High Court Of Punjab & Haryana
CIT vs. Upper India Steel Mfg. & Engg. Co. Ltd.
Sections 115JA, 143(1)(a), 207, 234B, 234C
Asst. Year 1997-98, 1998-99, 1999-2000
N.K. Sud & S.S. Grewal, JJ.
IT Appeal Nos. 172 & 173 of 2003
25th September, 2004
Counsel Appeared
D.S. Patwalia, for the Appellant : Sanjay Bansal, for the Respondent
JUDGMENT
N.K. Sud, J. :
This order will dispose of three IT Appeal Nos. 172 and 173 of 2003 and 49 of 2004, involving common questions of law and facts.
These appeals are directed against the common order passed by the Income-tax Appellate Tribunal, Chandigarh Bench ‘B’ (for short “the Tribunal”), dt. 18th Nov., 2002. Revenue is aggrieved by the finding of the Tribunal that interest under ss. 234B and 234C of the IT Act, 1961 (for short “the Act”), cannot be charged in a case where income is computed as per provisions of s. 115JA of the Act.
Briefly stated, the identical facts of the cases are that the assessees filed their respective returns declaring income computed as per provisions of s. 115JA of the Act. While processing the returns, the AO charged interest under ss. 234B and 234C of the Act on the tax determined on the returned income.
Being aggrieved, the assessees filed appeals before the Commissioner of Income-tax (Appeals) [for short “the CIT(A)”] challenging the levy of interest. It was contended before the CIT(A) that s. 115JA intended to tax income by creating a legal fiction by which total income is deemed to be 30 per cent of the book profits and such fiction did not extend beyond that. It was also argued that until the books of account are completed and book profits determined, the assessees would not know as to whether they were liable to pay tax under s. 115JA of the Act or not. This fact can only be known after the close of the financial year. The CIT(A) accepted the assessee’s contention and deleted the levy of interest under ss. 234B and 234C of the Act. He also held that the issue about levy of interest in a case where tax is levied on the basis of income computed under s. 115JA of the Act was a debatable one and thus fell outside the ambit of s. 143(1)(a) of the Act.
On further appeals by the Revenue, the Tribunal has upheld the orders of the CIT(A) on both the counts and dismissed the appeals of the Revenue. The Tribunal has held that the power of the AO under s. 143(1)(a) of the Act was limited to : (a) rectifying any arithmetical error, (b) allowing any deduction, allowance or relief, which on the basis of information available in the return, accounts or documents was, prima facie, admissible but was not claimed, and (c) disallowing any deduction, allowance or relief in the return which on the basis of the information available in such return was, prima facie, inadmissible. It does not empower the AO to make substantial adjustments which would require examination of any evidence or which would require a hearing to be given to the assessee. According to the Tribunal, the issue about leviability of interest under ss. 234B and 234C of the Act being debatable, fell outside the scope of the provisions of s. 143(1)(a) of the Act. The Tribunal has also accepted the other contention that even on merits, interest under ss. 234B and 234C of the Act could not be levied in cases where the taxable income was computed under s. 115JA of the Act because the question about applicability of the provisions of s. 115JA of the Act can be known only after the close of the books of account at the end of the previous year whereas advance tax was to be paid prior to that date. For this purpose, the Tribunal has placed reliance on its earlier order in some other case which had been decided on the basis of the judgment of the Karnataka High Court in Kwality Biscuits Ltd. vs. CIT (2000) 159 CTR (Kar) 316 : (2000) 243 ITR 519 (Kar).
4. Mr. D.S. Patwalia, learned counsel for the Revenue, contended that levy of interest is merely a process of determining the liability of the assessee on account of tax or interest payable by the assessee on the basis of return of income. This process of determination of assessee’s liability cannot be equated with an adjustment made in the income or loss declared in the return as had been done by the Tribunal. He, therefore, contended that the Tribunal has erred in holding that levy of interest under ss. 234B and 234C of the Act was an adjustment made by the AO under s. 143(1)(a) of the Act and cancelling the same on the ground that the issue being debatable, was outside the purview of that section. He pointed out that the provisions of ss. 234B and 234C of the Act are mandatory and the interest chargeable thereunder is not penal in nature but is compensatory. Learned counsel further contended that the view taken by the Karnataka High Court in the case of Kwality Biscuits Ltd. (supra) was not based on a correct interpretation of the relevant provisions of the Act. He pointed out that a contrary view has been taken by various High Courts in the following cases : (i) Assam Bengal Carriers Ltd. vs. CIT (2000) 162 CTR (Gau) 170 : (1999) 239 ITR 862 (Gau); (ii) Itarsi Oils & Flours (P) Ltd. vs. CIT (2001) 170 CTR (MP) 158 : (2001) 250 ITR 686 (MP); (iii) CIT vs. Kotak Mahindra Finance Ltd. (2003) 183 CTR (Bom) 491 : (2004) 265 ITR 119 (Bom); and (iv) CIT vs. Holiday Travels (P) Ltd. (2003) 181 CTR (Mad) 442 : (2003) 127 Taxman 250 (Mad).
