Interest on restored tax demand remains payable where the original notice survives and tax stayed unpaid in substance.

Interest under section 220(2) of the Income-tax Act is attracted where an original demand was paid, a refund followed appellate relief, and the assessment was later restored. The Karnataka High Court reasoned that the Taxation Laws (Continuation and Validation of Recovery Proceedings) Act, 1964 keeps the original demand alive when the assessment is ultimately upheld, so a fresh demand notice is not necessary to sustain interest. It further noted that section 220(2) is compensatory, aimed at reimbursing the Revenue for being kept out of money lawfully due. On that basis, interest was held payable and the assessee's plea that it was not in default was rejected.

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Issues: Whether interest under section 220(2) of the Income-tax Act, 1961 is leviable where the assessee paid the original demand, obtained refund after appellate relief, and later paid the tax again after the assessment was ultimately restored.

Analysis: Section 220(2) fastens liability when the amount specified in a notice of demand under section 156 is not paid within the statutory period, but the effect of the Taxation Laws (Continuation and Validation of Recovery Proceedings) Act, 1964 is to keep alive the original demand notice when the assessment is ultimately upheld by the superior forum. The levy of interest is compensatory, not penal, and is intended to recompense the Revenue for being kept out of money lawfully due. The scheme of the Act, the Board's circular, and the case law relied upon support the view that the ultimate restoration of the assessment relates back to the original demand and that the absence of a fresh demand notice does not prevent levy of interest where the tax remained unpaid in substance during the relevant period after the assessment was restored.

Conclusion: Interest under section 220(2) was held payable, and the contention that the assessee was not in default was rejected.

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