Facts

The Appellant before the Hon’ble Supreme Court is a sterling company and is engaged in the business of export of manganese extracted from its manganese mines situated in the States of Maharashtra and Madhya Pradesh. The Appellant had filed its return of income for the AY 1967-68 beyond the due date prescribed under section 139 of the Act. The AO while finalizing the assessment levied interest under section 139(8) of the Act for delay in filing the return as well as under section 215 for delay in payment of advance tax. The Appellant being aggrieved by the action of the AO filed an appeal before the AAC challenging the additions made to the assessed income as well as levy of interest under section   139 and 215 of the Act. Pending the proceedings before the AAC, the Appellant sought professional help, wherein it has been informed that the issue of levy of interest under section 139 and 215 are not appealable. The Appellant as per the advice of the professional filed two revision application before the CIT objecting    to the levy of interest under section 139(8) as well as 215 of the Act. In its application, the Applicant had explained the reasons for not filing of return within the stipulated period provided under section 139 of the Act as well as under estimation of advance tax. The Applicant had also mentioned in the application about the pendency of appeal before the AAC on these issues. The CIT was kind enough to intimate to the Applicant that in view of clause (b) of sub-section (4) of section 264 of the Act,  he has no power to decide the issues raised in application  as the same is subject matter of a valid appeal pending before the AAC. The Appellant, thereafter, made an application before the AAC for withdrawing the grounds challenging the levy of interest under section 139(8) as well as 215 of the Act as the same are not appealable. The AAC  has not passed any separate order   on the application made by the Applicant; however, in the order disposing off the appeal, he had not decided the issue of levy of interest challenged in the grounds  of appeal. The CIT,  thereafter, without appreciating the facts and circumstances    of the case dismissed both the applications filed by the Applicant on the ground that the Applicant should have withdrawn the entire appeal and not only the grounds challenging the levy of interest. The Appellant being aggrieved by the order passed by the CIT filed Writ Petition before the Hon’ble Bombay High Court, which was dismissed in limine.

The Appellant being aggrieved by the order of the High Court preferred the present SLP before the Hon’ble Supreme Court.

Issue

Question that arose for the determination of Hon’ble Supreme Court was whether the levy of interest under section 139(8) and section 215 of the Act is part of assessment order and appealable within the meaning of provisions of section 246  of the Act.

View

Interest under section 139(8) as well as 215 is levied for the reason of non- filing of return in time or default in payment of advance tax as the department       is deprived of the benefit of  taxes  for  the  period for  which it  has  remained to be unpaid. Hence the  levy of  interest under section 139(8) and  215  of  the  Act  is compensatory and not penal in nature. Further, the levy of interest is part of process of assessing the tax liability and passing of final assessment. Hence, the levy of interest under section 139(8) and 215 of the Act can be challenged in appeal before AAC  where the ground is raised that the assessee is not liable to   levy of interest at all.

Held

On appeal reversing the judgment, the Court held that levy of interest under sections 139(8) and 215 is part of assessment and, hence, Applicant can dispute such levy in appeal, if he limits himself to the ground that he is  not  liable to levy at all. However, order passed for waiver or reduction of interest under section 139(8) and 215 are not appealable as per the provisions of section 246(c)    of the act. In the present case, the Applicant has not made any application before the ITO for reduction or waiver of interest under section 139(8) or under section 215, no question arose of the relevant authority having denied improperly   a reduction or waiver of the interest and that being so, no revision petition could  be maintained in that regard by the Applicant before the Commissioner. (AY 1967-68) (CA No. 1338 and 1340 of 1974 dated 15-7-1986)

Editorial : National Products v. CIT [1977] 108 ITR 935 (Kar) referred where the court has held that interest under sections 139 and 215 is part of the assessment. When such penal interest is levied the assessee is ‘assessed’, meaning thereby,  he  is subjected to the procedure for ascertaining and imposing liability on him. If the assessee denies his liability to be assessed under the Act, he has a rightof appeal

to the Appellate Assistant Commissioner against the order of assessment. Where penal interest is levied under section 215 by the order of assessment, the assessee may altogether deny his liability to pay such interest on the ground that he was   not liable to pay advance tax at all or that the amount of advance tax determined  by the Income-tax Officer as payable ought to be reduced.

“It is unwise to be too sure of one’s own wisdom.   It is healthy to be reminded that the strongest might weaken and the wisest might err.”

– Mahatma Gandhi