Kerala High Court
Kerala State Cashew Development ... vs Income-Tax Officer And Anr. on 27 July, 1990
Equivalent citations: [1990]186ITR521(KER)
JUDGMENT T.L. Viswanatha Iyer, J.
1. This appeal is by the assessee against the dismissal of its writ petition, The assessee had challenged the order of the Commissioner of Income-tax refusing substantially its prayer for waiver of the interest levied under Section 139(8) of the Income-tax Act, 1961 ("the Act"). The learned single judge did not find any merit in the writ petition and dismissed it. The judgment is reported as Kerala State Cashew Development Corporation Ltd. v. ITO [1984] 145 ITR 266 (Ker).
2. The assessment year in question is 1975-76 corresponding to the accounting year ending March 31, 1975. The appellant is a company owned by the State of Kerala, running thirty-four cashew factories in the State. The appellant is an assessee on the files of the first respondent, the Income-tax Officer, C-Ward, Trivandrum. The return for the assessment year 1975-76 was due on July 31, 1975, under Section 139(1) of the Act. The appellant applied for and obtained extension of time for furnishing the return up to September 30, 1975, but actually furnished it only on January 23, 1976. The tax payable on self-assessment under Section 140A was Rs. 74.24 lakhs. The assessment was completed on December 6, 1977, disallowing certain claims for deduction and making some additions to the income returned. The Appellate Assistant Commissioner modified the assessment on appeal. But we are not concerned in this appeal with the details of the assessment or its modification. Copies of the order of assessment and of the revised order giving effect to the appellate order are exhibits P-1 and P-2.
3. By and under the assessment, the Income-tax Officer made demand for an amount of Rs. 5,57,515 as interest under Section 139(8) for the period from August 1 to December 31, 1975, for the delayed furnishing of the return. This stood reduced to Rs. 5,09,770 because of the modification in appeal. The appellant applied for waiver of the interest under the proviso to Section 139(8) read with Rule 117A(v) of the Income-tax Rules, 1962 ("the Rules"), by its application, exhibit P-3, dated August 25, 1978. The ground stated in support of the application was the delay in the audit having regard to the large volume of accounts involved. The Income-tax Officer, however, rejected the application by his proceedings, exhibit P-4, dated September 5, 1978, stating :
"In case you had found by the end of September, 1975, that the audited balance-sheet, etc., would not be ready by September 30, 1975, you could have filed a provisional return showing the income as per the pro-audited balance-sheet and profit and loss account and then revised it if necessary after the audit. That you did not do this means that the matter had not been given the attention it deserved and that too without any reasonable cause. In the circumstances, I am unable to come to the conclusion that you were prevented by sufficient cause from furnishing the return in time."
4. The appellant challenged the order, exhibit P-4, in revision under Section 264 of the Act before the Commissioner of Income-tax by the petition exhibit P-5.
5. In the meanwhile, the Income-tax Officer imposed penalty on the appellant under Section 271(1)(a) of the Act for failure without reasonable cause to furnish the return within the time allowed. The penalty was, however, cancelled in appeal by the Commissioner of Income-tax (Appeals) by his order, exhibit P-7, dated January 14, 1980. The Commissioner held that the fact that the audit of the appellant's accounts had not been finalised in time to enable the return to be furnished before the prescribed date was sufficient to hold that there was no default without reasonable cause on the part of the appellant.
6. The appellant's revision petition, exhibit P-5, was thereafter disposed of by the order, exhibit P-8, dated May 27, 1980. It was partly allowed reducing the interest charged by rupees one lakh. It was the appellant's contention before the Commissioner that since the penalty imposed under Section 271(1)(a) was cancelled, finding reasonable cause for the failure to furnish the return in time, the interest should be completely waived. The Commissioner noted the submission and observed :
"It could, therefore, be inferred that the evidence produced by the petitioner-company was to the satisfaction of the Income-tax Officer and the petitioner-company was prevented by sufficient cause from furnishing the return within time. This, however, does not automatically mean that the interest levied should be waived in toto."
