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LEGISLATIVE BACKGROUND:

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Prior to 1944, income tax was payable by the assessee only on an assessment being made by the Assessing Officer. Though the levy/charge was created by the Indian Income Tax Act, 1922, the tax became payable only when it was ascertained in accordance with the provisions of the Act. In 1944, however, Section 18A was introduced providing for the payment of tax in advance, i.e., even prior to the making of the assessment. Section 18A incorporated the principle "pay as you earn". The advance tax was payable on prescribed dates during the financial year preceding the relevant assessment year. Sub-section (5), as originally introduced, provided for payment of simple interest at two percent per annum on the entire amount paid by way of advance tax. (The rate of tax was raised to four percent with effect from April 1, 1995.) The interest was payable "from the date of payment (to the date of the provisional assessment made under Section 23-B* or if no such assessment has been made) to the date of the
Provided further that no interest under this sub-section shall be payable for a period of one month from the date of the passing of the order in appeal or other proceeding:
Provided also that where any interest is payable to an assessee under this sub-section, no interest under sub- section (1) shall be payable to him in respect of the amount so found to be in excess."

DECISIONS OF HIGH COURTS:

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Coming to the decided cases, the first one which considered the meaning of the expression "regular assessment" is of the Bombay High Court in Sarangpur Cotton Manufacturing Company Limited v. Commissioner of Income Tax (31 I.T.R.698). It related to the assessment year 1947-48, which means that the matter was governed by Section 18A before its amendment in 1952. According to the said provision, interest was payable on the whole of the amount paid by way of advance tax from the date of payment "till the date of assessment (hereinafter called the "regular assessment" under Section 23...")". During the financial year relevant to the said Assessment Year, the assessee paid advance tax in a sum of Rs.12,95,508/- in three equal instalments. An assessment was made (hereinafter referred to as the "Original Assessment Order") on March 30, 1948, according to which the assessee became liable to pay a further tax of Rs.6,00,000/- in addition to the advance tax amount already paid. He paid it and preferred an appeal to the Appellate Assistant Commissioner against the order of assessment. The Appellate Assistant Commissioner set aside the assessment and directed the Income Tax Officer to make a fresh assessment. Accordingly, the Income Tax Officer made a fresh assessment on January 25, 1954 (hereinafter referred to as the "Revised Assessment Order") according to which the total assessable income was substantially reduced. The tax now payable was less than the amount of tax paid as advance tax. The Income Tax Officer refunded the excess amount of tax paid. The assessee laid a claim for interest on the excess amount of advance tax paid as well as on the amount of Rs.6,00,000/- paid pursuant to the original assessment order from the respective dates of payment till the date of refund. (Before the High Court, the assessee gave up his claim for interest on the sum of Rupees six lakhs.) So far as the claim for interest on excess advance tax paid is concerned, his case was that once the original order of assessment was set aside by the appellate authority and a revised assessment order was made pursuant to the appellate order, it is that assessment which is the regular assessment for the purposes of Section 18A(5) and, therefore, he is entitled to interest till that date, viz., January 25, 1954. This contention was rejected by Chagla, C.J., speaking for the Division Bench. The learned Chief Justice gave two reasons for rejecting the assessee's contention. The first reason reads thus:

Prior to 1944, it may be recalled, tax was payable only after and in pursuance of an order of assessment. It was only by virtue of Section 18A(5) (introduced in 1944) that tax became payable in advance of the assessment. But once an assessment is made - according to this reasoning - the advance nature of the tax ceases. It becomes relatable and referable to the assessment order just as the amount paid under and in pursuance of the assessment order. Actually, in the above case, besides the advance tax paid during the relevant financial year, the assessee had also paid a sum of Rupees six lakhs pursuant to the original assessment order. If the assessee says that he is entitled to interest on the excess amount paid by way of advance tax upto the date of the revised assessment order, points out Chagla, C.J., there is no reason why he should not be entitled to claim interest on Rupees six lakhs paid pursuant to original assessment order from the date of its payment till the date of the revised assessment order. At that time, it must be remembered, there was no provision under which interest could be claimed on the said amount of Rupees six lakhs. Chagla, C.J. points out the inequity or illogicality in paying interest on the excess amount of advance tax from the date of payment till the date of revised assessment order and in denying any interest on the amount of Rupees six lakhs paid pursuant to the original assessment order. The learned Chief Justice accordingly held that when Section 18A(5) spoke of "the date of the assessment (hereinafter called the "regular assessment") made under Section 23", it referred to the original order of assessment.

The first feature to be noted is that under Section 18A(5) the date from which interest was payable (whether upon the whole amount or on the excess amount, as the case may be) was the date of payment of the advance tax whereas under Section 214, the date from which interest is payable is not the date of payment but the first day of the relevant assessment year. This is clear from the words "from the first day of April next following the said financial year"

in Section 214(1). This feature of Section 214(1) indicates that the Parliament has now prescribed an artificial date from which interest is payable though logically speaking, one can say that it should have provided for payment of interest from the date of payment as was provided by Section 18A(5) of the 1922 Act. This is an aspect elucidated at a later stage in this judgment.