Mr. Sanjay Bansal, learned counsel for the assessee, on the other hand, supported the orders of the CIT(A) and the Tribunal.
We have heard the counsel for the parties and have perused the relevant provisions of the Act. We have also gone through the authorities cited before us.
We find merit in the contention raised on behalf of the Revenue that the Tribunal has wrongly equated the AO’s action in levying interest under ss. 234B and 234C of the Act with an adjustment referred to in s. 143(1)(a) of the Act. Sec. 143(1)(a) reads as under : “143(1)(a). Where a return has been made under s. 139, or in response to a notice under sub-s. (1) of s. 142,— (i) if any tax or interest is found due on the basis of such return, after adjustment of any tax deducted at source, any advance tax paid and any amount paid otherwise by way of tax or interest, then, without prejudice to the provisions of sub-s. (2), an intimation shall be sent to the assessee specifying the sum so payable, and such intimation shall be deemed to be a notice of demand issued under s. 156 and all the provisions of this Act shall apply accordingly; and (ii) if any refund is due on the basis of such return, it shall be granted to the assessee : Provided that in computing the tax or interest payable by or refundable to the assessee, the following adjustments shall be made in the income or loss declared in the return, namely : (i) any arithmetical errors in the return, accounts or documents accompanying it shall be rectified; (ii) any loss carried forward, deduction, allowance or relief, which, on the basis of the information available in such return, accounts or documents, is prima facie admissible but which is not claimed in the return, shall be allowed; (iii) any loss carried forward, deduction, allowance of relief claimed in the return, which, on the basis of the information available in such return, accounts or documents, is prima facie, inadmissible, shall be disallowed : Provided further that an intimation shall be sent to the assessee whether or not any adjustment has been made under the first proviso and notwithstanding that no tax or interest is due from him : Provided also that an intimation under this clause shall not be sent after the expiry of two years from the end of the assessment year in which the income was first assessable.” A perusal of cl. (i) shows that the AO has to determine the tax or interest found due on the basis of the return after adjustment of prepaid tax or interest and send an intimation to the assessee specifying the amount payable by him. Tax and interest has to be computed as per the provisions of the Act. Clause (ii) provides for grant of refund if the assessee is found to be so entitled on the basis of the return. The first proviso describes the adjustments which the AO is required to make in the income or loss declared in the return. These adjustments clearly relate to the determination of quantum of income or loss. Levy of tax or interest does not amount to adjustment in the income or loss declared in the return. The Tribunal, in our opinion, has committed the basic mistake of treating the levy of interest under ss. 234B and 234C of the Act at par with the adjustments envisaged under this proviso. Thus, the tests applicable to examine the validity of adjustments permissible under s. 143(1)(a) of the Act have been wrongly applied by the Tribunal for quashing the levy of interest under ss. 234B and 234C of the Act. The Tribunal was required to resolve the issue solely on merits and could not have granted the relief on the ground that the issue was debatable.
8. The validity of the provisions of ss. 234A, 234B and 234C of the Act came to be challenged before the Karnataka High Court in Union Home Products Ltd. & Ors. vs. Union of India & Ors. (1995) 129 CTR (Kar) 217 : (1995) 215 ITR 758 (Kar), on the ground that these provisions provided unfettered power to the assessing authority and automatic imposition of interest without affording any opportunity of hearing to the assessee. The learned single Judge held that on the basis of language employed in ss. 234A, 234B and 234C of the Act, it is clear that the object behind the introduction of the said provisions by means of the Direct Tax Laws (Amendment) Bill, 1987, was to remove uncertainty in the matter of assessments by cutting down the areas of subjective decisions of the tax authorities with a view to ensure uniform treatment of persons similarly placed and to reduce litigation. It was further held that these sections do not envisage grant of any hearing; the levy was automatic the moment it was proved that the assessee committed a default within the comprehension of the provisions in question. At p. 776, the Karnataka High Court held thus : “…..In the first place, the very purpose behind the introduction of ss. 234A, 234B and 234C is to take away from the authorities concerned the discretion of reducing or waiving the levy of interest which was earlier exercisable by them. In other words, the impugned provisions do not envisage the grant of any hearing or the grant of any relief to the assessees concerned insofar as the levy of interest is concerned. The levy is automatic the moment it is proved that the assessee has committed a default within the comprehension of any one of the provisions in question. That being so, it is difficult to accept the argument that the authorities must grant such a hearing and exercise the power to grant relief, the legislative intent to the contrary notwithstanding. The principles of natural justice upon which the petitioners rely do not supplant the law, they simply supplement it. These principles have no application where a statute either by express words or by necessary implication excludes the grant of a hearing to the assessee concerned. The provisions of ss. 234A, 234B and 234C are in my opinion, incapable of being interpreted to mean that the assessee concerned has a right of being heard against the levy which is otherwise automatic in nature.”
