Interest under section 220(2) continues on unpaid tax demand when assessment is only sent back for recomputation.

Interest under section 220(2) continues to accrue where an assessment is not wholly set aside and the matter is restored only for recomputation of disallowance. The Tribunal treated the original demand notice under section 156 as remaining operative because the earlier appellate order did not annul the assessment in full. As the assessee had not paid the outstanding tax within the prescribed time, default persisted and interest remained chargeable, subject only to any reduction in the tax demand itself. Authorities cited for superseded assessments or fully paid demands were distinguished on facts, and deletion of the interest was not warranted.

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Issues: Whether interest under section 220(2) of the Income-tax Act, 1961 was chargeable from the original demand when the assessment was only restored for recomputation of disallowance and a fresh demand was not the basis of the default.

Analysis: The Tribunal held that the earlier appellate order had not annulled the assessment in full but had only restored the matter for quantification of disallowance under section 14A. In that situation, the original demand notice did not stand completely displaced, and the assessee remained in default in respect of the unpaid tax demanded under section 156. The precedents relied upon by the assessee were distinguished on facts because in those cases the original demand had been superseded by a truly fresh assessment or the tax had already been paid. The statutory scheme of sections 156 and 220 showed that interest follows non-payment within the prescribed time, subject to reduction only to the extent the tax demand itself is reduced.

Conclusion: Interest under section 220(2) was rightly leviable on the unpaid demand from the original assessment, and the assessee was not entitled to deletion of the interest.

Final Conclusion: The departmental appeal succeeded, and the recomputation direction issued by the first appellate authority was set aside.

Ratio Decidendi: Where an assessment is not wholly set aside and the assessee remains unpaid on the demand raised under section 156, interest under section 220(2) continues to run on the outstanding tax notwithstanding later recomputation or partial reduction of liability.

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