7. He then went on to consider the case on merits and noted that the appellant-assessee was liable to pay an admitted amount of Rs. 74.24 lakhs on self-assessment under Section 140A. The result of the belated submission of the return was to postpone payment of this amount by about six months. This was a factor which could not be ignored while dealing with the petition for waiver of interest. In the circumstances, the Commissioner held that since Government revenues had suffered by the belated submission of the return, this was not a case for total waiver of interest. Nevertheless, he reduced the interest levied by rupees one lakh with the following observations :
"Having regard to the large amount the payment of which stood postponed because of the belated submission of return, and taking into consideration the rate at which interest is paid by the Government on excess payment of tax, and also taking into consideration the fact that' the self-assessment tax was not paid on the due date but was paid in instalments, it would suffice if, in the present case, the interest charged is reduced by Rs. 1 lakh."
8. The appellant challenges the order, exhibits P-4 and P-8, in this original petition.
9. Before the learned single judge, the appellant's contention was that "reduction" and "waiver" conveyed the same meaning in Rule 117A and, therefore, when once the Commissioner (Appeals) had found that there was "reasonable cause" for not furnishing the return in time, it must necessarily follow that the appellant was entitled to total waiver of interest. The learned single judge held that the words "reduction" and "waiver" had not been employed as interchangeable or as to convey the same idea. The intention was to convey different ideas, and to confer different powers, the power to reduce interest and if it was so thought fit to waive interest altogether. The learned single judge noted that interest under Section 139(8) was compensatory and not punitive as held by this court in Kerala Tile and Clay Works v. CIT [1976] 104 ITR 597. The order, exhibit P-8, had been passed with reference to relevant circumstances. This was not a case for total waiver of interest and the appellant was not entitled to any relief. The original petition was, accordingly, dismissed. The assessee challenges this decision in the appeal.
10. The contention of Sri. Sivarajan for the appellant is that when once it is accepted that the assessee had sufficient cause for not filing the return in time (as was held by the Commissioner in his order, exhibit P-8, in the passage extracted in paragraph 5 above), which alone attracts the power under Rule 117A(v), there is no option left to the Income-tax Officer but to waive the interest. To vest a further discretion either to reduce or to waive, even after finding sufficient cause, will lead to arbitrariness, leaving the Income-tax Officer to act on his whims and fancies. He submits, therefore, that there should have been a total waiver of interest in this case as against a mere reduction of Rs. one lakh by the Commissioner. He submits further that the loss sustained by the Government by the delayed payment of the tax is not a factor relevant in considering the question of reduction or waiver of interest under Rule 117A(v).
11. Counsel for the Revenue, however, points out that the levy of interest under Section 139(8) is not punitive but compensatory, and, therefore, the interest is leviable irrespective of whether the penatly under Section 271(1)(a) is leviable or not. The cancellation of the penalty by the order, exhibit P-7, is irrelevant since the levy of interest is compensatory. The loss to the Government by delayed payment is a very relevant factor in exercising the discretion under the proviso to Section 139(8) and under Rule 117A.
12. Before proceeding to discuss the issue involved, it will only be appropriate to extract the relevant statutory provisions as they stood in the relevant year of assessment :
"139. (8)(a) Where the return under Sub-section (1) or Sub-section (2) or Sub-section (4) for an assessment year is furnished after the specified date, or is not furnished, then whether or not the Income-tax Officer has extended the date for furnishing the return under Sub-section (1) or Sub-section (2), the assessee shall be liable to pay simple interest at twelve per cent. per annum, reckoned from the day immediately following the specified date to the date of the furnishing of the return, or, where no return has been furnished, the date of completion of the assessment under Section 144, on the amount of the tax payable on the total income as determined on regular assessment, as reduced by the advance tax, if any, paid, and any tax deducted at source :
Provided that the Income-tax Officer may, in such cases and under such circumstances as may be prescribed, reduce or waive the interest payable by any assessee under this sub-section .... (Explanations omitted as unnecessary)
(b) Where as a result of an order under Section 154, or Section 155 or Section 250 or Section 254 or Section 260 or Section 262 or Section 264, the amount of tax on which interest was payable under this sub-section has been reduced, the interest shall be reduced accordingly, and the excess interest paid, if any, shall be refunded."
