Kerala H.C : On the conjoint effect of ss. 237 to 240, 241 and 244 of the IT Act, 1961, there has been a conflict of judicial opinion.

K. SUKUMARAN, J.:

On the conjoint effect of ss. 237 to 240, 241 and 244 of the IT Act, 1961, there has been a conflict of judicial opinion. On the one side is the view taken by the Allahabad High Court in Purshottam Dayal Varshney vs. CIT (1974) 94 ITR 187 and by the Bombay High Court which followed it in CIT vs. S. C. Shah (1981) 25 CTR (Bom) 401 : (1982) 137 ITR 287. On the other, is the decision of a learned judge of this Court in New Woodlands vs. CIT (1982) 27 CTR (Ker) 341 : (1982) 138 ITR 795. It is that decision which has been challenged in the appeal before us.

The facts of the case are not tedious nor complicated. The assessee was subjected to assessments for the years 1968-69, 1969-70 and 1970-71 by exhibits P-1 to P-3 orders, the first two on March 16, 1972, and the last one on March 19, 1973. The tax demanded for the respective years was Rs. 19,594, Rs. 38,702 and Rs. 58,838. Appeals were filed against the assessment orders. The appeals for the first two years were disposed of by the appellate order, exhibit P-4, dated September 15, 1972, and that of the year 1970-71 by the order, exhibit P-5, dated October 24, 1973. It is sufficient to notice at this juncture that, under the above orders, the assessments had been cancelled. A reassessment was directed.

In due course, that exercise was undertaken and completed by the assessing authority. Exhibits P-6 to P-8 evidence the resultant assessment orders for the three years 1968-69 to 1970-71. The proceedings resulted in a refund of Rs. 7,004, Rs. 12,222 and Rs. 75,547, respectively, for the three years in question. There was a consequential direction for refund of the interest and penalty already levied. The assessee claimed interest for the entirety of the period subsequent to the disposal of the appeals by the AAC. The order of the ITO, exhibit P-9, dated November 30, 1977, declined that request. The revisional jurisdiction of the CIT was invoked by the petitions, exhibits P-10 to P-12. The revisions were ultimately disposed of by the CIT under exhibit P- 15 order dated January 27, 1978, which upheld the order, exhibit P-9, passed by the ITO.

The pursuit of the remedy before this Court by filing a writ petition under Art. 226 of the Constitution as is evident from New Woodlands vs. CIT (supra)was unsuccessful. The pursuit continues. The appeal is before us. Judicial thoughts contained in the decisions on the point referred to above have considerably lightened our work in dealing with this interesting and somewhat involved issue.

We feel that the question could be viewed from a larger aspect, in the constitutional framework, and the status and set up of the Union of India. A Government has necessarily to collect taxes from the citizens but subject to the constitutional limitations. One limitation is indicated in Art. 265. It inhibits the State from levying or collecting any tax without the authority of law. The conjoint effect of that article with a corresponding provision under s. 72 of the Indian Contract Act has been interpreted by the Supreme Court as casting an obligation on the State to refund the tax when the basis of the collection was blasted by a legal process. Interest, ordinarily, is a reckonable compensation, when there is a retention of the amount due, particularly for an unduly long period. We have passed those stages where payment of interest was found to be un- social or immoral. Even in rigorous climes where such payments were felt to be taboo, the concept has come to settle and interest payment has come to be recognised.

The law has recognised that there could be damage due to delay in the payment of money. Such damage is nothing but interest, declared Lord Kincairney, way back in 1897. In about a decade, another important decision on interest was rendered in Toronto Railway Co. vs. Toronto Corporation (1906) AC 117 (PC). F. A. Mann referred to the decision and gave his comment on the legal position thus: “Where money is due and payment has been demanded, but with-held, interest is recoverable as of right, a fact which has had singularly little influence on English law, but deserves great emphasis.” (Emphasis, italicised in print, supplied) (See [1985] 101 Law Quarterly Review, page 31) The same author points out how “since the days of Roman law interest has rightly and, indeed, necessarily been treated as a form of damages, . . . ” and recollects how among other legal Codes of modern times, “American law equiparate (sic) damages and interest.” The English Court declared the law in a case in which the President of India was a party. The reason for interest payment was explained thus: “….when money is owing from one party to another and that other is driven to have recourse to legal proceedings in order to recover the amount due to him, the party who is wrongfully withholding the money from the other ought not in justice to benefit by having that money in his possession and enjoying the use of it, when the money ought to be in the possession of the other party who is entitled to its use.” (See observations of Lord Brandon of Oakbrook in President of India vs. La Pintada Compania Navigacion S. A. (1984) 3 WLR 10 (HL).

