tribunal has committed an error in allowing the deduction as claimed by the assessee and reducing the income of the assessee to this extent when neither any factual foundation has been laid by the assessee nor the ratio of the judgment of the Supreme Court in the case of Maharashtra Sugar Mills Ltd. case (supra) applied to the facts of the present case.

20. Countering such submission made on behalf of the Revenue, Sri Kulkarni, learned counsel for the assessee would very vehemently urge that there is absolutely no error of law or of fact committed by the Tribunal that the orders passed by the Tribunal in the case of the individual assessee as well as the company are quite justified and the appeals have been rightly allowed and no interference is called for and the appeals are to be dismissed.

21. Elaborating his submission insofar as the question of levy of interest under section 158BFA(1) which is a question common to both the appeals, Mr. Kulkarni has very vehemently submitted that the very fact that the amount is described as interest is suggestive that it is compensatory in nature and if it has to be compensated in favour of the Revenue it has to be suffering loss of the revenue which is required to be made good. Submission is that loss can be inferred to have occurred to the Revenue only an amount due to the Revenue in terms of the statutory provisions is not paid within the permitted time but the payment is delayed. By drawing an attention to the provisions of section 140A of the Act; learned counsel for the assessee would submit that the section clearly indicates the various situations wherein a liability arises for payment of tax even in a situation where it is on a self-assessment or advance payment of tax and which has not been paid within the stipulated time and therefore a corresponding requirement in law to pay the amount with interest for the delayed period either for furnishing the return or any other default or delay in payment of advance tax etc.

22. On such premise Sri Kulkarni would submit so far as the scheme of block assessment in terms of Chapter XIV-B is concerned, there is no provision or situation warranting payment of any advance tax as in the normal course of assessment and also the possibility of payment of tax along with the return is not mandatory for the period relevant to the block assessment period; that in fact it had become so only after 1st June, 1999 by the amendment effected by the Finance Act of 1999 w.e.f. 1st June, 1999 that when there is not even a requirement of payment of tax on self-assessment for the block period when the return is filed and even in the contemplation of the scheme under Chapter XIV, when there is no requirement of payment of tax before the AO actually determines the tax liability, and calls upon the assessee to make payment of the tax within a stipulated time and thereupon only that too in case of default by the assessee by not paying within the permitted period can it be said that there is a loss to the Revenue. In the present case such being not the case, it cannot levy interest on the assessee and therefore levy of interest both on the individual assessee and assessee-company in terms of the assessment orders were wrong and the Tribunal has correctly interfered with the deletion of interest part.

23. Sri Kulkarni has taken quite some time to drive home the point that in the absence of a mandate for payment of any tax on a particular day and only when there is mandate of non-payment of tax could attract the levy of interest even as is revealed in terms of section 140A that there was no scope at all for levy of interest in the present situation.

24. The provision of section 158BC has also been taken care of to be included within section 140A of the Act for the first time w.e.f. 1st June, 1999 by the very Finance Act of 1999 is also clearly demonstrative of the fact that prior to this period there was no scope or intention to levy interest on the assessed amount even in terms of Chapter XIV-B and therefore the AO as well as the appellate authority are clearly wrong in holding that the assessee was liable to pay interest in terms of section 158BFA(1) of the Act. It is therefore submitted that Tribunal has rightly deleted this levy of interest and no interference is warranted and the questions on this aspect are to be answered against the Revenue.

25. Mr. Kulkarni would draw support from the notes on clauses provided under Finance Bill, 1999 for the purpose of amendment of section 140A of the Act as culled out at p. 141 of the journal section of [1999] 236 ITR (St.) 141 and clause 63, as also a Board circular explaining the scope of the amendment and the effect of amendment on section 140A in terms of the Board circular as contained at p. 187 of [1999] 236 ITR (St.) 141 and [1999] 240 ITR (St.) 36 para 45.1 and has drawn our attention to the Memorandum Explaining the provisions in the Finance Bill as culled out at [1999] 236 ITR (St) 141. One another submission made by Sri Kulkarni on the question of non-justification of levy of interest under section 158BFA(1), so far as the individual assessee is concerned, it is that even in terms of the provisions of section 158BFA(1) levy of interest is only in a situation where block assessment is pursuant to a notice issued under section 158BC and in the case of individual assessee notice issued being only under section 158BD of the Act, section 158BFA(1) is not even attracted apart from the argument relating to levy of interest and therefore it is submitted that in the case of individual assessee there is absolutely no scope or justification to levy of interest, even under the statutory provision of section 158BFA(1).

