I paid the original demand in full, got a refund when I won in appeal, and repaid on a fresh demand after losing in reference. The department now wants s.220(2) interest for the period in between. Must I pay it?
No. The Supreme Court held that the condition precedent for s.220(2) is a notice of demand under s.156 AND a default in paying the amount demanded within the time allowed. Where the assessee satisfied the original demand promptly and later satisfied the fresh demand promptly, there was no default at any point, and s.220(2) cannot be invoked for the period during which the refunded money was in his hands.
Decided by the Supreme Court (S.P. Bharucha J, N. Santosh Hegde J and Y.K. Sabharwal J) on 2001-02-09, reported as Civil Appeal Nos. 10202-04 of 1995; (2001) 247 ITR 821 (SC); AIR 2001 SC 800; 2001 (3) SCC 76. It bears on section 220(2), section 220(1), section 156 of the Income Tax Act 1961, in Demand, Recovery & Stay, How Tax Law Is Read and Refunds, Interest & Condonation matters.
This is the case that keeps s.220(2) inside its own boundaries, and it is why s.220(2) must never be argued or conceded as if it were s.234B. Section 234B compensates for a failure to pay ADVANCE TAX and runs from 1 April of the assessment year; s.220(2) compensates for a failure to pay a DEMAND and runs from the expiry of the period in the s.156 notice. They have different triggers, different periods, and different defaults, and an order or a commentary that treats them as interchangeable is wrong. The second holding matters just as much: s.3 of the Taxation Laws (Continuation and Validation of Recovery Proceedings) Act 1964 revives a demand notice that was never satisfied and got quashed along the way; it cannot be used to revive a demand notice that was fully satisfied. And the Court restated the strict-construction rule for interest — interest can be levied on delayed payment of tax only if the statute makes a substantive provision for it.
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For assessment years 1977-78, 1978-79 and 1980-81 assessment orders were served on the appellant and demand notices issued under s.156(1). The appellant paid the tax demanded and nothing remained due under those notices. On appeal the appellate authority allowed the appellant's case and the taxes paid were refunded to it. The Tribunal dismissed the Revenue's appeal. On a reference the High Court allowed the Revenue's case and upheld all the assessment orders. The Revenue then made fresh demands and the appellant paid the tax as assessed and demanded, within the time stipulated in the fresh notices. The Revenue nevertheless invoked s.220(2) and demanded interest for the period commencing with the refund of the tax after the first appellate order and ending with final payment after the disposal of the reference. The appellant's writ petitions were dismissed by a Division Bench of the Karnataka High Court, which held that s.3(2) of the Taxation Laws (Continuation and Validation of Recovery Proceedings) Act 1964 kept the earlier demand notice alive even though it had been paid in full.
The appeals were allowed, the High Court's judgment set aside, and the s.220(2) interest demands for those years quashed. The condition precedent for s.220(2) is that there be a demand notice under s.156 and a default in paying the amount so demanded within the time stipulated; where the assessee promptly satisfied both the original and the fresh demands there was no default and s.220(2) cannot be invoked. Section 3 of the Validation Act revives only a demand notice that was never satisfied and was quashed at some stage; it cannot revive a notice already fully satisfied.
The Court read s.220(2) as it stands and held that the liability arises only if the amount specified in a s.156 notice is not paid within the period limited by s.220(1); on the admitted facts the appellant satisfied the original demands and nothing remained due under them, and it satisfied the fresh demands within the time stipulated, so on a literal meaning of s.220(2) no demand for interest could be made. Applying the settled rule that revenue Acts must be given a fair and reasonable construction with no equitable construction permitted, and relying on India Carbon Ltd. v. State of Assam (interest can be levied and charged on delayed payment of tax only if the statute that levies and charges the tax makes a substantive provision in that behalf) and the Constitution Bench in V.V.S. Sugars v. Government of A.P. (a taxing statute must be interpreted as it reads, with no additions and no subtractions), the Court held the High Court's liberal interpretation impermissible. It held that s.3 of the Validation Act was enacted for a different fact situation — it revives an old demand notice that was never satisfied and was quashed during a challenge and later restored by a higher forum, dispensing with a fresh notice — and cannot be resorted to for reviving a demand notice already fully satisfied. It agreed with the Kerala High Court in ITO v. A.V. Thomas & Company (1986) 160 ITR 818, that the condition precedent is that the assessee continue as a defaulter after the s.156 notice and the further period under s.220(1), and held that the Karnataka High Court erred in declining to follow it.
