The Kerala High Court has held that Section 220(2) of the Income Tax Act, 1961 has no retrospective effect and no liability to pay interest on tax crystallised.
Smt.Nisha John, counsel appeared for the petitioner and Sri. Christopher Abraham, Standing Counsel appeared for the Income Tax Department.
Catherine Thomas, the petitioner challenged the demand notice directing the petitioner to pay an amount of Rs.16,11,512/- as interest on the income tax of Rs.10,76,869/-, the tax determined finally by order dated passed on the rectification application of the petitioner.
The petitioner has already paid the entire tax amount on 27.01.2011, within 35 days from the date of Ext.P4. The counsel for the petitioner submitted that the 2nd proviso to Section 220(2) of the Income Tax Act has been inserted by the Finance Act of 2014 and it has been made applicable only with effect from 01.10.2014. Therefore, this provision cannot be made use of in respect of the demand of tax crystallized and paid by an assessee before the said date ie.,01.10.2014.
The counsel for the petitioner also submitted that the petitioner’s case has to be governed by the unamended provision of Section 220 as existed on 01.10.2014. It was submitted that the petitioner was liable to pay interest if he failed to make the payment of the finally assessed amount within 35 days from the date of crystallizing the tax. However, the assessee had paid the tax within 35 days from the date of the order.
In the case of Vikrant Tyres Ltd v.First Income Tax Officer, it was held that Section 220(2) of the Income Tax Act would be applicable in a case where even after the notice of demand under Section 156 and after a further period of 35 days as provided under Section 220(1) the assessee continues as a defaulter in the matter of payment of tax. Only in case where the assessee defaults in payment of tax assessed, 35 days after the notice of demand under Section 156 liability to pay interest accrues.
The demand was crystallized only on 10.01.2011 by order and the assessee had paid the crystallized tax amount within 35 days from the said date ie. on 27.01.2011. It is therefore submitted that the petitioner cannot be held liable to pay the interest by taking recourse to the 2nd proviso of Section 220(2) which has been introduced with effect from 01.10.2014.
The Standing Counsel for the Income Tax Department has not disputed the legal position that the 2nd proviso which has been introduced in the Finance Act of 2014 will have prospective operation with effect from 01.10. 2014.
As the Finance Act itself makes it clear it has come into effect from 01.10.2014 and therefore, by no stretch of imagination its operation cannot be said to be retrospective. Considering the said position of law, the court comprising Justice Dinesh Kumar Singh held that the petitioner cannot be held to default in making the payment of tax which was crystallized by order. Therefore, Section 220(2) would not empower the Department to levy interest on the tax assessed which has already been paid.
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