26. However, insofar as the question of the tax liability in the case of assessee-company including surcharge on the tax @ 60 per cent of the assessed income is concerned, though Sri Kulkarni would not dispute that in Suresh N. Gupta’s case (supra) the Supreme Court did take the view that even in respect of the block assessment under Chapter XIV-B of the Act, the word “tax” has to be understood as inclusive of surcharge as provided in the Finance Act, submission is that in a subsequent decision, another Bench of the Supreme Court has doubted the correctness and the reasoning as indicated in Suresh N. Gupta’s case (supra) and matter had been ordered to be referred to a Larger Bench as was done in the case of CIT v. Vatika Township (P.)  Ltd. [2009] 314 ITR 338/ 178 Taxman 322 (SC) passed in petitions for grant of Special Leave to Appeal (Civil) No. 16862 of 2008 directed against the judgment of Delhi High Court dt. 17th April, 2007 rendered in IT Appeal No. 375 of 2007 and a Larger Bench having not opined so far, answer to the question, be deferred till then submits that the Supreme Court itself having doubted the correctness of the legal position, there is no need to apply the ratio of Suresh N. Gupta’s case ( supra), the ratio laid down in Suresh N. Gupta’s case (supra) need not be followed.

27. But on the other hand this Court having answered such question earlier in favour of the assessee and against the Revenue in CIT v. Hotel Naufal [IT Appeal No. 88 of 2004 dt. 30-8-2007], it is more appropriate this Court should follow the judgment of the earlier Division Bench of the very Court rendered, than to apply the ratio as laid down in Suresh N. Gupta’s case (supra) though by the Supreme Court but doubted by the Supreme Court itself and the question having been referred to a Larger Bench.

28. We have bestowed our serious consideration to the submissions made at the Bar and perused the records made available to us.

29. We will examine the questions one after one. We first take up the question of the expenditure amount claimed by the individual assessee in his return for the block assessment period for a sum of Rs. 66,000 as an expenditure incurred for paying interest on the investment made in moneylending business.

30. So far as this question is concerned we notice that the assessee in fact had not even laid any factual foundation to indicate that there was some investment made in moneylending business for which purpose the assessee had borrowed commensurate amount. At the outset the assessee had not been paying interest on the investment in the moneylending business. It is not as though a claim of this nature had been made by the assessee earlier but was for the first time in the return filed in response to the notice issued to the assessee under section 158BD and Chapter XIV-B of the Act and was not a claim at any point of time earlier.

31. It is the admitted case of the assessee that an amount of expenditure by way of interest paid on investment which had been specifically claimed in earlier years and only for the purpose of the amount borrowed for investment in the partnership as by way of assessee’s capital contribution to the firm and not in any manner to the firm.

32. If the assessee has not even averred the factual position to indicate that the income attributable to moneylending and for earning such income from moneylending, some amount had been borrowed for this business and had been invested in this business and for which assessee was paying interest to the person who had lent money to him for this purpose, there is no question of assessee claiming so in the return filed under section 158BC of the Act. The assessee himself has not claimed so either before the first appellate authority or even before the Tribunal. But strangely enough the Tribunal itself takes upon the question of examining this aspect only on the basis of the stand of the assessee, that expenditure claimed is attributable to the interest paid in moneylending business and to compound the unwarranted finding has called in aid the judgment of the Supreme Court in Maharashtra Sugar Mills Ltd.’s case (supra) which is not at all applicable to the facts of the case.

33. It is not as though the expenditure incurred was such that it was not possible for apportionment of the expenditure to the different business activities carried on by the assessee and as to in respect of which business what amount of interest had been paid. There was no such ambiguity in the present demand and the claim was for entire expenditure attributable inclusive of the investment made in moneylending business and incurred by way of interest paid on borrowing for such investment. If such is the claim the judgment in Maharashtra Sugar Mills Ltd.’s case (supra) is clearly not attracted. But to make good the claim and even to explain the applicability of the decision relied upon it was for the assessee to demonstrate there was in fact a debt for the purpose of investment and certain amount of interest was being paid to the lender. None of these facts has been established. On the other hand the past conduct and the past transaction had indicated that the dealing by the assessee was inclusive for investment in the partnership firm and the interest paid was on such partnership and it was allowed as deduction in the earlier years.