If we apply this principle in interpreting Section 220 of the Act, we find that the condition precedent for invoking the said Section is only if there is a default in payment of amount demanded under a notice by the Revenue within the time stipulated therein and if such a demand is not satisfied then Section 220(2) can be invoked.
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Handle my notice → Ask a CA on WhatsAppNo. The Supreme Court held that the condition precedent for s.220(2) is a notice of demand under s.156 AND a default in paying the amount demanded within the time allowed. Where the assessee satisfied the original demand promptly and later satisfied the fresh demand promptly, there was no default at any point, and s.220(2) cannot be invoked for the period during which the refunded money was in his hands. This was decided by the Supreme Court (S.P. Bharucha J, N. Santosh Hegde J and Y.K. Sabharwal J) and bears on section 220(2), section 220(1), section 156 of the Income Tax Act 1961. It is reported as Civil Appeal Nos. 10202-04 of 1995; (2001) 247 ITR 821 (SC); AIR 2001 SC 800; 2001 (3) SCC 76. This is the case that keeps s.220(2) inside its own boundaries, and it is why s.220(2) must never be argued or conceded as if it were s.234B. Section 234B compensates for a failure to pay ADVANCE TAX and runs from 1 April of the assessment year; s.220(2) compensates for a failure to pay a DEMAND and runs from the expiry of the period in the s.156 notice. They have different triggers, different periods, and different defaults, and an order or a commentary that treats them as interchangeable is wrong. The second holding matters just as much: s.3 of the Taxation Laws (Continuation and Validation of Recovery Proceedings) Act 1964 revives a demand notice that was never satisfied and got quashed along the way; it cannot be used to revive a demand notice that was fully satisfied. And the Court restated the strict-construction rule for interest — interest can be levied on delayed payment of tax only if the statute makes a substantive provision for it. If it applies to you, the first step is this: Reconstruct the payment history against the notices: for each s.156 notice, the date served, the date the period under s.220(1) expired, and the date of payment. If nothing was ever outstanding beyond that period, s.220(2) has no starting point.
For assessment years 1977-78, 1978-79 and 1980-81 assessment orders were served on the appellant and demand notices issued under s.156(1). The appellant paid the tax demanded and nothing remained due under those notices. On appeal the appellate authority allowed the appellant's case and the taxes paid were refunded to it. The Tribunal dismissed the Revenue's appeal. On a reference the High Court allowed the Revenue's case and upheld all the assessment orders. The Revenue then made fresh demands and the appellant paid the tax as assessed and demanded, within the time stipulated in the fresh notices. The Revenue nevertheless invoked s.220(2) and demanded interest for the period commencing with the refund of the tax after the first appellate order and ending with final payment after the disposal of the reference. The appellant's writ petitions were dismissed by a Division Bench of the Karnataka High Court, which held that s.3(2) of the Taxation Laws (Continuation and Validation of Recovery Proceedings) Act 1964 kept the earlier demand notice alive even though it had been paid in full. The matter was decided on 2001-02-09 by the Supreme Court (S.P. Bharucha J, N. Santosh Hegde J and Y.K. Sabharwal J). On those facts the Supreme Court held as follows. The appeals were allowed, the High Court's judgment set aside, and the s.220(2) interest demands for those years quashed. The condition precedent for s.220(2) is that there be a demand notice under s.156 and a default in paying the amount so demanded within the time stipulated; where the assessee promptly satisfied both the original and the fresh demands there was no default and s.220(2) cannot be invoked. Section 3 of the Validation Act revives only a demand notice that was never satisfied and was quashed at some stage; it cannot revive a notice already fully satisfied.