8. These general principles underlying the right to claim in one case, and lliability to pay in the other, interest could be useful in giving a properproper perspective of the problem even beyond the confines of the statutory framework.

At times when the society was somewhat static, and when inflationary spiral was a rare phenomenon, interest may not have been of much significance. It is not so in modern times. This has heightened the obligation of a party who had had the benefit of undeserved money in his hands. To insist upon such a party to disgorge a benefit or advantage received by the retention of the amount to which it was not entitled will not be inequitable or immoral. Is it illegal ?is the question which we have to consider in the backdrop of the scheme of the IT Act, in particular, the provisions referred to above. Sec. 237 of the Act specifically provides for the refund of tax in the circumstances made mention of therein. Secs. 240, 241 and 244 have relevance in understanding the scheme of the enactment. It is unnecessary to, extract those sections over again, inasmuch as the essence thereof has been already subjected to a detailed discussion by the judicial decisions referred to already. Sec. 240 primarily casts an obligation on the ITO to refund to the assessee the amount which has become due to him as a result of an order passed in appeal or other proceeding under this Act. This makes it abundantly clear that to entitle him to the refund, it is superfluous for the assessee to make a claim in that behalf. The ingredients of the section are not difficult to be visualised. It is not enough that a favourable order is passed in appeal or other proceedings as far as the assessee is concerned. The question of refund must have arisen on the basis of such an appellate order or other proceedings. In the case of an assessee who has not paid any amount by way of tax, the question of refund does not arise at all. In the case of an assessee who has been assessed somewhat excessively, but who had paid only a portion of the tax, a refund of a tax will not arise as a result of the appellate order, if even after reckoning the relief as granted by the appellate order, further tax is payable. In other words, the mere passing of an appellate order is not sufficient to entitle an assessee to the refund referred to in s. 240. Other conditions also have to be satisfied. That, according to us, is the significance of the term “refund of any amount becomes due to the assessee.”

Sec. 244 is the substantial provision with which we are concerned. It posits a case where refund is due to the assessee by virtue of s. 240. If the scope of the order under s. 240 is as we have indicated above, in the present case refund had already become due as a result of the appellate order. It is unnecessary to consider hypothetical cases where, for technical reasons, an assessment has been set aside, but has been restored with, an equal measur of tax on the recomputation or reassessment. In the present case, it cannot be overlooked that the ultimate position is one where the assessee was entitled to considerable amounts by way of refund. A projection of this state of affairs to an anterior point of time would also, therefore, not make any difference in the situation.

The other ingredients of the section had been satisfied, in the back-ground of the above factual position and the legal interpretation we have placed on the two sections. If there be any lingering doubt, that too vanishes when a reference is made to s. 241 of the IT Act. That section visualises a situation where an order giving rise to a refund is the subject-matter of an appeal or further proceedings or, where any other proceedings under the Act is pending. Parliament has sought to make art equitable provision between the Revenue on the one hand and the citizen on the other. To protect the interest of the Revenue, it is necessary that the realisation of the legitimate tax is not in jeopardy. “A bird in hand is worth two in the bush”. Amounts already paid but found returnable due to technical reason for a temporary phase may become payable again in the event of completion of other proceedings or the hearing of an appeal. Such amounts need not be parted with during the interregnum. At the same time, the resultant hardship to an assessee arising out of the retention of the amount due by way of refund, when such retention of amount is to subserve the interest of the Revenue, has also to be taken care of. It is a balancing of these two ideas that is reflected in s. 241. It enables the officer to retain with him the amount, subject of course, to the safeguard of prior approval as visualised therein. Simultaneously and that is important the assessee is also enabled to have some compensation for the retention of the amount so made by the IT authority, albeit without the authority of law. The scheme is, therefore, clear that, consequent on an appellate order, and de hors the justifiability for the retention of the tax amount paid by the assessee, an obligation arises on the part of the Revenue to effect the refund. Sec. 244 is fully attracted to such a situation, with a corresponding obligation for the payment of interest as well.