9. This Court in Sant Lal vs. Union of India & Ors. (1996) 134 CTR (P&H) 581 : (1996) 222 ITR 375 (P&H), concurred with the view of the Karnataka High Court in the case of Union Home Products Ltd. (supra). The argument raised on behalf of the assessee that the provisions should be held ultra vires as they leave no discretion with the AO to waive or reduce the interest even in a case of extreme hardship, was rejected by holding as under (at p. 385) : “We shall now deal with the argument of learned counsel for the petitioners that, even in cases of extreme hardship, no discretion has been conferred upon the assessing authority to waive or reduce interest and, therefore, the provisions impugned are unreasonable. It is well-settled that the legislature is presumed to be aware of the needs of the time and the measures to be adopted for collection of revenue and the Courts cannot interfere with the legislative instrument merely because there does not exist a provision in the statute giving some discretion to the authorities constituted under the Act. It is also well-settled that mere hardship to a particular party cannot be a ground for holding that the statute is unreasonable. Under the taxing statutes, greater degree of latitude vests with the legislature. The choice of the legislature in matters pertaining to taxes as well as the mode and manner of recovery of taxes cannot ordinarily be interfered with by the Court.”
10. The Bombay High Court in Umesh S. Bangara vs. Union of India (2004) 189 CTR (Bom) 319 : (2004) 268 ITR 405 (Bom), has also concurred with the decisions in the cases of Union Home Products Ltd. (supra) and Sant Lal (supra).
11. It is, thus, clear that the provisions contained in ss. 234A, 234B and 234C of the Act are surely not penal provisions but are compensatory in nature for breach of civil obligation. These provisions have been introduced to obviate the arbitrariness and to eliminate the subjective decisions of the tax authorities ensuring uniform treatment to similarly situated persons. The provisions are mandatory and the levy thereunder is automatic, the moment it is proved that a default has been committed within the comprehension of any one of the provisions in question.
12. In Mrs. Prabha Lal vs. CIT (2004) 190 CTR (Pat) 99 : (2004) 269 ITR 212 (Pat), it was held that the taxing statutes should be viewed with greater latitude than laws touching civil liberty and the legislature should be allowed some play in the joints. The Court held that the provisions of s. 234C of the Act could not be declared unconstitutional only on the ground that it may create hardship in some cases.
13. In CIT vs. Anjum M.H. Ghaswala & Ors. (2001) 171 CTR (SC) 1 : (2001) 252 ITR 1 (SC), the nature of these provisions was examined by the apex Court and it was held that interest leviable under ss. 234A, 234B and 234C of the Act was mandatory in nature. At p. 13, the apex Court has observed as under : “….. Secs. 234A, 234B and 234C in clear terms impose a mandate to collect interest at the rates stipulated therein. The expression ‘shall’ used in the said section cannot, by any stretch of imagination, be construed as ‘may’. There are sufficient indications in the scheme of the Act to show that the expression ‘shall’ used in ss. 234A, 234B and 234C is used by the legislature deliberately and it has not left any scope for interpreting the said expression as ‘may’. This is clear from the fact that prior to the amendment brought about by the Finance Act, 1987, the legislature in the corresponding section pertaining to imposition of interest used the expression ‘may’ thereby giving a discretion to the authorities concerned to either reduce or waive the interest. The change brought about by the Amending Act (Finance Act, 1987) is a clear indication of the fact that the intention of the legislature was to make the collection of statutory interest mandatory.”
14. The scope of ss. 234B and 234C of the Act was considered by the Bombay High Court also in CIT vs. Kotak Mahindra Finance Ltd. (supra), and it was observed as under (at p. 124) : “…..It is well settled that interest under s. 234B is compensatory in character. It is not penal in nature. So also, interest under s. 234C is compensatory in character. It is for this reason that s. 234B does not envisage grant of hearing insofar as levy of interest is concerned. The levy is automatic on it being proved that the assessee has committed a default as governed by s. 234B. This reasoning also applies to levy of interest under s. 234C. Therefore, the question of equity, rules of natural justice and justification for not making payment do not arise for determination in cases where interest is leviable under s. 234B and s. 234C.”
