1971 PLP 795 (PTD)

DIXIT, C. J.‑

This order will also govern the disposal of Miscellaneous Petitions Nos. 279 to 282, all of 1966,. The facts and circumstances in which these five applications under Article 226 of the Constitution have been filed by the Gwalior Rayon Silk Manufacturing (Wvg.) Co. Ltd. (hereinafter referred to as the company) are that the petitioner‑company is engaged m the business of manufacturing rayon silk cloth. After the decision of the Supreme Court in Union of India v. Gwalior Rayon Silk Mfg. (Wvg.) Co. Ltd. ((1964) 53 I T R 466 (S C)) reversing the decision of this Court in Gwalfor Rayon Silk Mfg. (Wvg.) Co. v. Union of India ((1961) 43 I T R 184) rejecting the petitioner's claim for exemption from tax for twelve years from June 1949, in respect of artificial silk rayon section and for twelve years from February 1954, in respect of staple fibre section of the company was rendered, provisional assessment of tax for the assessment years 1960‑61 to 1964‑65 was made and an amount of rupees six and a half crores was found payable by the company and was demanded from it. The company found itself unable to pay this large amount of tax in a lump sum, anti, therefore, entered into correspondence with the income‑tax Department for grant of instalments for payment of tax and submitted a scheme to the Department for the purpose. By 26th December 1964, the company had paid Rs. 3 crores. On this date, the company addressed the following letter to the Income‑tax Officer, A‑Ward, Indore, praying for the facility of instalments for psyment of the balance of the tax due: "We beg to inform you that we have paid Rs. 3 crores since your last order was passed. Thus according to us about Rs. 2'40 crores remain outstanding out of the demands already fixed. Besides, we expect a demand of about 1'20 crores within January 1965, for provisional or self‑assessment for 1964‑

65. Besides this, there may be demand for advance tax payment within March 1965. We will make the advance payment of tax over and above Rs. 3 crores that we have already paid, but in the peculiar circumstances of our case, our difficulty in making further payment within March 1965, should be appreciated. Thus, for a sum of Rs. 3'60 crores, we have to request you for instalments for three years as under: Rs. 1'00 crore Before 15th March 1966 1'20 crores Before 15th March 1967 1'40 crores Before 15th March 1968 3,60 crores We know that, under the existing law, the interest chargeable on the unpaid dues is 4 %. It appears that because of this rate of interest, you have been reluctant to grant time. We, therefore, voluntarily offer to raise the rate of interest to 5 % after 31st December 1964. The interest will be paid along with the instalments. We hope that considering the financial aposition and commitments of the company, you will kindly accommodate us by accepting our request and offer." The Income‑tax Officer accepted the terms and conditions of payment suggested by the company, and by his letter dated the 16th January 1965, informed the company as under: "Please refer to your petition dated the 26th December 1964, on the above subject. The terms of payment offered in the petition referred to above are accepted, i.e., the taxes are allowed to be paid as under: Rs. 1 crore by 15th March 1966. Rs. 1'20 crores by 15th March 1967. Rs. 1,34,76,999 by 15th March 1968. One of the terms is that the rate of interest on the unpaid dues will be 5 % from January 1, 1965 (it will be ,4 % up to December 31, 1964). The interest will be calculated from the dates the demands fall due." By a letter dated the 10th January 1966, the Income‑tax officer, referring to the last paragraph of his earlier letter dated the 16th January 1965, informed the petitioner that in view of the amendment made in section 220(2) of the Income‑tax Act, 1961 (hereinafter called "the Act"), raising, with effect from 1st April 1965, to six per cent. the interest payable by an assessee under subsection (2) of section 220, the rate of interest on unpaid balance of tax would have to be the revised rate of six per cent. with effect from 1st April 1965. The petitioner protested against this variation of interest from five per cent. to six per cent., and addressed a communication to the Central Board of Direct Taxes contending that the amendment made in section 220(2) in regard to the rate of interest was not applicable to it and no variation could be made in the terms of payment of unpaid tax amount in instalments with interest at the rate of five per cent., which was accepted by the Income‑tax Officer in exercise of his, powers under section 220(3) of the Act. On 16th March 1966, the Under Secretary of the Central Board of Direct Taxes addressed a letter to the petitioner rejecting the plea of the petitioner in regard to the inapplicability of the enhanced rate of interest under section 220(2) of the Act. That letter said: " . . . the amendment of subsection (2) of section 220 raising the rate of interest on the unpaid