The Income Tax Officer Circle Ii Madura,... vs M. R. Vidyasagar

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

Court: Supreme Court of India

Case Number: Civil Appeal Nos. 545 and 546 of 1960

Decision Date: 17 January 1962

Coram: J.C. Shah, Bhuvneshwar P. Sinha, J.L. Kapur, M. Hidayatullah, J.R. Mudholkar

The case involved a petition filed by the Income‑Tax Officer of Circle II at Madura against M. R. Vidyasagar. The petition was decided on 17 January 1962 by a Bench of the Supreme Court comprising Justices J. C. Shah, Bhuvneshwar P. Sinha, J. L. Kapur, M. Hidayatullah and J. R. Mudholkar. The factual background began when the Income‑Tax Officer issued a notice under section 18A(1) of the Indian Income‑Tax Act, 1922, requiring the payment of advance tax. The respondent, who was then the manager of a Hindu Undivided Family, exercised the statutory option to file a revised estimate of income for the assessment years 1946‑47 and 1948‑49. The assessments for those years were completed in November 1950 and February 1951 respectively, and on each occasion the assessed income substantially exceeded the estimate that had been submitted. Consequently, the Income‑Tax Officer directed the legal representative of the respondent to pay interest under section 18A(6) of the Act.

The respondent challenged the levy of interest before the Income‑Tax Appellate Tribunal, which reduced the assessed income. Acting on the Tribunal’s order, the Income‑Tax Officer also reduced the amount of interest and demanded payment of the reduced sum. The respondent then submitted a petition to the same officer requesting that interest not be levied under section 18A(6), contending that the levy was illegal and unjustified. Alternatively, the respondent sought a waiver of the interest pursuant to the fifth proviso to section 18A(6), a provision that had been inserted by section 13 of the Income‑Tax (Amendment) Act, 1953, and which was given retrospective effect from April 1952. Both the Income‑Tax Officer and the Inspection Assistant Commissioner refused to grant the waiver.

Thereafter, the respondent approached the Madras High Court for a writ of certiorari under article 226 of the Constitution, seeking to set aside the levy of interest on the ground that the refusal of the revenue authorities to cancel the levy was arbitrary and was not based on any exercise of the discretion conferred by the statute. The High Court allowed the writ, ordered the Income‑Tax Officer to determine whether the respondent had established a proper case for the exercise of discretion, and remanded the matter for consideration. The sole question before the Supreme Court on appeal was whether the benefit of the fifth proviso to section 18A(6) could be granted in respect of assessments of income that had been completed by the Income‑Tax Officer before April 1952.

The Supreme Court held that the jurisdiction conferred by the fifth proviso of section 18A(6) could be exercised by the Income‑Tax Officer in all cases that were pending on 1 April 1952 before him or any superior authority possessing the power under the Act to modify the assessment of income. This holding clarified the temporal scope of the discretionary power to waive interest under the amended provision.

The Court exercised civil appellate jurisdiction over Civil Appeal Nos. 545 and 546 of 1960, which were filed against the judgment and order dated 13 August 1954 of the Madras High Court in Writ Petitions Nos. 743 and 748 of 1954. Counsel K.N. Rajagopal Sastri and P.D. Menon represented the appellants, while the respondent chose not to appear before the Court. The judgment was delivered on 17 January 1962 by Justice Shah, who noted that the matters arose from certificates of fitness granted by the Madras High Court to set aside orders issued under Article 226 of the Constitution. The original taxpayer, Ramaswami Iyer, who was the father of the respondent, had been assessed for income‑tax as a Hindu Undivided Family. Ramaswami Iyer died in 1949 and the management of the family estate passed to his son, M.R. Vidyasagar, who became the family manager. The family held a partnership interest through its manager in a firm named ‘The Madura Knitting Company’, and the share of the partnership’s profits, which were subject to registration under the Indian Income‑Tax Act, constituted the principal component of the family’s assessable income. Under section 18A of the Indian Income‑Tax Act, the Hindu Undivided Family was required to pay advance tax for each of the assessment years 1946‑47, 1947‑48 and 1948‑49. The Income‑Tax Officer in Madura issued notices under section 18A(1) demanding payment of advance tax on the basis of the preceding year’s income. Section 18A(2) allowed the assessee to submit a revised estimate of income for the year in question, and the then‑manager, Ramaswami Iyer, exercised this option by estimating the income for the years 1946‑47 and 1948‑49 at Rs. 45,000 each. The assessments for those two years were completed on 28 November 1950 and on 29 February 1951 respectively, and the income derived from the Madura Knitting Company was incorporated into the assessments under section 23(5). The Income‑Tax Officer consequently determined the total income of the Hindu Undivided Family as Rs. 1,01,335 for the year 1946‑47 and as Rs. 3,10,697 for the year 1948‑49. Because the assessed totals far exceeded the manager’s estimate of Rs. 45,000, the Officer imposed interest of Rs. 6,999 12/‑ for 1946‑47 and Rs. 36,687 for 1948‑49. The taxpayer appealed the assessment orders, and on 12 March 1954 the Income‑Tax Appellate Tribunal reduced the income of the Madura Knitting Company, which consequently lowered the family’s share of the partnership profit to Rs. 83,335 for 1946‑47 and to Rs. 2,83,868 for 1948‑49. In accordance with the third proviso to section 18A(6), the Income‑Tax Officer in Madura gave effect to the Tribunal’s orders and reduced the liability.

