Supreme Court: Even in absence of Notice Interest can be levied under Section 158BFA(1) of Income Tax Act
The Supreme Court by its division bench comprising of Justices M.R. Shah and C.T. Ravikumar while considering series of petitions, ruled that the revenue was justified in levying interest under Section 158BFA(1) of the Income Tax Act (hereinafter referred to as 'Act') for late filing of the return for the block period even in absence of any notice under Section 158BC of the Act and for the period prior to 1st June. 1999.
The factual matrix of the case is that the appellant- K.L. Swamy was a Director Partner in a company. A search was conducted under Section 132 at the residential premises of the family members of the company and warrants were issued.
Under Section 158BD a notice was served to the appellant to file return of income for block period of 1st April, 1986 to 13th February, 1997. The appellant filed return for the block period in response to notice under Section 158BD by including the undisclosed income of Rs.45,00,000 for the block period. The Assessing Officer levied interest under Section 158BFA(1) of the Act for the period from 18th January, 1998 to 19th January, 1999 at the rate of two per cent per month for 13 months and levied interest of Rs.7,12,296 on the tax amount of Rs.27,49,600. Aggrieved by the order of Assessing Officer, the appellant filed an appeal before the Commissioner of Income Tax (Appeal) (in short CIT(A)).
The learned CIT (A) held that Section 158BFA provides for levy of interest for late filing of return of block assessment in response to the notice under Section 158BC similar to the provisions of Section 234A. The CIT(A) also held that levy of interest under Section 234A is compensatory in nature and is attracted the moment there is a default. The appellant/ assessee being aggrieved by the order of CIT(A) filed an appeal before the ITAT, Bangalore.
The learned ITAT allowed the appeal preferred by the assessee by observing that Section 158BFA(1) inserted with effect from 1st January, 1997, prescribes levy of interest and never require to pay the self-assessment tax due along with the return of income. It was observed that in the present case the return was filed on 19 January, 1999 and at the relevant point of time there was no provision to pay self-assessment tax along with the return of income and therefore no interest was leviable under Section 158BFA(1). The revenue being aggrieved by the order passed by the ITAT, filed an appeal before the High Court. The High Court after deciding the question of law favored the revenue and against the assessee/appellant. Being dissatisfied with the impugned judgment, the appellant preferred the appeals before the Apex Court.
The questions of law posed for the consideration before the Apex Court in the present appeals were:
1. Levy of interest under Section 158BFA(1) of the Income Tax Act for late filing of the return for the block period in absence of any notice under Section 158BC of the Act and for the period prior to 01.06.1999?
2. The levy of the surcharge under proviso to Section 113 of the Income Tax Act.
The Court observed, "with respect to assessment of undisclosed income for the block period including the filing of the return etc., the normal assessment proceedings including under Section 140 of the Income Tax Act shall not be applicable. Therefore, the submission on behalf of the assessee that interest under Section 158BFA for the period prior to 1 June, 1999 in view of insertion of the words "Section 158BC" in Section 140A with effect from 1 June 1999 , shall not be chargeable, cannot be accepted."
The Top Court with respect to chargeability of interest held that under Section 158 BFA prior to 1 June 1999 in case of persons issued notice under Section 158BC and that the submission on behalf of assessee/appellant that since the interest only follows principal, the liability of payment of interest cannot not arise as there was no liability to pay tax along with return, since at the relevant point of time, Section 140A did not apply to Section 158BC and there was no liability to deposit tax along with return, hence, there can be no levy of interest on that tax for mere failure to file return. The Court asserted that the said contention runs contrary to the mandatory and compensatory language of Section 158BFA(1) of the Act.
Insofar as the levy of the surcharge under proviso to Section 113 of the Income Tax Act was concerned, it was held in favor of assessee and against the revenue. The Court placed reliance on the case CIT v. Suresh N. Gupta, (2008), where it was acknowledged and admitted that the position prior to the amendment of Section 113 of the Act whereby the proviso was added, whether surcharge was payable in respect of block assessment or not, was totally ambiguous and unclear. The Court pointed out that some assessing officers had taken the view that no surcharge is leviable.
Consequently, in view of the above stated observations the Apex Court partly allowed the appeals and observed and held that the respective assessee was not liable to pay the surcharge under proviso to Section 113 of the Income Tax Act.