from 4 % to 6 % by section 53 of the Finance Act, 1965, prevails over the action taken under subsection (3) of that section, in view of the opening words of subsection (3), viz., `without prejudice to the provisions contained in subsection (2). Hence the rate of interest on the unpaid balance of tax will be 6% with effect from April 1, 1965." Thereafter, the Income‑tax Officer issued to the petitioner a notice of demand under section 156 of the Act for each of the assessment years calculating interest at the rate of six per cent. per annum on the unpaid balance of tax instead of at the rate of five per cent. mentioned in the Income‑tax Officer's letter dated the 16th January 1965. In each of these petitions, the prayer made by the company is that the notice of demand for the relevant year be quashed by the issue of a writ of certiorari and the respondent be restrained from demanding or recovering from it interest on the unpaid balance of tax "at a rate higher than 5 per cent. as agreed and decided upon in the past". Before stating the contentions advanced on behalf of the petitioner and the Department, it is necessary to refer to the relevant provisions of section 220 of the Act. By the first subsection of section 220, it is provided that any amount, otherwise than by way of advance tax, specified as payable in a notice of demand under section 155, shall be paid within thirty‑five days of the service of notice at the place and to the person mentioned in the notice. Subsection (2) of section 220, in so far as it is material here, is as follows: "(2) If the amount specified in any notice of demand under section 156 is not paid within the period limited under subsection (1), the assessee shall be liable to pay simple interest at four per cent. per annum from the day commencing After the end of the period mentioned in subsection (1,) : . ," By section 53 of the Finance Act, 1965 (X of 1965), section 220(2) of the Act was amended by substituting the words "six percent." for the words "four per cent." Section 1(2) of the Finance Act, 1965, provided, inter alia, that section 53 of that Act shall be deemed to have come into force on 1st April 1965. It was argued by Shri Chitale, learned counsel appearing for the Company, that section 220(2) of the Act was a provision in no way connected with section 220(3) ; that it merely provided for payment of interest by an assessee who did not pay the amount specified in any notice of demand under section 156 of the Act within the period limited under subsection (1) of section 220 ; and that section 220(3) gave to the Income‑tax Officer the power to extend time for payment or allow payment by instalments subject to such conditions as the Income‑tax Officer thought fit to impose in the circumstances of the case. It was said that it was because subsections (2) and (3) dealt with different topics and operated in different fields that the Income tax Officer gave to the petitioner the facility of payment of tax by instalments on the condition of interest at the rate of five per cent. being paid on the unpaid dues from 1st January 1965, and the petitioner agreed to pay interest at the rate of five per cent. According to the learned counsel, the arrangement embodied in the Income‑tax Officer's letter dated the 16th January 1965, for the payment of tax amount by instalments with the condition of payment by the assessee‑company of interest at the rate of five per cent. was a "settlement" under section 220(3) which could not be affected or altered in any way by the amendment made in section 220(2) of the Act enhancing the rate of interest from four per cent. to six per cent. The amendment made in section 220(2), it was said, was made operative specifically only from 1st April 1965, and, therefore, it could not affect anything done or any action taken by the Income‑tax Officer under section 220(3) of the Act or any demand raised by him prior to 1st April 1965. Learned counsel further submitted that even if it be assumed that subsections (2) and (3) of section 220 were inter‑connected, the amendment of section 220(2) raising the rate of interest from four per cent. to six per cent. from 1st April 1965, did not have any retrospective effect so as to make that rate applicable in those cases where the period limited under subsection (1) of section 220 for payment of the amount specified in any notice of demand ended before 1st April 1965 ; and that there was nothing in section 220(2) or in the Finance Act, 1965, to indicate that the amendment made by section 53 of the Finance Act, 1965, In section 220(2) had such a retrospective effect. Thus, according to the learned counsel, an assessee, to whom a notice under section 156 had been served and who does not pay the amount specified in the notice of demand within the period limited under subsection (1), is liable to pay interest at the rate of four per cent. only from the day commencing after the end of the period mentioned in subsection (1), if the period ended before 1st