The Income‑tax Officer reduced the interest charge to Rs 4,358 for the year 1946‑47 and to Rs 32,714 10 for the year 1948‑49, and then required the respondent to pay the tax arrears together with the adjusted interest. The respondent subsequently asked the Officer not to levy interest under section 18A(6), contending that the levy was illegal and unjustified, and alternatively requested that the interest be waived under the authority created by the fifth proviso to clause (6) of section 18A, which had been introduced by section 13 of the Indian Income‑tax (Amendment) Act (25 of 1953). The Income‑tax Officer refused the request, and the respondent’s application to the Inspecting Assistant Commissioner for cancellation of the interest levy was also rejected. Thereupon the respondent instituted two petitions, numbered 743 and 748, before the Madras High Court under article 226 of the Constitution, seeking writs to set aside the orders imposing liability for interest. In those petitions the respondent alleged that the penal interest imposed under section 18A(6) was contrary to law and was prima facie unjustified given the facts of the case. He further argued that the interest, being penal in character, could not be imposed on the legal representative of the deceased manager, who had not been responsible for the original return filed by the partnership of which the manager was a member. The respondent also maintained that the provision of the Income‑tax Act did not justify the levy because, for the assessment years in question, he was not the assessee; the delay in completing the assessment was not attributable to the former manager, Ramaswami Iyer, nor to himself; consequently, no liability for interest could arise, and the refusal to cancel the levy was arbitrary and not based on any judicial exercise of discretion vested in the Income‑tax Officer. A Division Bench of the Madras High Court held that the provision imposing liability to pay interest under subsection (6) of section 18A was not opposed to law and could be enforced against the legal representative of the deceased manager, who was a partner of the assessee firm. However, the Court observed that the Income‑tax Officer and the Inspecting Assistant Commissioner had failed to consider whether, in the circumstances, a reduction or waiver of the interest was warranted. Accordingly, the Court ordered the Income‑tax Officer to determine whether the petitioner had established a case for the exercise of the discretion conferred on the Officer by the fifth proviso of clause (6) of section 18A to waive or reduce the interest. Against that order, with certificates of fitness, the Commissioner of Income Tax preferred the present appeals.

