P. S. Subramanyan, Income-Tax Officer,... vs Simplex Mills Ltd.

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

Court: Supreme Court of India

Case Number: Not extracted

Decision Date: 15 November 1962

Coram: SARKAR J.

The appeal before the Supreme Court concerned an application filed under article 226 of the Constitution by the respondent‑assessee, seeking a writ to set aside an order of reassessment issued under section 34 of the Income‑Tax Act, 1922. The respondent had earlier made an advance payment of tax for the assessment year 1952‑53 in accordance with section 18A(1) of the Act. On 30 August 1952 the regular assessment for that year was completed, and a portion of the advance tax was held to be refundable to the respondent. At the time, sub‑section (5) of section 18A provided that interest at a prescribed rate was payable on the amount paid in advance, and the amount of interest determined under that provision was Rs 14,720‑14‑0, which the Government paid in September 1952. Subsequently, on 24 May 1953, sub‑section (5) of section 18A was amended with retrospective effect from 1 April 1952. The amendment reduced the interest payable to the respondent to Rs 9,404‑5‑0. This amendment, however, was not described in detail, as the essential point was that the statutory interest liability was diminished.

On 18 March 1957 the Income‑Tax Officer issued a notice under section 34(1)(b), alleging that the respondent’s income for the year ended 31 March 1953 had been under‑assessed and that the assessment had conferred excessive relief. The officer proposed to reassess the income. Although the respondent protested the proposed reassessment, the officer proceeded to make the assessment on 30 July 1957. The reassessment order stated that, in view of the amended provision of section 18A(5), the respondent was entitled to a much smaller amount of interest than had been allowed in the original assessment. The officer further observed that excessive relief had been granted under section 23(3) and that the reassessment was necessary to recover the excess interest previously allowed. Consequently, the officer sought to recover the surplus interest by invoking section 34. The respondent challenged this order by filing a petition under article 226, and the High Court of Bombay set aside the reassessment order. The present appeal therefore arises from that judgment. For the purposes of this case the Court reproduced the relevant portion of section 34, which authorises the Income‑Tax Officer, when having reason to believe that income, profits, or gains have escaped assessment, have been under‑assessed, have been assessed at too low a rate, or have been the subject of excessive relief, to proceed with assessment, reassessment, or recomputation as if a notice under section 22 had been issued.

The Court explained that Section 34 empowers the Income‑tax Officer to proceed to assess, reassess or recompute income, profits, gains, loss or depreciation allowance when, in the Officer’s opinion, income has escaped assessment, has been under‑assessed, has been assessed at too low a rate, has been the subject of excessive relief, or when an excessive loss or depreciation allowance has been computed. The assessment, reassessment or recomputation under this provision must be carried out in accordance with the provisions of the Act as if it were made pursuant to a notice under Section 22. Consequently, an earlier assessment may be reopened only if any of the specified conditions is satisfied. The Court observed that none of those conditions appeared to be present in the present case. Although the notice issued under Section 34 enumerated all the possible grounds, only two of them were actually relied upon in the notice that had been previously set out; no other grounds were advanced by the counsel for the appellants, and therefore the Court did not consider the remaining grounds. The two grounds relied upon were that income had been under‑assessed or that excessive relief had been granted. The Court noted that the order dated 30 July 1957 was based solely on the ground that excessive relief had been allowed and did not hold that the respondent’s income had been under‑assessed. Accordingly, the Court found that the case did not involve an under‑assessment of income nor an excessive relief in computing that income. Instead, the matter concerned tax that had been paid in advance and, upon a later regular assessment for the same period, was discovered to have been paid in excess of the amount actually due. This situation constituted a provisional over‑assessment rather than an under‑assessment. The interest paid was, in a sense, a relief granted in computing the tax liability and was calculated at the rate applicable under the law then in force. Although a subsequent amendment to the law, given retrospective effect, might have reduced the amount of interest payable, the computation of interest at the time was performed under the law then existing and therefore cannot be reopened under Section 34. The Court concluded that the computation did not fall within any of the situations contemplated by Section 34, as it was merely a reduction of the State’s statutory liability to pay interest from a higher amount to a lower one, and thus it was clearly not a case within the scope of Section 34. The matter was then referred.

In this case the Court examined the notice of demand for tax. The petitioner argued that the notice indicated that, when computing tax, interest under section 18A had to be taken into account and therefore interest formed part of the tax; on that basis the petitioner claimed that because the government had paid the assessee more interest than was actually due, the assessee had received excessive relief. The Court noted that counsel for the respondent, Mr. Kolah, correctly pointed out that this interpretation of the notice was erroneous. The notice, the Court explained, identified the net amount of tax payable and then allowed a deduction of specific interest in order to arrive at the amount of demand. Consequently, the interest that was deducted pursuant to the notice was not treated as part of the tax; at least the notice itself did not treat it as such, and this observation was sufficient to reject the petitioner’s argument. The Court then turned to sub‑sections (8) and (11) of section 18A. Sub‑section (8) dealt with interest payable by an assessee, while sub‑section (11) stipulated that any sum other than a penalty or interest paid by an assessee under section 18A would be treated as a payment of tax. The petitioner contended that these provisions demonstrated that the interest in question was part of the tax and that the payment of a larger amount of interest therefore amounted to excessive relief. The Court found this contention plainly incorrect because the relevant sub‑sections concerned interest that the assessee might have to pay, whereas the present dispute concerned interest payable by the Government to the assessee. Finally, the Court considered civil appeals Nos. 37‑40 of 1962 (M. Chockalingam v. Commissioner of Income‑tax). In those appeals the Court had observed, with reference to the proviso to section 35 of the Income‑Tax Act, that the argument that the addition of penal interest was not an enhancement of assessment was untenable. The petitioner attempted to rely on that observation to argue that penal interest formed part of the tax. The Court rejected that argument and noted that the present case did not involve penal interest at all; moreover, it could not be suggested that interest paid by the Government to the assessee on amounts previously paid as advance tax constituted tax paid by the assessee. During the hearing, counsel for the State sought leave to argue that the order dated 30 July 1957 could be sustained under section 35 of the Income‑Tax Act. The Court refused leave because the issue had not been raised before the lower court and because the revenue authorities had expressly acted under section 34 of the Act. Accordingly, the Court dismissed the appeal with costs and entered an order of dismissal.