"Rule 117A. Reduction or waiver of interest payable under Section 139.---The Income-tax Officer may reduce or waive the interest payable under Section 139 in the cases and in the circumstances mentioned below, namely :--
(i) where the return of income is furnished by a person who has been treated under Section 163 as an agent of a non-resident and is assessed in respect of the latter's income ;
(ii) where the return of income is furnished by an assessee whose only source of income during the relevant previous year is a share in the income of an unregistered firm which has been assessed on its total income in respect of that previous year under Clause (b) of Section 183 ;
(iii) where the return of income of a deceased individual is furnished by his legal representative and the legal representative satisfies the Income-tax Officer that he had sufficient cause for not furnishing such return within time ;
(iv)where the return of income has been furnished in pursuance of a notice issued under Section 148 ;
(v) any case in which the assessee produces evidence to the satisfaction of the Income-tax Officer that he was prevented by sufficient cause from furnishing the return within time :
Provided that the previous approval of the Inspecting Assistant Commissioner has been obtained where the amount of interest reduced or waived, as the case may be under Clause (iv) or Clause (v) exceeds one thousand rupees."
13. We may, at this stage, point out that the Act, as it stood enacted in 1961, provided, by the proviso to Sub-sections (1) and (2), for charging interest on the balance amount of tax payable, if the date for furnishing the return was extended beyond September 30 or December 31, as the case may be, in relation to the cases mentioned, on the application of the assessee. There was also provision for recomputation of the interest in the light of modifications on rectification or on appeal, reference or revision. Sub-section (8) was inserted with effect from April 28, 1963, enabling the Income-tax Officer to reduce or waive the interest payable under the Section in such cases and under such circumstances as may be prescribed. This, prescription of cases and circumstances came in the shape of Rule 117A which we have extracted earlier.
14. This was the position before April 1, 1971. The provisions were amended substantially with effect from that date. The provisions for interest were all concentrated in the amended Sub-section (8) with the power of reduction or waiver being provided in the proviso. It was specified that whether or not the assessee applied for extension, interest was chargeable in all cases where the return was furnished beyond the prescribed date, But power vested in the Income-tax Officer to reduce or waive the interest in such cases and under such circumstances as may be prescribed was continued. This was the position during the relevant assessment year 1975-76.
15. The cases and the circumstances envisaged by the proviso to Section 139(8) are to be found in Rule 117A. We are concerned with Sub-rule (v) thereof as per which the Income-tax Officer may reduce or waive the interest in cases where the assessee produces evidence to the satisfaction of the Income-tax Officer that he was prevented by sufficient cause from furnishing the return within time. Since we are concerned in this case only with this sub-rule, the discussion in this judgment will be centred on, and be confined to, the effect of this sub-rule.
16. The case of the appellant-assessee is that once sufficient cause is made out to attract Sub-rule (v), total waiver of interest should follow as a matter of course without any discretion to the Income-tax Officer merely to reduce it, without waiving it in toto.
17. It is indisputable that interest under Section 139(8) is levied by way of compensation and not by way of penalty. The interest is levied because the default in furnishing the return in time results in postponement of payment of tax by the assessee, thereby depriving the State of a corresponding amount of revenue for the period of delay. It was to compensate for the loss so occasioned that Parliament enacted the provision for payment of interest. The very period for which interest is levied points to the nature of the levy as compensatory. It is true that penalty may also be imposed under Section 271(1)(a) for the very same default. But that is a punishment for the assessee's failure to comply with a statutory duty and is deterrent in character. Interest is compensatory while penalty is punitive. (See in this connection Kerala Tile and Clay Works v. C1T [1976] 104 ITR 597 (Ker) ; CIT v. Chandra Sekhar (M.) [1985] 151 ITR 433 (SC) ; Central Provinces Manganese Ore Co, Ltd. v. CIT [1986] 160 ITR 961 (SC) and Ganesh Dass Sreeram v. ITO [1988] 169 ITR 221 (SC)). It must be remembered that when the statute provides a time limit within which an assessee should do a particular thing, it is also entitled to provide, inter alia, for compensation by way of interest in case the act is not done in time and thereby loss is caused to the Revenue. The fact that penalty is also imposable for the delayed furnishing of the return is irrelevant as penalty is punitive while interest is compensatory and each is complementary to the other.