Section 18A was inserted into the Indian Income‑Tax Act by Act 11 of 1944. That provision authorised the Income‑Tax Officer, on or after the first day of April in any financial year, to issue a written order requiring an assessee to pay to the Central Government, in specified instalments, income‑tax and super‑tax on the portion of the assessee’s total income of the preceding year for which assessment had already been made. Under sub‑section (2), an assessee who is directed by such an order to pay tax may, at any time before the last instalment is due, if he believes that the portion of his income to which the sub‑section applies for the relevant period will be less than the income on which tax is required, submit an estimate of the tax payable and make payment according to that estimate. Sub‑section (6), however, provided that in any year in which the assessee had paid tax under sub‑section (2) on the basis of his own estimate and the tax actually paid was less than eighty per cent of the tax that would be determined on the basis of his regular assessment (to the extent that such tax relates to income not covered by section 18), the assessee must also pay simple interest at six per cent per annum from the first day of January of the financial year in which the tax was paid until the date of the regular assessment. The amount of interest was to be calculated on the shortfall between the tax paid and the eighty per cent threshold. When originally enacted, the liability to pay interest on that shortfall was absolute; the Income‑Tax Officer possessed no discretion and was required to impose the interest liability. By way of amendment, section 13 of the Indian Income‑Tax (Amendment) Act, 1953 (Act 25 of 1953), introduced an additional proviso to sub‑section (6) which read: “Provided further that in such cases and under such circumstances as may be prescribed, the Income‑Tax Officer may reduce or waive the interest payable by the assessee”. This proviso was given retrospective effect from 1 April 1952. Subsequently, exercising the powers conferred by section 59, the Central Board of Revenue framed Rule 48, which stated: “The Income‑Tax Officer may reduce or waive the interest payable under section 18A in the cases and under the circumstances mentioned below, namely— (1) Where the relevant assessment is completed more than one year after the submission of the return, the delay in assessment not being attributable to the assessee. (2) Where a person is under section 43 deemed to be an agent of another person and is assessed upon the latter’s income. (3) Where the assessee has income from an unregistered firm to which the provisions of clause (b) of sub‑section (5) of section 23 are applied. (4) Where the “previous year” is the financial year or any year ending near the close of the financial year and large profits are made after the fifteenth of March in circumstances which could not be foreseen. (5) Any case in which the Inspecting Assistant Commissioner considers that the circumstances are such that a reduction or waiver of the interest payable under section 18A (6) is justified.” The incorporation of the fifth proviso into sub‑section (6) of section 18A and the issuance of Rule 48 were clearly intended to empower the Income‑Tax Officer, in the exercise of his discretion, to mitigate the strict rule originally set out in sub‑section (6) concerning the payment of interest when the tax paid on estimate fell below eighty per cent of the tax payable on regular assessment. The sole issue to be resolved in the present appeals is whether the benefit of that discretionary power extends to the respondent in the circumstances of this case.

The rule enumerated several situations in which the Income‑tax Officer was permitted to reduce or waive interest under section 18A(6). The third situation referred to a taxpayer who derived income from an unregistered partnership, to which the provisions of clause (b) of sub‑section (5) of section 23 were applicable. The fourth situation dealt with a “previous year” that was either the fiscal year itself or any year ending close to the close of the fiscal year, in which large profits were realised after 15 March under circumstances that could not have been anticipated at the time of assessment. The fifth situation covered any case wherein the Inspecting Assistant Commissioner, after examining the facts, considered that the particular circumstances justified a reduction or waiver of the interest payable under section 18A(6). These categories were expressly listed in Rule 48 as the circumstances that could be prescribed for the exercise of discretion by the Income‑tax Officer.

The incorporation of the fifth proviso into subsection 18A(6) together with the provisions of Rule 48 was clearly intended to give the Income‑tax Officer the authority to soften the strict rule that originally required a taxpayer to pay interest whenever the tax paid on the estimate fell below eighty percent of the tax that would be payable on a regular assessment. Consequently, the only issue that required determination in the present appeals was whether the benefit of the fifth proviso to subsection 18A(6) could be invoked with respect to the assessments of the respondent’s family income that had been completed by the Income‑tax Officer before 1 April 1952.

The High Court had held that even if the assessment was completed before 1 April 1952, the fact that the final adjustment, made pursuant to the order of the Appellate Tribunal, occurred after that date meant that the Income‑tax Officer remained competent, under the powers conferred by the fifth proviso to clause (6) of section 18A, to reduce or waive the interest payable by the assessee. The High Court further observed that because the Income‑tax Officer had not exercised that discretion, a writ under article 226 of the Constitution could be issued, directing the officer to consider whether relief could be granted to the respondent in the circumstances of the case.

Representing the Commissioner of Income‑tax, it was submitted that the power created by the fifth proviso could unquestionably be exercised in cases where the assessment was completed on or after 1 April 1952. However, where the assessment had been completed earlier and the liability to pay interest had become fixed under subsection (6) as it originally stood, the Income‑tax Officer possessed no authority under the amended subsection to reduce or waive the interest, even if the assessment proceedings were still pending on appeal before the Appellate Assistant Commissioner or the Appellate Tribunal. It was further contended that interest under section 18A(6) was payable only up to the date of the regular assessment and that, once liability crystallised under the original provisions, the amendment could not retroactively reopen the order because the amending statute was given only a limited retroactive effect and its retroactivity could not be expanded without contradicting the clear intention of the Legislature.

