I paid the demand on time, won in appeal, got a refund, then lost on reference and paid again on a fresh demand. Can the department charge me s.220(2) interest for the period in between?
No. The condition precedent for s.220(2) is a default in paying the amount demanded within the time stipulated in the notice under s.156. Where the assessee satisfied the original demand on time, and later satisfied a fresh demand on time after the Revenue succeeded, there was never a default, and no interest can be charged for the intervening period during which the money was with the assessee under a refund granted by the Revenue itself.
Decided by the Supreme Court (S.P. Bharucha J, N. Santosh Hegde J and Y.K. Sabharwal J (judgment by Santosh Hegde J)) on 2001-02-09, reported as Civil Appeal Nos. 10202-04 of 1995 (Supreme Court of India), on appeal from Writ Petition Nos. 17068-70 of 1988 of the High Court of Karnataka; reported at (2001) 247 ITR 821, AIR 2001 SC 800 and 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 and How Tax Law Is Read matters.
This is the Supreme Court's answer to a demand that still gets raised whenever an assessment is restored after appellate reversal. It matters most in the set-aside and remand cycle, where the department treats the original demand as having revived. The Court also confines s.3 of the Taxation Laws (Continuation and Validation of Recovery Proceedings) Act, 1964 to its purpose: it revives a demand notice that was never satisfied and was quashed at some stage, dispensing with a fresh notice; it cannot revive a notice that has already been fully satisfied. The wider proposition is worth having on hand in every interest dispute - interest can be levied only if the statute levying the tax makes a substantive provision for it, and a taxing statute is read as it is, with no additions and no subtractions.
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For AYs 1977-78, 1978-79 and 1980-81 assessment orders were served on the appellant and demand notices issued; the appellant paid the tax due. The appellate authority allowed the appellant's appeals and the taxes paid were refunded to it. The Tribunal dismissed the Revenue's appeal, but 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 re-paid the taxes as assessed and demanded, within the time stipulated. The Revenue nevertheless invoked s.220(2) and demanded interest for the period from the refund following the first appellate order until the taxes were finally paid after the reference was decided. The appellant's writ petitions challenging that interest 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 notwithstanding payment in full.
The appeals were allowed, the impugned judgment set aside, and the demands made by the Revenue under s.220(2) for interest on the tax due for AYs 1977-78, 1978-79 and 1980-81 quashed. Section 220(2) cannot be invoked to demand interest from the appellant, the condition precedent being a demand notice under s.156 and a default in paying the amount demanded within the time stipulated, neither of which existed.
The Court set out s.220(2) with its proviso and read it literally: liability to interest arises where the amount specified in a notice of demand under s.156 is not paid within the period limited under s.220(1). On the facts, the original demands were satisfied and nothing was due under them, and the fresh demands issued after the reference were also satisfied within time; on a literal meaning such a demand for interest cannot be made. The High Court's liberal interpretation was rejected: in construing revenue statutes the Court must give a fair and reasonable construction without leaning either way, adhere to the words used, and reject equitable construction - applying India Carbon Ltd. v. State of Assam [1997 (6) SCC 479], that interest can be levied on delayed payment of tax only if the statute levying the tax makes a substantive provision for it, and the Constitution Bench in V.V.S. Sugars v. Government of A.P. [1999 (4) SCC 192], that a taxing statute must be interpreted as it reads, with no additions and no subtractions. Section 3 of the Validation Act was enacted for a different fact-situation: it revives an old demand notice never satisfied by the assessee which was quashed at some stage of a challenge and later restored, and does away with the need for a fresh notice; it cannot be resorted to for reviving a demand notice already fully satisfied. The Court agreed with the Kerala High Court in ITO v. A.V. Thomas & Company (1986) 160 ITR 818, that the assessee must continue as a defaulter after the s.156 notice and the further 35 days under s.220(1) for the liability to accrue, and held the Karnataka High Court in error for 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 condition precedent for s.220(2) is a default in paying the amount demanded within the time stipulated in the notice under s.156. Where the assessee satisfied the original demand on time, and later satisfied a fresh demand on time after the Revenue succeeded, there was never a default, and no interest can be charged for the intervening period during which the money was with the assessee under a refund granted by the Revenue itself. This was decided by the Supreme Court (S.P. Bharucha J, N. Santosh Hegde J and Y.K. Sabharwal J (judgment by Santosh Hegde 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 (Supreme Court of India), on appeal from Writ Petition Nos. 17068-70 of 1988 of the High Court of Karnataka; reported at (2001) 247 ITR 821, AIR 2001 SC 800 and 2001 (3) SCC 76. This is the Supreme Court's answer to a demand that still gets raised whenever an assessment is restored after appellate reversal. It matters most in the set-aside and remand cycle, where the department treats the original demand as having revived. The Court also confines s.3 of the Taxation Laws (Continuation and Validation of Recovery Proceedings) Act, 1964 to its purpose: it revives a demand notice that was never satisfied and was quashed at some stage, dispensing with a fresh notice; it cannot revive a notice that has already been fully satisfied. The wider proposition is worth having on hand in every interest dispute - interest can be levied only if the statute levying the tax makes a substantive provision for it, and a taxing statute is read as it is, with no additions and no subtractions. If it applies to you, the first step is this: Build the chronology first: the date of each s.156 notice, the date of payment, the date of the refund, the date of the fresh notice and the date of the second payment. If each demand was met within time, there is no default and s.220(2) does not arise.
