Kerala High Court
Commissioner Of Income-Tax vs Dhanalakshmy Weaving Works on 10 November, 1999
Equivalent citations: [2000]245ITR13(KER)
Author: Arijit Pasayat
Bench: Arijit Pasayat, K.S. Radhakrishnan
JUDGMENT Arijit Pasayat, C.J.
1. An interesting question arises in this reference made by the Income-tax Appellate Tribunal, Cochin Bench (in short, "the Tribunal"), under Section 256(1) of the Income-tax Act, 1961 (in short, "the Act"). The questions referred are as follows ;
"1. Whether, on the facts and in the circumstances of the case (and also in the light of the decision of the Supreme Court--169 ITR 221), the Tribunal is right in law and fact in deleting the interest levied under section 201(1A) of the Income-tax Act ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal is right in applying the decision in 151 ITR 477 rendered under Section 201 to the case concerned with the levy of interest under Section 201(1A) of the Act ?"
2. The factual position, as set out in the statement of case, is as follows: The assessee is a partnership firm carrying on business in manufacture of hand-loom cloth. During the previous year ending on June 30, 1984, relevant to assessment year 1985-86, the assessee paid a sum of Rs. 2,85,980 to Sangi and Co., as interest, without deducting tax at source. The assessee produced before the Assessing Officer evidence to show that income-tax assessment of that firm had already been completed admitting interest received from the assessee and taxes were also paid by Sangi and Co., on their assessment. For the assessee's default in not deducting tax on interest, in accordance with the provisions of section 194A of the Act, the Assessing Officer levied interest under Section 201(1A), even though no penalty was levied under Section 201(1). Interest of Rs. 9,761 was levied for the period from June 30, 1984, to October 31, 1986 under Section 201(1A). In the first appeal, the Commissioner of Income-tax (Appeals) (in short, the CIT(A)) accepted the assessee's contentions regarding non-levy of interest on the facts of the case and following the ratio of the decision of this court in CIT v. Kannan Devan Hills Produce Co. Ltd. [1986] 161 ITR 477 (Ker), the Commissioner of Income-tax (Appeals) held that no interest was to be levied for failure to deduct tax by the assessee. Accordingly, he cancelled the levy of interest.
3. Before the Tribunal, the Department's contention was that the recipient of interest had paid tax much later. The Tribunal observed that in the case of Kannan Devan Hill Produce Co.'s case [1986] 161 ITR 477 (Ker), this court had gone into the purpose behind the provisions of sections 192 and 201 of the Act and the connected sections on the payment of salary was not an end in itself and that it was only a means to an end. The liability of the employer to make deduction at source and pay over the tax to the Revenue is not independent of the liability of the employee to pay tax. If, on the estimated income of the employee, no tax is due, the employer has no liability to deduct tax at source. The liability of the employer and the employee is interconnected and not independent of each other. The Tribunal felt that though the decision was rendered by this court in connection with the failure to deduct tax on payment of salary, the ratio would apply to the deduction of tax at source on payment of interest. The Tribunal found that there was no infirmity in the order of the Commissioner of Income-tax (Appeals) in deciding the issue in favour of the assessee following the decision of this court. The Tribunal accordingly dismissed the appeal filed by the Revenue. At the instance of the Revenue, the questions, as set out above, have been referred. For bringing out the real essence of the controversy, the questions are consolidated and reframed to a single question to read as follows:
"Whether, on the facts and in the circumstances of the case, the Tribunal was justified to delete interest levied under Section 201(1A) of the Act on the ground that ultimately no tax was payable ?"
4. According to learned counsel for the Revenue, Sections 201(1) and 201(1A) stand on a different footing. One relates to levy of penalty for non-deduction and deposit and the other relates to levy of interest. The Tribunal was not justified in holding that interest was not payable. Learned counsel for the assessee, on the other hand, submitted that it has been rightly observed by the Tribunal that when no tax is payable, question of levy of interest does not arise. According to him, the two are literally interlinked.
5. For resolving the dispute, it is necessary to take note of both Sections 201(1) and 201(1A), as they stood at the relevant time. They read as follows;
"201. (1) If any such person and in the cases referred to in section 194, the principal officer and the company of which he is the principal officer does not deduct or after deducting fails to pay the tax as required by or under this Act, he or it shall, without prejudice to any other consequences which he or it may incur, be deemed to be an assessee in default in respect of the tax :
Provided that no penalty shall be charged under Section 221 from such person, principal officer or company unless the Income-tax Officer is satisfied that such person or principal officer or company, as the case may be, has without good and sufficient reasons failed to deduct and pay the tax.
