Income-Tax Officer and Another, Bombay vs The Simplex Mills Ltd., Bombay

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: Supreme Court of India

Case Number: Civil Appeal No. 165 of 1962

Decision Date: 15 November 1962

Coram: SARKAR, J.

In the case titled Income‑Tax Officer and Another, Bombay versus The Simplex Mills Ltd., Bombay, the Supreme Court of India delivered its judgment on fifteen November 1962. The petitioner was the Income‑Tax Officer and Another of Bombay, while the respondent was The Simplex Mills Limited, Bombay. The matter concerned the provisions of the Indian Income‑Tax Act of 1922, specifically sections 34, 18 A(1), 18 A(5), 18 A(8) and 18 A(11). The central issue was whether an advance payment of tax that had been made by the assessee could be partially refunded after a regular assessment, and whether legal interest paid on that refundable amount could be recovered by the tax officer under section 34. The respondent had made an advance tax payment for the assessment year 1952‑53 pursuant to section 18 A(1). After the regular assessment on thirty August 1952, part of the advance payment was declared refundable. Consequently, on eleven September 1952, the government paid the respondent an interest sum of Rs 14,720‑14‑0 under section 18 A(3) on the refundable portion as it stood at that time. Subsequent amendment of section 18 A on twenty‑four May 1953, made retrospectively effective from one April 1932, altered the entitlement of the assessee to a reduced interest amount of Rs 9,404‑5‑0, thereby creating a discrepancy between the amount actually paid and the amount now deemed payable. The Income‑Tax Officer issued a notice under section 34(1)(b) proposing to recover the excess amount by way of reassessment, alleging that the respondent had been under‑assessed and that excessive relief had been granted. By an order based on the alleged excessive relief, the officer directed recovery of the surplus. The respondent challenged this order before the High Court under Article 226 of the Constitution, and the High Court set aside the officer’s order. The Supreme Court held that section 34 of the Act was inapplicable because none of its conditions were satisfied. The Court explained that the case did not involve an under‑assessment; rather, it involved an over‑assessment in the sense that the taxpayer had paid more tax in advance than was ultimately due. The interest paid by the Government under section 18 A(3) was not a grant of relief to the assessee, and therefore excess interest could not be characterised as excess relief. Sub‑sections 8 and 11 of section 18 A relate to interest payable by the assessee and do not treat the Government’s interest payment as tax payable by the assessee. Consequently, the contention that excess allowance of such interest amounted to an excessive grant of relief was rejected. The Court also observed that interest paid by the Government to a taxpayer for tax paid in advance could not be characterised as tax paid by the assessee. The decision distinguished the earlier authority of M Chockalingam v Commissioner of Income‑Tax, Madras, reported in the 1963 Supplement to the Supreme Court Reports at page 599.

In this appeal, the parties sought special leave to challenge a judgment and order dated 11 March 1959 that had been issued by the Bombay High Court in Appeal No. 60 of 1958. The appellants were represented by counsel N. D. Karkhanis and R. N. Sachthey, while the respondent was represented by counsel R. J. Kolah, J. B. Dadachanji, O. C. Hatkw and Ravinder Narain. The appeal was filed on 15 November 1962, and the judgment was delivered by Justice Sarkar.

The Court observed that the appeal “is entirely without substance” because it originated from an application under Article 226 of the Constitution. The respondent, who was the taxable assesse, had applied for a writ to set aside an assessment order that had been made under section 34 of the Income‑Tax Act, 1922. The factual background showed that the respondent had made an advance payment of tax in respect of the assessment year 1952‑53 under section 18A(1) of the Income‑Tax Act. On 30 August 1952, the regular assessment for that year was completed and a portion of the advance tax was held refundable to the respondent.

At that time, the provision contained in subsection (5) of section 18A required that interest be paid on the amount advanced by an assessee, at a rate prescribed by law. Accordingly, the authorities calculated that an interest amount of ₹ 14,720‑14‑0 was payable to the respondent, and this sum was actually paid in September 1962. However, on 24 May 1953, subsection (5) of section 18A was amended with effect from 1 April 1952. The amendment reduced the interest liability, so that the Government ought to have paid only ₹ 9,404‑5‑0 to the respondent, rather than the larger amount originally calculated.

Subsequently, on 18 March 1957, the Income‑Tax Officer issued a notice under section 34(1)(b) stating that he had reason to believe that the respondent’s income for the assessment year ending 31 March 1953 had been under‑assessed and had been the subject of excessive relief. The notice proposed a reassessment of that income. Although the respondent contested the notice, the reassessment was nevertheless effected on 30 July 1957. The reassessment order declared that, pursuant to the amended provisions of section 18A(5), the assessee was entitled to a much smaller interest amount than had been allowed in the original assessment. The order further stated that because excessive relief had been granted in the original assessment under section 23(3), the officer was proceeding under section 34 to recover the excess interest that had been allowed.