15. An analysis of this provision has been undertaken in the earlier decision of the Allahabad High Court, as indicated earlier, in Purshottam Dayal Varshney vs. CIT (1974) 94 ITR 187. The crux of the reasoning of the Allahabad High Court is contained in the passage reading : “Under the IT Act, although the liability to pay tax is cast upon an assessee each year in accordance with the Finance Act of that year, yet the tax becomes due and payable only when an assessment order is passed and a notice of demand If there is no assessment order, the assessee is not liable to pay any tax. It follows, therefore, that if an assessment order is set aside, the notice of demand becomes ineffective and the tax already paid under such a notice of demand becomes refundable. If a fresh assessment is made, the tax determined as a result of the fresh assessment order again becomes due and payable only after a fresh notice of demand is served upon the assessee. “

16. Adverting to the provisions in s. 244, that Court observed (at P. 190) : “This provision fully covers the cases where remand proceedings are pending after the assessment order is set aside. In such cases, the ITO can, with the approval of the CIT, withhold the refund till the remand proceedings are over. The Legislature has taken care that if the refund is withheld, the assessee is not deprived of the interest on such refund to which he may be ultimately found entitled.”

The fact that, as soon as an assessment order is set aside, the tax paid by the assessee under the assessment order becomes refundable to him, subject to the restrictions indicated above is also emphasised in the judgment. The Division Bench of the Bombay High Court, Madon and Sujata V. Manohar JJ., approvingly referred to the Allahabad jdgment in CIT vs. S. C. Shah (supra)The Court observed (at p. 292) : “The Allahabad High Court in this case has observed that as soon as the assessment order is set aside, the tax paid by the assessee under the assessment order becomes refundable to him. No doubt, the ITO is entitled to withhold the refund with the previous approval of the CIT during the pendency of remand proceedings under the provisions of s. 241 of the IT Act. But even in such a case, under the provisions of s. 244, sub-s. (2), interest becomes payable on the amount of refund ultimately determined to be due for the period commencing after the expiry of six months from the end of the month in which the order referred to in s. 241 is passed, to the date the refund is granted.”

18. The decision of the Bombay High Court which was rendered on July 3, 1981, was apparently not available when the learned single judge pronounced the present judgment in New Woodlands vs. CIT (1982) 138 ITR 795 (Ker). The learned judge took the view that the Allahabad decision did not have force and effect after the Taxation Laws (Continuation and Validation of Recovery, Proceedings) Act, 1964. An assessment order may merge in the appellate orders but not the notice of demand. Even when the assessment order disappears as a result of appellate or other actions, the notice of demand remains with its life and activity observed the learned judge. The learned judge further observed : “What, is required by an order of remand is not to refund the money collected as per the original order, but to recompute the amount of, tax that is payable by the assessee. The original assessment is annulled, not with a view to refund, but with a view to the correct determination of the liability. Refund is only the consequence of that determination. The object of remand is, therefore, not to refund, but to recalculate, and then, to refund the excess, if any. That being the position, the question of interest as per s. 244 does not arise until a fresh computation of the tax is made by fresh assessment. With great respect, I do not accept as correct law the views expressed to the contrary by the Allahabad High Court in Purshottam Dayal Varshney vs. CIT (supra). “

19. We are clearly of the view that the Amendment Act does not have the effect as indicated by the learned judge. The amendment refers to a specific situation and operation only in a limited field. The Validation Act only dispenses with a fresh notice of demand in cases where the amount of tax had been reduced by the appellate authority. It cannot have any effect when the appellate authority annuls absolutely the assessment in totality, with a further direction to make a fresh determination. The basic reasoning contained in the decisions of the Allahabad and Bombay High Courts remains unaffected by the Validation Act, On principle and precedent, we are, therefore, of the view that the CIT and the ITO erred when they declined the payment of interest as demanded by the petitioner. We allow the original petition, quashing exhibits P-9 and P-15. We direct the ITO to effect the refund, in accordance with the principles indicated hereinabove. The appeal is allowed as above. There will be no order as to costs.

[Citation : 188 ITR 137]