18. It is evident from the provisions of Section 139(8) that interest becomes chargeable in all cases where the return is not furnished within the prescribed time. That is the reason why provision is made for reduction or waiver in appropriate cases and discretion vested in the Income-tax Officer for the purpose. This power, no doubt, should be exercised judiciously and fairly, keeping in mind factors relevant to the issue and eschewing irrelevant factors and circumstances, to be inferred from the policy of the law itself.
19. On the language of the proviso to Section 139(8) and having regard to the fact that the Legislature itself had left it to the rule-making authority to prescribe the conditions and circumstances, it has to be held that what the proviso intends is only to vest a discretion in the Income-tax Officer to reduce or waive the interest. In fact, the Supreme Court termed it so in the case of Central Provinces Manganese Ore Co. Ltd. [1986] 160 ITR 961, 967. The levy of interest is obligatory, but with a discretion vested in the assessing authority to reduce or waive it.
20. It is for the Income-tax Officer to reduce the interest in appropriate cases and waive it altogether if the circumstances of a given case justify it. As the discretion is one intended to be exercised objectively and reasonably, the Income-tax Officer cannot refuse to reduce or waive the interest, if the circumstances of a case warrant it. If the circumstances are such that a total waiver is called for, that has to be allowed and it will not be open thereafter to the Income-tax Officer to deny waiver. Similarly, the quantum of reduction to be allowed in a given case must be arrived at objectively and fairly. At the same time, it could not be said, as contended by the appellant before us, that the reduction or waiver follows as a matter of course, or as of right on sufficient cause being made out. All the relevant circumstances have to be considered. The exercise will depend upon an overall survey and assessment of all the facts and circumstances of the case. One of the relevant factors which needs to be taken into account in the exercise of the discretion is the loss to the Revenue by reason of the delay in furnishing the return, This is because the very levy of interest is compensatory and not penal.
21. A necessary corollary of the above discussion is that the exercise of the discretion is open to judicial review and is liable to be struck down if it has been arbitrary or unreasonable or if it is based on irrelevant circumstances or without advertence to relevant factors.
22. As observed in Breen v. Amalgamated Engineering Union [1971] 2 QB 175, 190 (CA) :
"The discretion of a statutory body is never unfettered. It is a discretion which is to be exercised according to law. That means at least this : the statutory body must be guided by relevant considerations and not by irrelevant. If its decision is influenced by extraneous considerations which it ought not to have taken into account, then the decision cannot stand. No matter that the statutory body may have acted in good faith : nevertheless the decision will be set aside."
23. So long as the discretion is exercised in accordance with law and in accordance with the well-established principles governing the exercise of the discretion, its exercise will not be open to challenge. We cannot, therefore, accept the tall contention put forward by Sri Sivarajan for the appellant that as soon as sufficient cause for not furnishing the return within time is made out, waiver of interest should follow.
24. What Sub-rule (v) stipulates is only a condition precedent the establishment of which alone will form the foundation for reduction or waiver of interest. It is not as if waiver of interest should follow automatically if sufficient cause enjoined by Sub-rule (v) is made out. There is no warrant for this proposition in the language of Rule 117A(v). On the other hand, it is clear that the sub-rule gets attracted and the question of exercising the discretion arises only if the circumstance mentioned in it is found to exist. There is no negation of the discretion merely because the basic condition for its exercise is found to exist.
25. If Sub-rule (v) is satisfied, necessarily the discretion is required to be exercised, as stated earlier, fairly and reasonably, having regard to the relevant facts and eschewing irrelevant circumstances. These factors and circumstances have to be governed by the policy of law and the purpose for which Section 139(8) is enacted, namely, to compensate the Revenue for the loss sustained due to the delay in payment of the tax consequent on the delay in filing the return. When the interest is compensatory, it must necessarily follow that the loss sustained by the State is a relevant factor. We cannot agree with counsel for the petitioner that this is irrelevant.
26. It is not as if that is the only relevant factor. It is only one of the relevant factors. There may be circumstances where, despite the loss caused to the State, the assessee may still be entitled to reduction or waiver of interest. For instance, it is possible to visualise cases where an assessee, for no fault on his part, is nevertheless prevented for reasons beyond his control from furnishing the return or from paying tax admitted to be due. Or there may be other reasons why levy of interest is not justified in a given case. An illustration of such a case is given by the Supreme Court itself in the second penultimate paragraph of the judgment in Ganesh Dass Sreeram's case [1988] 169 ITR 221. We are not entering into any discussion of such possible circumstances and cases as it is neither desirable nor possible to straitjacket them into rigid formula and rules. Each case has to be evaluated on its own facts and the discretion exercised objectively.