April 1965. It was pointed out that, as in the cases before us the period within which the petitioner was required to pay the amount of tax under the notices of demand issued to it under section 156 expired before 1st April 1965, the assessee-company was liable to pay interest only at the rate of four per cent. notwithstanding the amendment made in section 220(2) ; but the assessee agreed to pay interest at the rate of five per cent. according to the arrangement set out in the Income Officer's letter dated the 16th January 1965. It was emphasized by the learned counsel that payment of interest by the assessee‑company at the rate of five per cent. did not in any way prejudice the provisions contained in subsection (2) under witch interest was payable at the rate of four per cent. before 1st April 1965 ; that section 220(2), as it stood before 1st April 1965, continued to apply to the petitioner even after the amendment ; and that in relation to the petitioner‑company the expression without prejudice to the provisions contained in subsection (2) occurring in subsection (3), meant "without pre judice to the unamended provisions contained in subsection (2)" and that being so, there was no violation of subsection (2) if, according to the arrangement set out in the Income‑tax Officer's Inter dated the 16th January 1965, the assessee paid interest at the rate of five per cent. In answer, Shri Adhikari, learned counsel appearing for the respondent‑Department, said that, even If under the arrangement stated in the letter dated the 16th January 1965, of the income tax Officer the petitioner‑company was granted the facility of paying the unpaid tax amount due from it by instalments on the condition of paying five per cent. interest from 1st January 1965, and even if the condition of payment of interest at the rate of five per cent. from 1st January 1965, was suggested by the petitioner itself, still the applicant was liable; pay interest at the rate of six per cent. from 1st April 1965, after the amendment of subsection (2) of section 220 raising the rate of interest from 4 per cent. to 6 per cent. It was said that there was nothing sacrosanct about the scheme embodied in the letter dated the 16th January 1965, of the Income‑tax Officer in regard to the payment of the tax amount due from the petitioner ; that the said scheme could be varied or affected by airy amendment made in subsection (2) inasmuch as the scheme was without prejudice to the provisions contained in subsection (2) ; and that the Finance Act, 1965, which was passed in May 1965, itself gave retrospective effect to the enhanced rate of interest by making it operative from 1st April 1965, and, in demanding from the petitioner interest at the rate of six per cent., the Department was not giving a greater retrospective effect to the amendment than that expressly stated in section 1(2) of the Finance Act, 1965. To support his contention, learned counsel relied on Venkatachalam v. Bombay Dyeing & Mfg. Co. Ltd. ((1958) 34 I T R 143 (S C)). In our judgment, the plea of the petitioner that it cannot be called upon to pay interest at the rate of six per cent. from 1st April 1965, on the tax amount which it was required to pay in instalments under the arrangement embodied in the Income‑tax Officer's letter dated the 16th January 1965, must be accepted. The language of subsection (2) of section 220 is plain enough to show that under that provision the liability of an assessee to pay interest at the rate prescribed therein arises if a notice of demand under section 156 has been served on the assessee and if he has failed to pay the amount specified in the notice of demand within the period limited under subsection (1); the liability to pay interest is from the day commencing after the end of the period mentioned in subsection (1). An assessee, who does not pay the amount of tax within the time limited under sub section (1), is deemed to be in default, as is clear from sub section (4) of section 220, and becomes liable to pay penalty under section 221 in addition to the amount of interest payable under section 220(2) of the Act. Originally, interest payable under section 220(2) was at the rate of four per cent. per annum from the day commencing after the end of the period limited under subsection (1) within which the assessee was required to pay the amount specified in the notice of demand under section