The Court read s.220(2) as it stands and held that the liability arises only if the amount specified in a s.156 notice is not paid within the period limited by s.220(1); on the admitted facts the appellant satisfied the original demands and nothing remained due under them, and it satisfied the fresh demands within the time stipulated, so on a literal meaning of s.220(2) no demand for interest could be made. Applying the settled rule that revenue Acts must be given a fair and reasonable construction with no equitable construction permitted, and relying on India Carbon Ltd. v. State of Assam (interest can be levied and charged on delayed payment of tax only if the statute that levies and charges the tax makes a substantive provision in that behalf) and the Constitution Bench in V.V.S. Sugars v. Government of A.P. (a taxing statute must be interpreted as it reads, with no additions and no subtractions), the Court held the High Court's liberal interpretation impermissible. It held that s.3 of the Validation Act was enacted for a different fact situation — it revives an old demand notice that was never satisfied and was quashed during a challenge and later restored by a higher forum, dispensing with a fresh notice — and cannot be resorted to for reviving a demand notice already fully satisfied. It agreed with the Kerala High Court in ITO v. A.V. Thomas & Company (1986) 160 ITR 818, that the condition precedent is that the assessee continue as a defaulter after the s.156 notice and the further period under s.220(1), and held that the Karnataka High Court erred in declining to follow it. In the words reproduced by the source cited on this page: "If we apply this principle in interpreting Section 220 of the Act, we find that the condition precedent for invoking the said Section is only if there is a default in payment of amount demanded under a notice by the Revenue within the time stipulated therein and if such a demand is not satisfied then Section 220(2) can be invoked." The decision followed or applied India Carbon Ltd. & Ors. v. State of Assam [1997 (6) SCC 479] — applied; V.V.S. Sugars v. Government of A.P. & Ors. [1999 (4) SCC 192] — applied; ITO v. A.V. Thomas & Company (1986) 160 ITR 818 (Kerala) — approved.
It was decided by the Supreme Court on 2001-02-09 and is reported as Civil Appeal Nos. 10202-04 of 1995; (2001) 247 ITR 821 (SC); AIR 2001 SC 800; 2001 (3) SCC 76. Binding on every court and authority in India. A Supreme Court decision binds every assessing officer, every Commissioner (Appeals), every bench of the Income Tax Appellate Tribunal and every High Court in India. An officer who declines to follow it is acting contrary to law, and that refusal is itself a ground of appeal. On section 220(2), section 220(1), section 156, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The appeals were allowed, the High Court's judgment set aside, and the s.220(2) interest demands for those years quashed. The condition precedent for s.220(2) is that there be a demand notice under s.156 and a default in paying the amount so demanded within the time stipulated; where the assessee promptly satisfied both the original and the fresh demands there was no default and s.220(2) cannot be invoked. Section 3 of the Validation Act revives only a demand notice that was never satisfied and was quashed at some stage; it cannot revive a notice already fully satisfied. It arises in Demand, Recovery & Stay, How Tax Law Is Read and Refunds, Interest & Condonation matters, on section 220(2), section 220(1), section 156 of the Income Tax Act 1961, and was decided by S.P. Bharucha J, N. Santosh Hegde J and Y.K. Sabharwal J. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Say expressly which charge you are contesting. If the order charges both s.234B and s.220(2), attack them separately — this case does nothing for a s.234B charge. Where the department relies on the 1964 Validation Act, point out that s.3 revives only an unsatisfied demand notice and dispenses with the need for a fresh notice; it does not resurrect a notice already fully satisfied. Where the demand is later reduced by an appellate or revisional order, work the proviso to s.220(2): the interest is reduced accordingly and any excess interest paid is refundable. Ask for the s.220(2) computation in writing with the start date and the notice it is anchored to; that alone disposes of a large number of these charges.
Validity check could not be completed. Validity check could not be completed; no citator search for later treatment was run on this pass. The judgment was applied by the Delhi High Court in Dr. Prannoy Roy v. CIT (21 December 2001), which reproduces it at length, and by the Full Bench of the Andhra Pradesh High Court in SMS Schloemann Siemag v. Dy. CIT [2001] 250 ITR 97 (AP) (FB) as noted in that judgment. The text of s.220(2) and its proviso reproduced in the judgment is the 2001 text and is not necessarily the current text; check the section as it stands for the year in hand. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The judgment on the source page carries NO paragraph numbers; the quote below is therefore identified by position, not by number. Note that the Delhi High Court in Dr. Prannoy Roy v. CIT reproduces this same judgment with paragraph numbers 8, 9 and 10, which are the numbers in the law reports — a reader working from the reported version will find the quoted passage at para 10, which is the paragraph the Delhi High Court's reproduction places it in. The version of s.220(2) reproduced in the judgment is the text as it stood in 2001 and includes a proviso listing ss.154, 155, 250, 254, 260, 262, 264 and s.245D(4); it must not be relied on as the current text. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The appeals were allowed, the High Court's judgment set aside, and the s.220(2) interest demands for those years quashed. The condition precedent for s.220(2) is that there be a demand notice under s.156 and a default in paying the amount so demanded within the time stipulated; where the assessee promptly satisfied both the original and the fresh demands there was no default and s.220(2) cannot be invoked. Section 3 of the Validation Act revives only a demand notice that was never satisfied and was quashed at some stage; it cannot revive a notice already fully satisfied.
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