27. The High Court of Karnataka had taken the view ini Govindaraju (S.) v. CIT [1982] 138 ITR 495 that it was incumbent on the Income-tax Officer to issue notice to the assessee and hear him before levying interest under Section 139(8). It was also stated that where penalty under Section 271(1)(a) has been cancelled on the ground that the assessee had reasonable cause for not furnishing the return in time, the levy of interest under Section 139(8) was not justifiable. Considerable reliance was placed on this decision by counsel for the assessee, but we do not find our way to accepting or following the ratio of this decision on either of these points. It has been held by the Supreme Court in Central Provinces Manganese Ore Co. Ltd. v. CIT [1986] 160 ITR 961 that it is not obligatory for the Income-tax Officer to issue notice to the assessee and hear him before levying interest under Section 139(8). If such notice is issued and opportunity afforded, the assessee can certainly plead his grounds under Rule 117A even at the time of the assessment. But absence of such notice and hearing does not vitiate the charging of interest. If, however, no such opportunity was afforded to the assessee before levying the interest, it will be open to the assessee to apply for reduction or waiver under the proviso to that section, and show that the circumstances of his case justified a reduction or waiver. This is what the Supreme Court said (headnote) :
"Since the statute provides for the waiver or reduction of interest, it is open to the Income-tax Officer before imposing a levy under Sub-section (8) of Section 139 and to the Inspecting Assistant Commissioner before doing so under Section 215 to issue notice to the assessee and hear him in the matter. In cases where the jurisdictional fact attracting the levy cannot be disputed, for example, that the return has been furnished under Section 139 with delay, it will be a question merely of satisfying the relevant, authority that there are circumstances calling for a reduction or waiver of the interest. If an opportunity to do so has not been made available to the assessee before the order levying interest is made, it will be open to the assessee to apply to the Income-tax Officer after such order has been made to show that a reduction or waiver of interest is justified."
28. See also Zacharia (C. J.) v. ITO [1988] 173 ITR 632 (Ker) and E. J. Peter and Co. v. ITO [1976] KLT 582.
29. Nor is it possible to accept the other proposition laid down in Govin-daraju's case [ 1982] 138 ITR 495 (Kar).
30. The fact that the penalty under Section 271(1)(a) has been cancelled is by itself not a ground for waiving or reducing the interest. It was pointed out by this court in Kerala Tile and Clay Works v. CIT [1976] 104 ITR 597 that the two impositions operate in different fields though they are complementary to each other. While penalty is punitive, interest is compensatory. Penalty is imposed in the absence of a reasonable cause ; while a request for reduction or waiver of interest requires the assessee to make out sufficient cause. The nature of the causes to be made out as well as the nature of the impacts are qualitatively different. Therefore, on the language and on the object of the two provisions, it cannot be held that cancellation of the penalty ipso facto results in total waiver of interest.
31. The orders, exhibits P-4 and P-8, are based on relevant circumstances. The appellant, admittedly, owed an amount of Rs. 74.24 lakhs by way of tax under Section 140A. Payment of this amount stood delayed till January 23, 1976, from the normal date July 31, 1975. The appellant has no case that they were otherwise not in a position to make payment of the amount or that, apart from the delay in the audit of their accounts, there were any other good reasons why they were liable to be excused for non-payment of the tax in time. The State has been deprived of the admitted revenue of Rs. 74.24 lakhs for the period August 1, 1975, to January 23, 1976. In the absence of any other relevant extenuating circumstances, this loss to the Revenue is liable to be compensated and that is what the authorities did by refusing to reduce the interest except to the extent of Rs. 1 lakh. We are not in a position to hold that the orders impugned are based on any irrelevant circumstances or that they have not taken note of any relevant factors. On the other hand, the reasons stated in exhibits P-4 and P-8 are valid and relevant and do not justify or call for review under Article 226 of the Constitution.
32. We do not find any illegality in exhibits P-4 and P-8. The writ appeal has to fail, though on different grounds. It is, accordingly, dismissed. There will be no order as to costs.