The Court observed that extending retroactivity beyond what the statute allowed would plainly defeat the clear intent of the Legislature. The Court held that, for the present appeals, it was unnecessary to examine whether a final assessment made before the fifth proviso became operative. It further held that, when such an assessment was not subject to any pending appeal, the question of reopening it to grant the assessee the benefit of the power created by that proviso was irrelevant. The issue that required determination was whether, in an assessment that was either under a pending appeal or could lawfully be appealed, the Income‑tax Officer could exercise the power to reduce or waive the interest. In the Court’s judgment, the rules contained inherent evidence showing that the power could be exercised even when the regular assessment had been completed by the Income‑tax Officer before 1 April 1952. The power granted to the Income‑tax Officer to reduce or waive interest owed by an assessee was described in the rules as exercisable ‘in such cases or such circumstances as may be prescribed.’ Rule 48 specifically authorised the Income‑tax Officer to reduce or waive interest payable under section 18A(6) when the circumstances listed in that rule arose. The first clause of Rule 48 provides that when an assessment is completed more than one year after the return was filed, the power may be exercised. The clause further stipulates that if the delay is not attributable to the assessee, the Income‑tax Officer may exercise that power. The rule contained no indication that the power to grant relief could be exercised only before the Income‑tax Officer completed the regular assessment. Clauses (1) and (5) of Rule 48 clearly supported the view that an order reducing or waiving interest could be issued even after the assessment order, which includes interest, had been made. Furthermore, by giving retrospective effect to Act 25 of 1953 from 1 April 1952, the Legislature demonstrated its intention that the fifth proviso to section 18A(6) should apply to regular assessments made between that date. The legislation further indicated that the proviso would also apply to assessments made up to the date on which the Act was enacted. The Court rejected the argument that liability to pay interest crystallised when the Income‑tax Officer included a direction for payment, on the basis that the order was not appealable. It held that the interest payment order could be modified if the assessment of income was varied by the Appellate Assistant Commissioner or by the Tribunal. While it was true that interest could be charged up to the date of the regular assessment by the Income‑tax Officer, this fact did not support a theory of crystallisation of liability. Consequently, the amount of liability could be altered even after the regular assessment date. Therefore, the assumption that the power to grant relief against a strict statutory provision should be limited to cases decided by the Income‑tax Officer after 1 April 1952 was not justified. The power of the Income‑tax Officer originated only after 1 April 1952. Thus, the Court concluded that the Income‑tax Officer could use the fifth proviso to modify interest even in pending appeals irrespective of the assessment date.

The Court noted that, although Parliament intended the provisions to apply to assessments made after 1 April 1952, the statute contains no language restricting the exercise of the power to only those assessments that the Income‑tax Officer entered after that date. The Court held that the jurisdiction conferred by the fifth proviso to section 18A(6) may be exercised by the Income‑tax Officer in every case that was pending on 1 April 1952 before the Income‑tax Officer or any superior authority empowered under the Income‑tax Act to modify the assessment of income, as well as in cases that were commenced after that date. In the case before it, the original assessments made by the Income‑tax Officer for the two years in dispute were altered in accordance with the orders of the Appellate Tribunal concerning the assessment of the Madura Knitting Co. The Appellate Tribunal’s order was rendered on 12 April 1953, which was after the commencement of Act 25 of 1953. Consequently, from that date onward the Income‑tax Officer was obligated to give effect to the Tribunal’s orders and to adjust the liability when computing assessable income and the tax payable thereon. Because the Income‑tax Officer was also bound to adjust liability for interest under clause (6) of section 18A, the Court saw no justification for denying him the authority, which had been vested in him since April 1952, to exercise the powers under the fifth proviso whenever the facts of the case warranted such use. The Court agreed with the High Court’s finding that the Income‑tax Officer possessed the authority to apply the fifth proviso to section 18A(6) to the assessments in question, and that his failure to exercise that discretion required the issuance of a writ directing him to consider whether the case satisfied the criteria for exercising his discretionary power. Accordingly, the appeals were dismissed as they failed to establish a contrary position.