For AYs 1977-78, 1978-79 and 1980-81 assessment orders were served on the appellant and demand notices issued; the appellant paid the tax due. The appellate authority allowed the appellant's appeals and the taxes paid were refunded to it. The Tribunal dismissed the Revenue's appeal, but 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 re-paid the taxes as assessed and demanded, within the time stipulated. The Revenue nevertheless invoked s.220(2) and demanded interest for the period from the refund following the first appellate order until the taxes were finally paid after the reference was decided. The appellant's writ petitions challenging that interest 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 notwithstanding payment 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 (judgment by Santosh Hegde J)). On those facts the Supreme Court held as follows. The appeals were allowed, the impugned judgment set aside, and the demands made by the Revenue under s.220(2) for interest on the tax due for AYs 1977-78, 1978-79 and 1980-81 quashed. Section 220(2) cannot be invoked to demand interest from the appellant, the condition precedent being a demand notice under s.156 and a default in paying the amount demanded within the time stipulated, neither of which existed.
The Court set out s.220(2) with its proviso and read it literally: liability to interest arises where the amount specified in a notice of demand under s.156 is not paid within the period limited under s.220(1). On the facts, the original demands were satisfied and nothing was due under them, and the fresh demands issued after the reference were also satisfied within time; on a literal meaning such a demand for interest cannot be made. The High Court's liberal interpretation was rejected: in construing revenue statutes the Court must give a fair and reasonable construction without leaning either way, adhere to the words used, and reject equitable construction - applying India Carbon Ltd. v. State of Assam [1997 (6) SCC 479], that interest can be levied on delayed payment of tax only if the statute levying the tax makes a substantive provision for it, and the Constitution Bench in V.V.S. Sugars v. Government of A.P. [1999 (4) SCC 192], that a taxing statute must be interpreted as it reads, with no additions and no subtractions. Section 3 of the Validation Act was enacted for a different fact-situation: it revives an old demand notice never satisfied by the assessee which was quashed at some stage of a challenge and later restored, and does away with the need for a fresh notice; it cannot be resorted to for reviving a demand notice already fully satisfied. The Court agreed with the Kerala High Court in ITO v. A.V. Thomas & Company (1986) 160 ITR 818, that the assessee must continue as a defaulter after the s.156 notice and the further 35 days under s.220(1) for the liability to accrue, and held the Karnataka High Court in error for 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. v. State of Assam 1997 (6) SCC 479 - applied; V.V.S. Sugars v. Government of A.P. 1999 (4) SCC 192 - applied; ITO v. A.V. Thomas & Company (1986) 160 ITR 818 (Ker) - approved.
It was decided by the Supreme Court on 2001-02-09 and is reported as Civil Appeal Nos. 10202-04 of 1995 (Supreme Court of India), on appeal from Writ Petition Nos. 17068-70 of 1988 of the High Court of Karnataka; reported at (2001) 247 ITR 821, AIR 2001 SC 800 and 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 impugned judgment set aside, and the demands made by the Revenue under s.220(2) for interest on the tax due for AYs 1977-78, 1978-79 and 1980-81 quashed. Section 220(2) cannot be invoked to demand interest from the appellant, the condition precedent being a demand notice under s.156 and a default in paying the amount demanded within the time stipulated, neither of which existed. It arises in Demand, Recovery & Stay and How Tax Law Is Read 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 (judgment by Santosh Hegde 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. Distinguish your case from one where the original demand was never paid - that is where s.3 of the Validation Act operates and where s.220(2) interest can run. Where the department relies on the Validation Act, put it to proof that the original notice was unsatisfied when it was quashed. Keep this point separate from s.234B: s.220(2) is interest on a demand notice in default, not interest on shortfall in advance tax.
Validity check could not be completed. Later treatment was not checked on this pass, and no search was made for any legislative change to s.220(2) since 2001 other than the rate. The rate stated in the section as reproduced in the judgment is out of date - see the editor note - but the holding turns on the condition precedent of default, not on the rate. Distinguish the proviso to s.220(2), which reduces interest where the amount on which it was payable is reduced by an appellate or rectification order; that situation is not what this case decides. 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 is not divided into numbered paragraphs, so any citation to a paragraph number in this case would be wrong; the key sentence is located here by its position in the reasoning. The text of s.220(2) reproduced in the judgment carries the rate of 'one and one-half per cent for every month or part of a month'. That rate has since been changed and the current rate could NOT be established on this pass: the departmental pages incometaxindia.gov.in/w/section-220 and /w/section-220-2 carry 'Year:' stamps of 2000 and 2001 and print one and one-half per cent and one and one-fourth per cent respectively, both of which are archived. Do not take the current rate of s.220(2) interest from this entry. The page prints an "Equivalent citations" line; the judgment is reported at (2001) 247 ITR 821, AIR 2001 SC 800 and 2001 (3) SCC 76 among others. The case number shown is Appeal (civil) 10202-04 of 1995, the date of judgment 09.02.2001, and the judgment was delivered by Santosh Hegde J. 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 impugned judgment set aside, and the demands made by the Revenue under s.220(2) for interest on the tax due for AYs 1977-78, 1978-79 and 1980-81 quashed. Section 220(2) cannot be invoked to demand interest from the appellant, the condition precedent being a demand notice under s.156 and a default in paying the amount demanded within the time stipulated, neither of which existed.
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