34. Even the question of allowing the interest amount as part of business, expenditure in terms of section 36(1)(iii) of the Act does not arise in the present case. In fact the question is on an hypothetical basis as the assessee had not established any right for making such claim. Though Mr. Seshachala, learned standing counsel for the Revenue pointed out that the claim under section 36(1)(iii) of the Act cannot be made as the situation never arose in the wake of exemption to section 10(2A) of the Act we are of the opinion that in the present situation even that question may not arise as the assessee never made good the claim for deduction as an interest paid on investment made in moneylending business and therefore the question has to be necessarily answered in the negative and against the assessee. The Tribunal was clearly in error in directing the deletion of this amount as part of the income of the assessee from moneylending business.

35. Insofar as the question of levy of interest under section 158BC [sic— 158BFA(1)] of the Act is concerned, we have to indicate that the scheme of block assessment under Chapter XIV-B of the Act is virtually a self-contained code, providing for a variation of the manner in which the liability for payment of tax is determined and covering a situation where an undisclosed income relatable to the block period had not suffered tax only due to the non-disclosure and the non-disclosure coming to light in the course of certain search proceedings etc. The normal period of limitation for reopening is not made applicable and one very distinguishing feature is that the rate of tax at which the income as assessed for the block period is to be made liable is provided for under section 113 of the Act itself unlike in other situations, where rate of tax is relegated to the Finance Act of each year.

36. This provision as it now occurs in section 113 of the Act, is also by way of an amendment inserted by Finance Act of 1995 w.e.f. 1st July, 1995.

37. With this background we notice the provisions of section 158BFA of the Act which reads as under :

“158BFA. Levy of interest and penalty in certain cases.—(1) Where the return of total income including undisclosed income for the block period, in respect of search initiated under section 132 or books of account other documents or any assets requisitioned under section 132A on or after the 1st day of January, 1997 as required by a notice under clause (a) of section 158BC, is furnished after the expiry of the period specified in such notice, or is not furnished, the assessee shall be liable to pay simple interest @ (one per cent) of the tax on undisclosed income, determined under clause (c) of section 158BC, for every month or part of a month comprised in the period commencing on the day immediately following the expiry of the time specified in the notice, and—

(a)where the return is furnished after the expiry of the time aforesaid, ending on the date of furnishing the return; or

(b)where no return has been furnished, on the date of completion of assessment under clause (c) of section 158BC.”

38. It provides for levy of interest in respect of situation and assessment pursuant to a search initiated under sections 132 and 132A on and after the 1st day of Jan., 1997.

39. It is of significance to notice that even the concept of block assessment is one of an exception to the scheme of the IT Act in bringing to tax the income of the previous year in the corresponding assessment year.

40. We appreciate the fair submission of Sri Kulkarni and as urged by Sri. Seshachala that so far as the block assessment is concerned there is no correlation to a corresponding previous year but the entire block period is taken as one period and assessed to tax at the rate as provided under section 113 of the Act itself.

41. Therefore for levy of interest in terms of section 158BFA(1) is concerned, the only requirement is that a situation as contemplated in this very provision should have occurred.

42. We are emphasising on this aspect for the reason that Sri Kulkarni for the assessee had made a valiant effort to make home his point for levy of interest as compensatory and therefore in turn is linked to the statutory provisions of section 140A of the Act and when section 140A did not provide for the levy by not making a reference to the assessment in terms of section 158BC at any point of time prior to Finance Act of 1999 and was brought on the statute book w.e.f. 1st June, 1999 there was no occasion to levy interest which is compensatory.

43. In support of his submission that interest is in the nature of compensatory levy, Sri Kulkarni places reliance on the following decisions :

(i)  Central Provinces Manganese Ore Co. Ltd. v. CIT [1986] 160 ITR 961/ 27 Taxman 275 (SC) of the Supreme Court; and

(ii)  Dr. S. Reddappa v. Union of India [1998] 232 ITR 62  of our High Court.

While ratio in terms of these authorities is that no liability can be fastened on the assessee without an enabling statutory provision the liability cannot be avoided on mere legal principles unless it is held that the statutory provision providing for the levy itself is bad in law either being unconstitutional or on any other ground. But in the present case levy of interest is fully enabled under the statute itself and it is not as though it is otherwise.