15. From the foregoing discussion, it is clear that once a default within the meaning of ss. 234B and 234C of the Act takes place, levy of penal interest is automatic and there is no scope for applying the principles of equity or rules of natural justice. No hearing is required to be given to the assessee seeking any justification for not making the payment of advance tax.
16. Sec. 207 of the Act provides that tax shall be payable in advance during the financial year in accordance with the scheme provided in ss. 208 to 219 in respect of the total income of the assessee that would be chargeable to tax for the assessment year immediately following that financial year. Such income has been described as “current income”. Thus, this section contemplates estimation of current income by the end of the financial year and on the basis of such estimation, the assessee is required to pay advance tax. Advance tax is payable on the current income irrespective of whether the same is computed under s. 115J or under the other provisions of the Act. In other words, the expression “current income”, on which advance tax is payable under the provisions of s. 207, does not exclude the income computed under the provisions of s. 115J. We, therefore, find no merit in the contention that the provisions of ss. 234B and 234C of the Act would not be attracted in cases where a company is assessed on the income computed under s. 115J. As already observed, the levy is automatic without any notice to the assessee. The Tribunal has cancelled the levy by placing reliance on its earlier order decided on the basis of the judgment of the Karnataka High Court in the case of Kwality Biscuits Ltd. (supra). The Karnataka High Court while accepting the claim of the assessee, has observed as under (at p. 526) : “The liability of the assessee for payment of tax under s. 115J arises if the total income as computed under the provisions of the Act is less than 30 per cent of its book profits. This exercise for determining the total income in accordance with the provisions of the Act and that of book profit can be only after the end of the relevant assessment year. It is only the deemed income for which the provisions of s. 115J have been incorporated. When a deeming fiction is brought under the statute, it is to be carried to its logical conclusion but without creating further deeming fiction so as to include other provisions of the Act which are not specifically made applicable. Since the entire exercise of computing the income or that of book profit could be only at the end of the financial year, the provisions of ss. 207, 208, 209 or 210 cannot be made applicable, until and unless the accounts are audited and the balance sheet is prepared, even the assessee may not know whether the provisions of s. 115J would be applicable or not. The liability would be after the book profits are determined in accordance with the Companies Act. The words “for the purposes of this section” in the Explanation to s. 115J(1A) are relevant and cannot be construed to extend beyond the computation of liability of tax.”
17. From the above, it is clear that two factors had weighed with the High Court while granting relief to the assessee. Firstly, that the provisions of s. 207 are not applicable to an income determined under s. 115J and, secondly, that a hardship is caused to the assessee because the liability to pay tax on the book profits is determined only at the end of the financial year. Both the grounds, according to us, are not tenable. As already observed earlier, provisions of s. 207 do not exclude the income determined under s. 115J from the purview of current income on which advance tax is payable. Similarly, there is no scope for considering hardship of the assessee as the levy is automatic and does not require any opportunity to be given to the assessee. We, therefore, dissent from the judgment of the Karnataka High Court in the case of Kwality Biscuits Ltd. (supra).
18. The view that we have taken is supported by the judgments of the Gauhati, Bombay, Madhya Pradesh and Madras High Courts.
19. In the case of Assam Bengal Carriers Ltd. (supra), the Gauhati High Court has observed as under (at p. 866) : “Sec. 207 of the Act envisions that tax shall be payable in advance, during any financial year on current income in accordance with the scheme provided in ss. 208 to 219 (both inclusive) in respect of the total income of the assessee that would be chargeable to tax for the assessment year immediately following that financial year. Sec. 215(5) of the Act spelled out what is the ‘assessed tax’, i.e., the tax determined on the basis of the regular assessment so far as such tax relates to income subject to advance tax. The evaluation of the current income as well as the determination of the assessed income accordingly, are to be made in terms of the statutory scheme comprising s. 115J of the Act. Under the setting of the statute, the levy of interest is inescapable. The scheme of the statute, as referred to above, unerringly points out that an assessee under the circumstances is to pay advance tax.”
