Interest u/s 220(2) Unsustainable Where Income Tax Demand Arose Only Through Subsequent Rectification Order: ITAT [Read Order]

The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has held that interest under Section 220(2) of the Income Tax Act, 1961 cannot be levied for a period during which no enforceable income tax demand existed.

The ruling was delivered in the case of Samsara Shipping Pvt. Ltd., where the dispute pertained to the levy of interest amounting to ₹32.54 crore under Section 220(2) for the Assessment Year 2021-22. comprising Saktijit Dey (Vice President) and Jagadish (Accountant Member),

The assessee had originally declared a total income of ₹55.22 crore. Although the assessment was completed under Section 143(3) read with Section 144B by determining a higher total income, the computation sheet of the assessment order reflected the original returned income. Consequently, the demand notice issued under Section 156 showed a ‘nil’ demand and even indicated a refund payable to the assessee.

The Assessing Officer then passed a rectification order under Section 154 of the Act, correcting the computational mistake and raising a tax demand. While doing so, the Assessing Officer also levied interest under Section 220(2).

Aggrieved by the interest, the assessee contended that in the absence of any demand specified in the original notice, there was no default under Section 220(1). And hence, no occasion to levy an interest under Section 220(2). It was further argued that interest could not be charged retrospectively.

The Tribunal, after examining Section 220, observed that interest under sub-section (2) can be levied only when an assessee fails to pay the specified amount within the prescribed time. In the present case, since the original demand notice reflected ‘zero’ demand, the assessee was under no obligation to make any payment.

The Tribunal rejected the Revenue’s contention and held that a demand raised for the first time through a rectification order can give rise to interest liability only after the expiry of the statutory period. Relying on the decision of the Delhi High Court in Vodafone Mobile Services Ltd. v. Union of India, the Tribunal concluded that interest under Section 220(2) could not be levied for a period when no demand existed.

Holding that the assessee could not be made to suffer for a mistake committed by the Assessing Officer, the Tribunal directed the deletion of interest. The appeal filed by the assessee was accordingly allowed.

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