44. We have examined the submissions made by Sri Kulkarni on all aspects and in all shades of the arguments but still are unable to agree with the proposition that the levy of interest under section 158BFA(1) is in any way linked to the provisions of section 140A of the Act. For foisting interest in terms of section 158BFA(1) one has to look into only the very provision and the quantification being linked to the period during the default in filing of return, that period alone is to be taken into consideration particularly as the levy of interest ceases the very moment the return is filed and the interest being only for the delayed period of filing return and does not link it to the payment of taxes per se but links it to the delay in filing a return.

45. It is no doubt true that for quantification of the income/interest, it is linked to the final payment of tax as determined for the block period and at a given percentage every month. But the levy of interest itself ceases once a return is filed in time, but the liability for payment of tax arises as rightly submitted, only on the determination.

46. In fact the reference made to section 140A of the Act and the subsequent amendment in this provision to include section 158BC also is only indicative that after the introduction of section 158BC within the scope of section 140A of the Act, the liability for payment of interest does stop by merely filing of the return but is thereafter attracted in terms of section 140A of the Act till payment of tax in terms of the section and even now the provisions of section 158BFA(1) and section 140A operate independently. Therefore the amendment to section 140A is of no consequence so far as determination of interest under section 158BC [sic—158BFA(1)] is concerned and we are of the view that any contrary view by the Tribunal is clearly wrong and is required to be set right.

47. One another argument addressed by Sri Kulkarni, learned counsel for the assessee insofar as the individual assessee’s case is concerned on the very question of levy of interest, is that even in terms of provisions of section 158BC levy of interest is justified only in a situation where a notice for filing return is issued in terms of section 158BC of the Act and admittedly notices having been issued to the individual assessee in terms of section 158BD and even here the provisions of section 158BD having undergone an amendment by including section 158BC also within the scope of section 158BD only by way of amendment through Finance Act, 2002 w.e.f. 1st June, 2002, it is suggestive that prior to the amendment so far as a notice issued under section 158BD, provision of section 158BFA(1) was not attracted. For this reason the levy of interest is not justified. This argument we are afraid also cannot succeed for the simple reason that a reading of provisions of section 158BD prior to the amendment in terms of Finance Act, 2002 i.e. , before adding the words ‘under section 158BC’, section itself indicates the procedure that was required to be followed by the AO, is only in terms of the very provisions of this chapter namely Chapter XIV-B of the Act and therefore section 158BC as well as section 158BFA(1) are even otherwise attracted and just because the Legislature thought it fit to add or to mention section 158BC by way of amendment through Finance Act, 2002, it would not make any difference to the earlier provisions of section 158BD which even otherwise envisages within itself the provisions and applicability of sections 158BD [sic—158BC] and 158BFA(1).

48. In the wake of our understanding of the provisions of sections 158BFA(1) and 158BD as indicated above we are of the opinion that the Tribunal is clearly in error in directing the deletion of the interest part on the tax amount as ultimately determined but for the period during which there is a delay in filing the return. Questions are accordingly answered in favour of the Revenue and against the assessee in the negative.

49. So far as the other question of tax liability including the surcharge in the case of the assessee-company is concerned, we are of the view that the judgment of the Supreme Court rendered in Suresh N. Gupta’s case (supra) being subsequent to the judgment of our High Court in the case of Hotel Naufal ( supra), the Supreme Court having categorically opined that surcharge has to be necessarily computed and added ultimately to the tax liability determined in terms of section 158BC of the Act also, we are afraid that it is not open for this Bench to enter into, debate or discussion regarding the decision for excluding the surcharge in the total tax liability of the assessee for the block period, though Sri Kulkarni would request us to defer answering the question for the reason that another Bench of the Supreme Court had subsequent to the judgment in Suresh N. Gupta’s case (supra) doubted the ratio and had directed a reference to the Larger Bench and the Larger Bench has to still opine. Subsequent doubt is no law but the law as laid down in Suresh N. Gupta’s case (supra) on the other hand having been followed and applied even in a case decided later to the reference order in the case of Rajiv Bhatara ( supra) referred to earlier, we are left with no choice but to apply the law as declared in the decision of the Supreme Court in Suresh N. Gupta’s case (supra). Even if it is possible to examine the question on legal principle judicial norms and propriety and the provisions of Article 141 of the Constitution do not allow us the liberty or freedom for this and accordingly this question has to be necessarily answered in favour of the Revenue and against the assessee.

