Court Upholds Interest Levy under Income-tax Act, Deems Section 220(2) Illegal

The court upheld the levy of interest under sections 234B and 234C of the Income-tax Act, finding it justified. However, it deemed the levy of interest under section 220(2) illegal due to arbitrary imposition without proper notice or opportunity to be heard. The court quashed the interest levied under section 220(2) and allowed the writ petition with no costs.

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Issues Involved:
1. Waiver of interest under sections 234B and 234C of the Income-tax Act, 1961.
2. Legality of considering the petitioner's case under a subsequent order dated June 26, 2006.
3. Levy of interest under section 220(2) of the Income-tax Act in an order passed under section 154.

Issue-wise Detailed Analysis:

1. Waiver of Interest under Sections 234B and 234C:

The petitioner sought waiver of interest levied under sections 234B and 234C of the Income-tax Act, 1961, based on Notification No. F. 400/234/95 IT(B), dated May 23, 2006. This notification allowed for the waiver of interest if cash seized during a search operation was not allowed to be utilized for payment of advance tax. However, the court found that no cash belonging to the petitioner was seized during the financial year 1992-93 that disabled the petitioner from paying advance tax. The cash seized was treated as adjusted against the petitioner's individual tax liability, and the petitioner never objected or requested its release for advance tax payment. Therefore, the court concluded that the petitioner's case was not covered under the said notification for waiver of interest under sections 234B and 234C, and the levy of interest was justified.

2. Legality of Considering the Petitioner's Case under Subsequent Order:

Given the conclusion that the petitioner's case was not covered under the notification dated May 23, 2006, the court deemed the second issue of academic interest only and did not provide a detailed answer. The Chief Commissioner had considered the petitioner's case under the subsequent order dated June 26, 2006, which was in force at the time of the waiver petition filing.

3. Levy of Interest under Section 220(2):

The petitioner challenged the levy of interest under section 220(2) of the Act, arguing it was imposed for the first time in an order passed under section 154 at the instance of the petitioner and without providing an opportunity of being heard. The court noted that the interest was levied arbitrarily after a gap of more than eight years and without any computation or reasoning. The court also highlighted that no notice of demand as required under section 156 was served on the petitioner, making the interest unenforceable. Additionally, the court found that the levy of interest under section 220(2) in a rectification proceeding under section 154 was illegal, as established in the Calcutta High Court decision in Birla Cotton Spinning and Weaving Mills Ltd. v. ITO. The court emphasized that such arbitrary and whimsical actions by the Assessing Officer were impermissible under the law.

Conclusion:

The court held that the levy of interest under sections 234B and 234C was justified and required no interference. However, the levy of interest under section 220(2) was not legally permissible. The writ petition was allowed to the extent of quashing the interest levied under section 220(2), with no costs.

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