156. The effect of section 1(2) of the Finance Act, 1965, is that the amendment to section 220(2), effected by section 53 of the Finance Act raising the rate of interest from four per cent., must be deemed to have been included in the principal Act as from 1st April 1965. Now, interest under section 220(2) is payable "from the day commencing after the end of the period mentioned in subsection (1)". It follows, therefore, that the amendment made in section 220(2) raising the rate of interest to six per cent. would apply only in those cases where "the day commencing after the end of the period mentioned in subsection (1)" is a day on or after the 1st April 1965. The amendment cannot be applied in those cases where "the. day commencing after the end of the period mentioned in subsection (1)" is a day before the 1st April 1965. If the amendments were to be made applicable even to those cases where the period limited under subsection (1) for payment of the amount specified in the notice of demand ended before 1st April 1965, that would in effect mean giving the amendment retrospective effect from a date earlier thin that prescribed by section 1(2) of the Finance Act, 1965. It must be noted that the liability of an assessee to pay interest under section 220(2) of the Act is at that prescribed rate which is in force on the day commencing after the end of the period mentioned in subsection (1). This liability cannot be affected by imposing the burden of an enhancement in the rate of interest in the absence of anything in section 1(2) and section 53 of the Finance Act, 1965, to show that the amendment made in section 220(2) expressly or by necessary implication would apply even in those cases where "the day commencing after the end of the period mentioned in subsection (1)", falls before 1st April 1965. Having regard to the significance of the expression "the day commencing after the end of the period mentioned in sub section (1)", as also to the fact that section 1(2) of the Finance Act, 1965, itself expressly made the amendment in section 220(2) effective only from 1st April 1965, there can be no justification whatsoever to apply the enhanced rate of interest of six per cent, to cases where the "day commencing after the end of the period mentioned in subsection (1)" fell before 1st April 1965. The amendment made in section 220(2) increasing the rate of interest to six per cent. cannot be so construed as to permit in cases where "the day commencing after the end of the period mentioned in subsection (1)" was a day before 1st April 1965, charging of interest at the rate of four per cent. up to 1st April 1965, and thereafter at the rate of six per cent. So to do would be to ignore totally the effect of subsection (2), namely, that the liability to pay interest is at that prescribed rate which is in force "on the day commencing after the end of the period mentioned in subsection (1)" and to re‑write subsection (2) so as to delete the words "from the day commencing" occurring in subsection (2) and provide that "the assessee shall be liable to pay simple interest at the rate of four per cent. pet annum after the end of the period mentioned in subsection (1)", thus making it permissible to charge interest at the enhanced rate from 1st April 1965, as a result of the amendment of section 220(2) of the Act. It is well settled that the function of the Court is to construe a provision and not to re‑write or legislate. The contention of the learned counsel for the Department that, even though the period for payment of the amount specified in the notices of demand issued to the petitioner under section 156 of the Act ended before 1st April 1965, yet the petitioner company was liable to pay interest at the rate of six per cent. per annum from 1st April 1965, under the amended section 220(2) of the Act, cannot therefore be accepted. Coming to subsection (3) of section 220, under which the Income‑tax Officer granted to the petitioner the facility of paying the tax amount by instalments on the condition of the petitioner paying interest at the rate of five per cent. per annum, that subsection is in the following terms: "Without prejudice to the provisions contained in sub section (2), on an application made by the assessee before the expiry of the due date under subsection (1), the Income‑tax Officer may extend the time for payment or allow payment by instalments, subject to such conditions as he may think fit to impose in the circumstances of the case." It will be seen that under this provision the Income‑tax Officer has the power to extend time for payment or allow payment by instalments. While doing so, he may impose such conditions as he may think fit in the circumstances of the case. The extension of time for payment or the grant of facility of payment by instalments or the conditions imposed are, however, without prejudice to the provisions contained in subsection (2). The effect and meaning of the expression "without prejudice to the provisions contained in subsection (2)", with which sub section (3) opens, is that the extension of time for payment or grant of the facility of payment by instalments cannot in any way absolve the assessee from the liability to pay simple interest as provided by subsection (2) from the day commencing after the end of the period mentioned in subsection (1). Therefore, in a case where while granting an assessee the facility of payment of tax amount by instalments or extending the time for payment, the Income‑tax Officer does not impose any condition in regard to payment of interest, the assessee would yet be liable to pay