Interest under section 220(2) needs a subsisting demand notice; an extinguished notice cannot be revived by the Validation Act.

Interest under section 220(2) arises only when a valid demand notice continues to subsist and the assessee defaults within the time allowed by that notice. Where the appellate effect order reduced the surtax liability to nil, the earlier demand notice ceased to operate, so later rectification and adjustment against refund did not create a live default or revive the extinguished notice. Section 3 of the Taxation Laws (Continuation and Validation of Recovery Proceedings) Act, 1964 applies only where a notice is restored by a higher forum after being quashed; it does not apply where the appellate order has attained finality and no fresh demand notice exists.

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Issues: Whether interest under section 220(2) could be levied when the original demand stood extinguished by a consequential order and no outstanding demand notice survived, and whether section 3 of the Taxation Laws (Continuation and Validation of Recovery Proceedings) Act, 1964 could revive the demand notice.

Analysis: Interest under section 220(2) is attracted only when there is a subsisting demand notice and default in payment within the time stipulated in that notice. Once the assessment order giving effect to the appellate order determined the surtax liability as nil, the earlier demand notice ceased to operate. The later rectification and adjustment of the revised tax liability against refund did not create a live default or revive a dead demand notice. Section 3 of the Validation Act applies only where a demand notice, though quashed in proceedings, is restored by a higher forum; it does not apply where the appellate order has attained finality and no fresh demand notice was issued.

Conclusion: The levy of interest under section 220(2) was not sustainable, and section 3 of the Validation Act did not assist the Revenue. The questions were answered in favour of the assessee and against the Revenue.

Final Conclusion: The reference was answered by holding that no interest liability could survive in the absence of an operative demand notice, and the Revenue could not rely on the Validation Act to sustain the recovery.

Ratio Decidendi: Interest under section 220(2) can be levied only when a valid demand notice remains outstanding and there is default in complying with it within the stipulated time; a demand notice that has ceased to subsist cannot be revived except in the limited situation covered by section 3 of the Validation Act.

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