On the respondent’s application under Article 226 of the Constitution, the High Court of Bombay set aside the reassessment order. The present appeal therefore challenges that decision. For the purposes of this review, the Court reproduced the relevant portion of section 34 of the Act, which reads: “If—(a)… (b)… the Income‑Tax Officer has reason to believe that income, profits or gains chargeable to income‑tax have escaped assessment for any year, or have been under‑assessed or assessed at too low a rate….”

Section 34 empowers the Income‑Tax Officer, when he has reason to believe that any income, profit or gain chargeable to tax has escaped assessment, has been under‑assessed, has been assessed at an unduly low rate, has been the subject of excessive relief under the Act, or that an excessive loss or depreciation allowance has been allowed, to proceed to assess, reassess or recompute such income, profit, gain, loss or depreciation allowance. The assessment, reassessment or recomputation that is undertaken under this provision must be carried out in accordance with the provisions of the Income‑Tax Act as if it were made pursuant to a notice under section 22 of the Act. Consequently, any earlier assessment may be reopened whenever any of the stated conditions—escaped assessment, under‑assessment, assessment at too low a rate, grant of excessive relief, or allowance of excessive loss or depreciation—are found to exist.

In the present matter, the Court observed that none of these conditions appear to be satisfied. The notice issued under section 34 enumerated all the grounds listed in the statute, but the appellant’s counsel relied only on two of those grounds: that the income had been under‑assessed and that excessive relief had been granted. The Court therefore limited its consideration to those two grounds and disregarded the others, as they were not raised by the appellant. It was noted that the order dated 30 July 1957 was premised solely on the finding that excessive relief had been allowed; the order did not hold that the respondent’s income had been under‑assessed. The Court further explained that the case did not involve an under‑assessment of income nor the granting of excessive relief in computing that income. Instead, the situation was that tax had been paid in advance, and a subsequent regular assessment for the same period revealed that the amount paid exceeded the tax actually due. This scenario constituted an over‑assessment, albeit a provisional one, rather than an under‑assessment. The interest that was paid was not a form of relief in the computation of income; it was calculated at the rate prescribed by the law that was then in force. Although the law was later amended and the amendment was given retrospective effect to cover the date of the original assessment, the interest had been computed before the amendment came into force and therefore according to the law applicable at that time. Because the computation of interest was performed under the law then in force and not under the amended provision, the Court held that the assessment could not be reopened under section 34. The situation did not fall within either the category of under‑assessment or the category of excessive relief having been granted. Rather, it represented a reduction of the statutory liability of the State to pay interest from a higher amount to a lower one, which does not fall within the ambit of section 34.

In this case the Court observed that the statutory liability of the State to pay interest had been reduced from a higher figure to a lower one, and therefore the situation did not fall within the ambit of section 34. The parties were asked to look at the format of the notice of demand for tax. It had been argued that the format indicated that, in computing tax, interest under section 18A had to be taken into account, and consequently the interest was a component of tax; so, when the assessee received more interest than was due, the Court held that this amounted to excessive relief. Counsel for the respondent correctly pointed out that this was a mistaken interpretation of the form. The form, as the Court noted, first gave the net amount of tax payable and then allowed for the deduction of certain interest to arrive at the amount of demand. Thus, the interest that was to be deducted under the form was not treated as part of the tax. This observation was sufficient to reject the argument. The Court then examined sub‑sections (8) and (11) of section 18A. Sub‑section (8) provides for the payment of particular interest by an assessee, while sub‑section (11) provides that any sum other than a penalty or interest paid by an assessee under the provisions of section 18A shall be treated as a payment of tax. The parties contended that these provisions showed that the interest in question formed part of tax, and therefore the excess interest allowed to the assessee constituted excessive relief. The Court found this contention plainly false because the two sub‑sections deal with interest payable by an assessee, whereas the present dispute concerned interest payable by the Government. Finally, the Court referred to the decision in M. Chockalingam v. Commissioner of Income Tax, Madras, where, with reference to the proviso to section 35 of the Income‑tax Act, the Court remarked that adding penal interest could not be described as an enhancement of assessment. The present case did not involve penal interest, and consequently the cited passage did not support the argument that the interest was part of tax.

At the hearing counsel for the State requested permission to argue that the order dated 30 July 1957 could be upheld under section 35 of the Income‑tax Act. The Court refused this request because the issue had not been raised before the lower tribunal, and the revenue authority had expressly acted under section 34 of the Act. Accordingly, the appeal was dismissed with costs, and the order of dismissal was entered. The Court therefore concluded that the appeal could not succeed and ordered its dismissal, directing that the costs of the proceedings be borne by the appellant.

The case is reported in the 1963 Supplement to the Supreme Court Reporter, page 599.