Interest under s 220(2)

Where the original assessment order dated 28 February 1997 was set aside by the ITAT, once the fresh assessment order is passed dated 24 December 2006, the demands arising therefrom would not relate back to the date of service of the original demand notice and interest under s 220(2) would be leviable after thirty days of the service of the demand notice dated 24 December 2006 — as held by MumHC in CIT v Chika Overseas Pvt Ltd — In favour of: The assessee.

CIT v Chika Overseas Pvt. Ltd.

High Court of Bombay

ITA No. 3737 of 2010

J.P. Devadhar and A.R. Joshi, JJ

Decided on: 18 November 2011

Counsel appeared:

Vimal Gupta for the appellant

Ms. Aarti Vissanji with S.P. Mehta for the respondent

Oral Judgment (Per J.D. Devadhar, J.)

1. Whether the ITAT was justified in holding that the assessee was liable to pay interest u/s.

220(2) of the Income Tax Act, 1961 (‘the Act’ for short) after thirty days from the service

of the fresh demand notice dated 24/12/2006 pursuant to the fresh assessment order passed

under section 143(3) of the Act, is the question raised in this appeal.

2. The assessment year involved herein is AY 1994-95.

3. Initially, by an assessment order passed under section 143(3) of the Act on 28/2/1997, the

income for the assessment year in question was assessed at Rs.2.05 crores and by a demand

notice dated 28/2/1997, demand of Rs.1.76 crores was raised against the assessee. On appeal

filed by the assessee, the CIT(A), by his order dated 8/9/1997 partially allowed the claim of the

assessee, as a result whereof the income was reduced to Rs.18.30 lakhs. Lateron, the ITAT set

aside the assessment order dated 28/2/1997 and directed the assessing officer to pass fresh

assessment order.

4. Accordingly, the matter was heard afresh and by a fresh assessment order dated 24/12/2006

the assessing officer assessed the income at Rs.44.88 lakhs and raised a demand of Rs.22.02

lakhs. The assessee paid the amount beyond thirty days from the service of the demand notice

dated 24/12/2006. The assessing officer held that the assessee was liable to pay interest under

section 220(2) of the Act after thirty days from the service of the original demand notice dated

28/2/1997. Challenging the aforesaid order, the assessee filed an appeal before the CIT(A) who

held that the assessee is liable to pay interest after thirty days from the date of service of

demand notice dated 24/12/2006 and not after thirty days from the service of demand notice

dated 28/2/1997. The said order was upheld by the ITAT. Challenging the aforesaid order, the

revenue has filed the present appeal.

5. The argument of the revenue is that even though the original assessment order dated

28/2/1997 was set aside by the ITAT, once the fresh assessment order is passed, the demands

arising therefrom would relate back to the date of service of the original demand notice. In the

present case, the original demand was served on 28/2/1997 and, therefore, interest under

section 220(2) would be leviable after thirty days from 28/2/1997.

6) We see no merit in the above contention. Under section 156 of the Act, service of the

demand notice is mandatory. Section 220(2) of the Act provides that if the amount specified

in any notice of demand under section 156 is not paid within the period prescribed under

sub-section (1) of section 220, then, the assessee shall be liable to pay simple interest at the

rate prescribed therein.

7) In the present case, it is not in dispute that the original assessment order dated 28/2/1997 was

set aside by the ITAT with a direction to pass fresh assessment order. Accordingly, fresh

assessment order was passed on 24/12/2006 and the demand notice was served on 24/12/2006.

As per section 220(1) of the Act, the assessee was liable to pay the amount of demand within

thirty days from the service of demand notice dated 24/12/2006. It is only if the assessee fails to

pay the amount demanded, within thirty days of the service of the demand notice dated

24/12/2006 as stipulated under section 220(1) of the Act, the assessee was liable to pay

interest under section 220(2) of the Act. If the liability to pay interest under section 220(2)

arises after thirty days of the service of the demand notice dated 24/12/2006, the question of

demanding interest for the period prior to 24/12/2006 does not arise at all. Neither the

assessment order dated 24/12/2006 nor the demand notice dated 24/12/2006 required the

assessee to pay interest after thirty days from the date of service of the original demand notice

dated 28/2/1997. Since the demand itself was crystallized under the assessment order dated

24/12/2006 and the assessee under section 220(1) of the Act had time to pay that demand

upto thirty days of the service of the demand notice dated 24/12/2006, the argument of the

revenue that the assessee was liable to pay interest under section 220(2) of the Act, for

the period prior to the crystallization of the demand on 24/12/2006 cannot be sustained.

Therefore, in the facts of the present case, the decision of the ITAT in holding that the assessee

is liable to pay interest under section 220(2) of the Act from the end of the period mentioned in

section 220(1) of the Act i.e. thirty days after the service of notice of demand dated

24/12/2006 till the date on which the amount demanded was paid cannot be faulted.

8. In the result, we see no merit in the appeal and the same is hereby dismissed with no order as

to costs.