(1A) Without prejudice to the provisions of Sub-section (1), if any such person, principal officer or company as is referred to in that Subsection does not deduct or after deducting fails to pay the tax as required by or under this Act, he or it shall be liable to pay simple interest at fifteen per cent per annum on the amount of such tax from the date on which such tax was deductible to the date on which such tax is actually paid.
(2) Where the tax has not been paid as aforesaid after it is deducted, the amount of the tax together with the amount of simple interest thereon referred to in Sub-section (1A) shall be a charge upon all the assets of the person, or the company, as the case may be, referred to in Sub-section (1)".
6. The levy of interest is of a compensatory measure for withholding tax which ought to have gone to the exchequer. The provision makes it clear that the levy is mandatory. It is true that the use of the expression "shall" is not always determinative of the fact whether a provision is directory or mandatory in nature. But the context in which the expression "shall" is used in Section 201(1A) makes it unambiguously clear that the levy is mandatory. The purpose of the levy is to claim compensation on the amount which ought to have been deducted and deposited and has not been clone.
7. The use of the word "shall" raises a presumption that the particular provision is imperative. But this prima facie inference may be regarded by other considerations such as the object and scope of the enactment and consequences flowing from such construction. In Sainik Motors v. State of Rajasthan, AIR 1961 SC 1480, it was observed by the apex court that the word "shall" is ordinarily mandatory, but it sometimes not so, if the context or intention otherwise demands. When a statute uses the word "shall", prima facie, it is mandatory, but the court may ascertain the real intention of the Legislature by carefully attending to the real scope of statute. In considering whether a statute is imperative, a balance may be struck between the inconvenience of sometimes rigidly adhering to it and the convenience of sometimes departing from its terms. For ascertaining the real intention of the Legislature, the court may consider, inter alia, the nature and design of the statute and the consequences which would follow from construing it one way or the other ; the impact of other provisions whereby the necessity of complying with the provisions in question is avoided ; the circumstances, namely, that the statute provides for a contingency of the non-compliance with the provisions ; the fact that the non-compliance with the provisions is or is not visited by some penalty ; the serious or the trivial consequences, that flow therefrom ; and above all, whether the object of the legislation will be defeated or furthered. If the object of enactment will be defeated by holding the same directory, it will be construed as mandatory whereas if by holding it mandatory serious general inconvenience will be created to innocent persons without very much furthering the object of enactment, the same will be construed as directory. A directory provision may be distinct from a discretionary power. The former gives no discretion and is intended to be obeyed, but a failure to obey it does not render a thing duly done in disobedience of it a nullity. The latter, i.e., discretionary power, leaves the donee of the power free to use or not to use it at his discretion. Another mode of showing a clear intention that the provision enacted is mandatory is by clothing the command in a negative form. As stated by Crawford in Statutory Interpretation, page 524, prohibitive or negative words can rarely if ever be directory. And this is so even though the statute provides no penalty for disobedience (see Lachmi Narain v. Union of India, AIR 1976 SC 714). Negative words are clearly prohibitory and are ordinarily used as a legislative device to make a statute imperative. Affirmative words stand on a weaker footing than negative words for reading the provision as mandatory, but affirmative words may also be so limiting as to imply a negative. "Interest" is a consideration paid either for use of money or for forbearance in demanding it after it has fallen due. It is a compensation allowed by law or fixed by parties or permitted by custom or usage for use of money belonging to another or for the delay in paying the money after it has become payable. It can be said to be the cost of using credit or funds of another. The liability for payment of interest at the rate stipulated accrues automatically on a failure to pay the amount of tax by the due date. This is so because such a provision is not a claim for any tax, but is a procedural matter providing machinery for recovery of tax which is compensatory in nature (see Karimtharuvi Tea Estate Ltd. v. State of Keralu [1966] 60 ITR 262 (SC) ; CST v. Qureshi Crucible Centre [1993] 89 STC 467 (SC) and Prahlad Rai v. STO [1992] 84 STC 375 (SC)). Liability to pay interest arises by operation of law, being automatic. Looking at the nature of levy, it is clear that it is compensatory in character and not in the nature of penalty. It is seen that there are several provisions where the Legislature has made a distinction between interest payable and penalty imposable. The ultimate liability for tax being not there does not dilute the requirements for the non-compliance of which interest is levied under Section 201(1A).
8. Judged in that background, the levy of interest is justified and the Tribunal was not justified in deleting it. The answer to the refrained question is in the negative, in favour of the Revenue and against the assessee. Reference application is accordingly answered.