20. In the case of Kotak Mahindra Finance Ltd. (supra), similar contentions raised on behalf of the assessee were repelled by the Bombay High Court and levy of interest upheld in the following terms (at p. 128) : “….. In our opinion, merely because the curtain rises in the cases of companies falling under s. 115J after 31st March, is no ground for the assessee-company not to pay interest under s. 234B and s. 234C. Under s. 115J, every assessee- company had to compute the total income under the Act and, thereafter, compare such total income with the book profits and if the total income computed under the Act was less than 30 per cent of the book profits, then the total income shall be deemed to be 30 per cent of the book profits. It is not in dispute that every such company has to prepare its P&L a/c under Sch. VI of the Companies Act after the end of the accounting year/previous year but, once it is found that the total income computed under the Act is less than 30 per cent of the book profits and consequent upon which there is non-payment or short-payment of advance tax then, the provisions of ss. 234B and 234C are automatically attracted.”
21. The Bombay High Court concurred with the judgments of the Gauhati High Court in the case of Assam Bengal Carriers Ltd. (supra) and that of Madhya Pradesh High Court in the case of Itarsi Oils & Flours (P) Ltd. (supra) and disagreed with the judgment of the Karnataka High Court in the case of Kwality Biscuits Ltd. (supra).
22. In the case of Itarsi Oils & Flours (P) Ltd. (supra), the Madhya Pradesh High Court has also held that there is no mention in ss. 234B and 234C of the Act that in cases of determination of income under s. 115J, the provisions of the same would not be attracted.
23. While upholding the levy of interest under s. 234B of the Act, the Madras High Court in the case of Holiday Travels (P) Ltd. (supra), has observed as under (at p. 255) : “…..It is true that for the applicability of s. 115J of the Act, the starting point is the P&L a/c for the relevant previous year which should be drawn in accordance with the provisions of the Companies Act and to the net profit as shown in the P&L a/c, certain amounts which are found in the Explanation to s. 115J are added to arrive at the book profit. There is no doubt that the entire exercise under s. 115J of the Act is required to be made and can be made only on the basis of the net profit arrived at on the basis of the P&L a/c. However, the question remains whether it is not possible for the assessee to estimate the profit of the current year. It is axiomatic that all assessees who are chargeable to income-tax are required to estimate current income and pay advance tax on the current income. The companies have all along been estimating current income prior to the insertion of s. 115J of the Act and paying the advance tax on the current income. It is significant that the company-assessees have been estimating the total income after providing for the deductions admissible under the IT Act. The shift now is that a company has to estimate its profit and pay advance tax on the basis of the estimate of the profits of the company. We are of the view, it cannot be regarded that it would be an impossible exercise or an insurmountable difficulty for the company-assessees to estimate the profits of the company during the current year itself and there would be no difficulty at all for a company maintaining its account on mercantile basis to estimate that profit during the current year itself and pay the advance tax on the estimated current profits. We find no logic in the view that, if the company can estimate the current income after providing for all deductions that may be available under the IT Act, it is not possible for the company to estimate the profits of the company of the current year.”
24. We fully concur with the view expressed in the aforesaid judgments. The Madras High Court has correctly pointed out that for the purpose of payment of advance tax, all assessees including the companies, are required to make an estimate of their current income. Even before the introduction of the provisions of s. 115J of the Act, companies had been estimating their total income after providing deductions admissible under the Act. In fact, all assessees who maintain books of account have to undertake this exercise for the purpose of payment of advance tax. If a P&L a/c can be drawn up on estimate basis for the purpose of IT Act, it is not understood as to why a similar P&L a/c on estimate basis under the Companies Act cannot be drawn up. If the explanation of the companies that the profits under s. 115J of the Act can only be determined after the close of the year were to be accepted, then no assessee who maintains regular books of account would be liable to pay advance tax as in those cases also, income can only be determined after the close of the books of account at the end of the year.
25. Before parting, we would like to observe that it cannot be said that even in a case of extreme hardship, the assessee is left with no remedy to seek waiver or reduction of interest leviable under ss. 234A, 234B or 234C of the Act. Sec. 119(2) of the Act confers powers upon the Board to grant relaxation of any of the provisions mentioned in the sub-section including ss. 234A, 234B and 234C of the Act. As a matter of fact, the Board, in exercise of its power under s. 119(2)(a) has already issued a notification on 23rd May, 1996 [see (1997) 225 ITR (St) 101] which was subsequently partly modified on 13th Jan., 1997, authorising the Chief CIT and Director General of IT to reduce or waive interest under these provisions under certain circumstances.
26. In view of the above, we are satisfied that the Tribunal was not right in holding that the assessee was not liable to pay interest under ss. 234B and 234C of the Act. Accordingly, the appeals are allowed and the findings of the Tribunal are reversed. No costs
[Citation : 279 ITR 123]
