Section 220(2) interest cannot run when no subsisting demand exists; liability begins only after demand revival.

Interest under Section 220(2) of the Income-tax Act could not be levied for the period when the assessee had been granted refund and no subsisting demand existed, because default is a necessary precondition for the charge. Although the original notice of demand could continue under the Taxation Laws (Continuation and Validation of Recovery Proceedings) Act, 1964, the substantive liability to interest arose only when the original demand was revived after the appellate order. Interest was therefore payable only on the revived balance demand for the post-revival period of default.

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Issues: Whether interest under Section 220(2) of the Income-tax Act, 1961 could be charged for the period during which the assessee had been granted refund and there was no subsisting demand, when the original demand was later revived after the Tribunal's order.

Analysis: The assessment year involved partial payment of the original demand, followed by a successful appeal and grant of refund. On departmental appeal, the appellate relief was reversed and the original demand was restored. The statutory scheme under Section 220(2) makes default a necessary condition for charging interest. During the refund period there was no subsisting demand, so the assessee could not be treated as a defaulter for that interval. Although the notice of demand could survive by virtue of the Taxation Laws (Continuation and Validation of Recovery Proceedings) Act, 1964, the substantive levy of interest under Section 220(2) could operate only from the point when the original demand was revived.

Conclusion: Interest under Section 220(2) was not leviable for the period from the refund order until revival of the original demand, and was payable only for the balance demand for the period of default after the Tribunal's order.

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