50. In the result both appeals are allowed and the assessment orders as affirmed by the first appellate authority are confirmed and orders of the Tribunal are set aside. Accordingly, the substantial questions of law raised in these appeals are answered as follows :

In IT Appeal No. 277 of 2004

Q.No. Question Answer
1. Whether, the Tribunal was correct in holding that if the assessee has incurred expenditure towards part of the income which is taxable and part of the income which is exempt then the entire expenditure can be disallowed ? In the negative, in favour of the Revenue and against the assessee i.e., the Tribunal is wrong in holding that no deduction towards expenditure for earning an exempted income can be allowed.
2. Whether the assessee is liable to pay interest under section 158BFA(1) of the Act in view of the mandatory provision for belatedly filing the return of income for the block period ? In the positive, in favour of the Revenue and against the assessee i.e., liable to pay interest.

In IT Appeal No. 281 of 2004

Q.No. Question Answer
1. Whether, the Tribunal was correct in holding that no surcharge for the block period 1st April, 1990 to 10th Nov., 2000 i.e., assessment years 1991 92 to 2001-02 could be levied as proviso to section 113 of the Act came into effect from 1st June, 2002 and as the search in the present case had taken place on 10th Nov., 2000 before the proviso was introduced ? In the negative, in favour of the Revenue and against the assessee i.e., the Tribunal is wrong in holding that the tax chargeable under section 113 of the Act cannot be increased by adding the surcharge leviable for the assessment year relevant to the previous year, in which search was initiated as per section 132 of the Act.
2. Whether the proviso to section 113 of the Act should be read along with the Finance Act for each of the earlier assessment years for the entire block period and surcharge should be levied from the inception of Chapter XIV- B of the Act ? In the positive, in favour of the Revenue and against the assessee, applying the law as declared by Supreme Court in the case of Suresh N. Gupta ( supra)
3. Whether, the Tribunal was correct in holding that interest under section 158BFA(1) of the Act is charged for non-payment of tax by the assessee to the Department ? In the negative, in favour of the Revenue and against the assessee, by holding that interest on the tax amount is levied for the delayed filing of the return.
4. Whether the mandatory interest under section 158BFA(1) of the Act was correctly levied by the AO on account of the failure of the assessee to file the return of income which was filed belatedly on 22nd Feb., 1999 after the notice was issued on 27th Nov., 1997 and the due date for filing the return was 12th Jan., 1998 ? In the positive, in favour of the Revenue and against the assessee, by holding that the AO had levied interest correctly, having regard to the facts and circumstances of the case and the provisions of section 158BFA(1) of the Act.
5. Whether, the Tribunal was correct in holding that no interest under section 158BFA(1) of the Act can be levied as the Finance Bill, 1999 had proposed extension of payment of self-assessment tax to the liability under section 158BC only prospectively w.e.f. 1st June, 1999? In the negative, in favour of the Revenue and against the assessee. The Tribunal is in error in holding so.

51. However, list this matter tomorrow as Mr. Seshachala learned standing counsel has expressed some difficulty in securing the records which we wanted to peruse and can be made available tomorrow before disposing of these appeals.

31st July, 2009

We dictated the judgment in these appeals yesterday, i.e.  , on 30th July, 2009 and the appeals were not disposed of only for the reason that Sri Seshachala, learned standing counsel for the appellants-Revenue was unable to produce the records relating to the details of investment made by the individual assessee in respect of purchase of about 424 acres of land in Manvarthakaval/Talagatpura Village and the matter was directed to be listed today only for the purpose of enabling the learned standing counsel to place the records as noticed in the assessment order.

2. Sri Seshachala, learned standing counsel for the appellants-Revenue pleads inability to place the records before the Court today also and requests the matter to be called on 5th Aug., 2009.

3. We do not find it necessary to keep the matter pending only for this reason but keeping open the question as to whether any further directions are required to be issued on perusal of the record, for the present, these appeals are allowed in terms of the judgment indicated above.

4. However, it may be listed for further orders on 5th Aug., 2009 for production of records and to examine the need for issuing further directions.

5. Appeals allowed. Parties to bear their respective costs.

[Citation : 335 ITR 215]

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