Interest under section 220(2) applies only after a valid fresh demand notice; earlier period interest was not chargeable.

Interest under section 220(2) of the Income-tax Act was treated as chargeable only from default under a valid demand notice arising after the fresh Settlement Commission order, not from the original demand date. On the facts, the earlier demand had already been satisfied and the original order had been set aside, so the CBDT circular relied on by the Revenue did not apply to compute interest for the earlier period. Applying strict construction of taxing provisions, the Tribunal found that interest could not be levied before the fresh order and that rejection of the rectification application under section 154 was not sustainable.

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Issues: Whether interest under section 220(2) of the Income-tax Act, 1961 could be levied for the period prior to the fresh order passed under section 245D(4), and whether rejection of the rectification application under section 154 was justified.

Analysis: The demand for interest arose only after the fresh order of the Settlement Commission and the consequential demand notice. The earlier demand had already been satisfied and the original order stood set aside in the course of litigation. The Tribunal held that, on the facts, the case did not fall within the CBDT circular relied upon by the Revenue to compute interest from the original demand date. Relying on the legal position that interest under section 220(2) is attracted only after default in payment of a valid demand notice and that taxing provisions must be construed strictly, the Tribunal agreed with the view that interest could not be charged for the earlier period. The rejection of rectification was therefore not sustainable.

Conclusion: Interest under section 220(2) was not chargeable for the period prior to the fresh order dated 03.05.2011, and the assessee's rectification claim was rightly allowed.

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