interest, according to subsection (2). Leaving aside the question whether the conditions which can be imposed by the Income‑tax Officer under subsection (3) can include a condition with regard to payment of interest at a particular rate when an express provision has been made by subsection (2), and assuming that a condition with regard to payment of interest can be imposed under sub section (3), it is clear that the Income‑tax Officer cannot extend time for payment or allow payment by instruments subject to the condition of the assessee paying interest at a rate lower than that provided by subsection (2). Such a condition would be in violation of subsection (2) and cannot be imposed having regard to the expression "without prejudice to the provisions contained in subsection (2)" occurring in sub section (3). If, on the other hand, the Income‑tax Officer extends time for payment or allows payment by instalments on the condition of the assessee paying interest at a rate higher than that provided by subsection (2), then such a condition as regards interest would not be to the prejudice of the provisions contained in subsection (2)". Here, when the facility of payment of the tax amount by instalments was granted to the petitioner by the Income‑tax Officer by his letter dated the 16th January 1965, the assessee was asked to pay interest at the rate of five per cent. per annum and the petitioner agreed to do so. On 16th January 1965, simple interest at the rate of four per cent. per annum was payable by the assessee from the day commencing after the end of the period mentioned in subsection (1). The payment of interest by the assessee company at the rate of five per cent. therefore, in no way prejudiced the provisions contained in subsection (2). It is fallacious to say that if the assessee‑company continues to pay interest at the rate of five per cent. after the amendment effected in subsection (2) of section 220 by enhancing the rate of interest to six per cent., that would be inconsistent with section (2) and would prejudice the provisions contained in subsection (2). The fallacy lies in assuming that the amended subsection (2) applied to the assessee‑company and it is liable to pay interest at the rate of six per cent. from 1st April 1965. As we have endeavoured to point out earlier, the liability of the assessee‑company for payment of interest under subsection (2) from the day commencing after the end of the period mentioned in subsection (1) is at the rate of four per cent. per annum inasmuch as the day commencing after the end of the period mentioned in subsection (1) fell before the 1st April 1965, and the amended subsection (2) has no applicability. The words, namely, "the provisions contained in subsection (2)" used in subsection (3) plainly mean the provisions with regard to payment of interest at particular rate applicable to the assessee on the day commencing after the end of the period mentioned in subsection (1). If, therefore, the assessee‑company was liable to pay simple interest at four per cent. per annum from the day commencing after the end of the period mentioned in subsection (1) inasmuch as the period specified in the notices of demand issued to it for payment of tax ended before 1st April 1965, and the amended subsection (2) cannot he applied to the assessee, then it follows that the payment of interest by the assessee at the agreed rate of five per cent. per annum is not to the prejudice of the provisions contained in subsection (2). In our judgment, the assesses‑company is not liable to pay interest at the rate of six per cent. from 1st April 1965, and that being so, the notices of demand issued to it for payment of tax amount computed on the basis of payment of interest at the rate of six per cent. must be quashed. In this view of the matter, it is not necessary to consider the argument put forward on behalf of the petitioner that the arrangement with regard to payment of tax amount by instal ments with interest at the rate of five per cent. was a "settlement" between the petitioner and the Department, which could not be disturbed by the amendment made in subsection (2) of section 220 of the Act. For the foregoing reasons, all these petitions are allowed and the notices of demand issued to the petitioner under section 156 of the Act based on interest computed at the rate of six per cent. per annum on the unpaid amount of tar in each case is quashed. The respondent is restrained from demanding or recovering interest from the petitioner on the unpaid balance of tax at a rate higher than five per cent. per annum according to the condition imposed by the Income‑tax Officer, while granting to the petitioner the facility of payment of tax amount by instalments as stated in his letter dated the 16th January 1965 to the petitioner. The petitioner‑company shall have costs of these applications. Counsel's fee in each case is fixed at Rs.

200. The outstanding amount of security deposit shall be refunded in each case to the petitioner.