Circular No. 334

1211. Levy of interest under sub-section (2) when original assessment is set aside/cancelled

What this is

Circular No. 334 was issued by the Central Board of Direct Taxes on 3 April 1982. Its subject is 1211. Levy of interest under sub-section (2) when original assessment is set aside/cancelled.

What it does

Fixes how interest under section 220(2) runs when the assessment behind the demand falls. Where the assessment is cancelled by the Income-tax Officer under section 146, or is cancelled or set aside by an appellate or revisional authority and that becomes final, no interest under section 220(2) can be charged on the original demand notice at all; when the assessment is reframed, interest can run only after thirty-five days from service of the demand notice issued on the fresh assessment. Where, on the other hand, the original assessment is varied or set aside by one appellate authority but the Income-tax Officer's order is restored wholly or in part on further appeal, interest under section 220(2) is computed from the due date reckoned from the original demand notice on the tax finally determined, and it makes no difference that in the intervening period no tax was payable under any operative order. The same position applies mutatis mutandis under the other direct taxes.

Why it was issued

Doubts had been raised about the quantum of interest chargeable under section 220(2) in these three situations, and the Board took the Ministry of Law's advice.

Who it reaches

Assessees whose assessments were set aside and later reframed
Assessees whose assessments were restored on second appeal
Tax Recovery Officers computing interest on an old demand
Assessees who obtained cancellation under section 146

The provisions it speaks to

Left, the provision of the Income-tax Act, 1961 as the instrument itself names it. Right, the section of the Income-tax Act, 2025 that the department’s own concordance maps it to — which is where the same ground is now covered.

Under the 1961 Act	Now
s.146	no counterpart recorded
s.220	s.411

The instrument, as the Board published it

The words below are the department’s own, reproduced from its published text. Where the department’s copy carried a publisher’s notes after the instrument, those are not reproduced.

1211. Levy of interest under sub-section (2) when original assessment is set aside/cancelled
1. Doubts have been raised as to the quantum of interest chargeable under section 220(2) when the original assessment order passed by the Income-tax Officer is—
(a) cancelled by him under section 146;
(b) set aside/cancelled by an appellate/revisional authority and such appellate/revisional order has become final ; or
(c) set aside by one appellate authority but, on further appeal, the order setting aside the assessment is varied by the second appellate authority and the demand gets finally determined.
2. These issues were comprehensively examined in consultation with the Ministry of Law and the Board has been advised :
1. Where an assessment order is cancelled under section 146 or cancelled/set aside by an appellate/revisional authority and the cancellation/setting aside becomes final (i.e., it is not varied as a result of further appeals/revisions), no interest under section 220(2) can be charged pursuant to the original demand notice. The necessary corollary of this position will be that even when the assessment is reframed, interest can be charged only after the expiry of 35 days from the date of service of demand notice pursuant to such fresh assessment order.
2. Where the assessment made originally by the Income-tax Officer is either varied or even set aside by one appellate authority but on further appeal, the original order of the Income-tax Officer is restored either in part or wholly, the interest payable under section 220(2) will be computed with reference to the due date reckoned from the original demand notice and with reference to the tax finally determined. The fact that during an intervening period, there was no tax payable by the assessee under any operative order would make no difference to this position.
3. The foregoing legal position will apply mutatis mutandis to the proceedings under other direct taxes also.
Circular : No. 334 [F. No. 400/3/81-ITCC], dated 3-4-1982.

What to watch

Everything turns on whether the setting aside became final or was undone on further appeal; the two lines produce very different interest.
Where the original order is restored, the intervening period during which nothing was payable is still charged, which is the point most often disputed.
In the set-aside line the fresh demand notice starts a new thirty-five day clock, so interest cannot be carried over from the old notice.
The Board extends the position to the other direct tax enactments, so the same working is used there.

Where you meet it

In a recovery or rectification proceeding over interest charged under section 220(2) after an appeal effect order, and in a stay application against that interest.

An example

Ours, not the Board’s: a worked case built from the rule the instrument sets, to show how it falls out.

An assessment is set aside in appeal and the appellate order becomes final. Interest under section 220(2) on the original demand stops for good, and when the Income-tax Officer reframes the assessment and serves a fresh demand notice, interest begins only thirty-five days after that service. Had the Tribunal instead restored the original assessment in part, interest would have run from the due date under the first demand notice on the tax finally determined.

On the same provision

Other instruments in this library that name the same provision of the 1961 Act. They are not necessarily still operative, and a later one may have replaced an earlier one without saying so.

Circular No. 15/2024 — Order under section 119(1) of the IT Act, 1961 fixing the monetary limits of the Income-tax authorities in respect of re 4 November 2024
Circular No. 589 — Whether Assessing Officer can exercise discretion under section 220(6) to treat assessee as not being in default in resp 16 January 1991
Circular No. 530 — Whether Assessing Officer can exercise discretion under section 220(6) to treat assessee as not being in default in resp 6 March 1989
Circular No. 251 — Circular dated 25-7-1969 granting stay of recovery of tax under sub-section (7) to assessees having income in Pakistan w 29 January 1979
Circular No. 25 — Circular dated 25-7-1969 granting stay of recovery of tax under sub-section (7) to assessees having income in Pakistan w 25 July 1969

← Circular No. 336, dated 6-4-1982 · Circular No. 333 →

A circular binds the department, not you and not a court. The Board issues a circular to its own officers. An assessee may hold the department to a circular that helps him; the department cannot hold an assessee to one that hurts him, and the Tribunal and the courts decide the law for themselves.

Source: the Income Tax Department’s own published text — its page for this instrument.