High Court affirms ITO's power to charge interest for late returns

The High Court held that the Income-tax Officer (ITO) had jurisdiction under section 154 to charge interest under section 139 for the late submission of the return. The Court emphasized the mandatory nature of penal interest under section 139(1)(b)(iii), stating that the ITO's discretion to waive or reduce penal interest required prior approval. The Tribunal's view of judicial divergence was deemed incorrect, and the decision favored the revenue, ordering the assessee to pay the costs of the reference to the revenue.

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Issues Involved:
1. Jurisdiction of the Income-tax Officer (ITO) u/s 154 for charging interest u/s 139 for late submission of the return.

Summary:

Jurisdiction of the Income-tax Officer (ITO) u/s 154 for charging interest u/s 139 for late submission of the return:

The core issue was whether the Tribunal was justified in holding that the ITO had no jurisdiction u/s 154 to charge interest u/s 139 for the late submission of the return. The relevant assessment year was 1967-68, and the return was filed late by the assessee. Initially, the ITO did not charge interest for the delay but later sought to rectify this omission u/s 154 and levied penal interest of Rs. 2,610.

The assessee contended that the levy of interest u/s 139(1) was discretionary, and the ITO must be deemed to have exercised his discretion in favor of the assessee by not charging penal interest in the original assessment order. The Appellate Assistant Commissioner agreed with this contention, citing the Supreme Court decision in S. A. L. Narayan Row v. Ishwarlal Bhagwandas [1965] 57 ITR 149 (SC), and canceled the ITO's rectification order.

The Tribunal upheld the Appellate Assistant Commissioner's decision, noting a judicial divergence between the Andhra Pradesh High Court in Kishanlal Haricharan v. Income-tax Officer [1971] 82 ITR 660 (AP) and the Mysore High Court in Indian Telephone Industries Co-operative Society Ltd. v. Income-tax Officer [1972] 86 ITR 566 (Mys), suggesting that the issue was debatable and thus not suitable for rectification u/s 154.

However, the High Court disagreed with the Tribunal for two reasons:
1. The decision in Dalwadi & Company v. Commissioner of Income-tax (Income-tax Reference No. 54 of 1972) clarified that there was no scope for debate regarding the mandatory nature of penal interest u/s 139(1)(b)(iii).
2. The plain reading of clause (iii) of the proviso to section 139(1)(b) mandated the levy of penal interest if the return was not furnished before the extended date.

The High Court cited its previous decisions in Dalwadi's case and Additional Commissioner of Income-tax v. Mohanlal P. Jain [1976] 102 ITR 584 (Guj), emphasizing that the ITO's discretion to waive or reduce penal interest u/s 139(8) and rule 117A required prior approval from the Inspecting Assistant Commissioner, which was not obtained in this case.

The High Court concluded that the ITO had the power to initiate rectification proceedings and levy penal interest as the omission was an error apparent from the record. The Tribunal's view of judicial divergence was incorrect, and the question was answered in the negative, favoring the revenue. The assessee was ordered to pay the costs of the reference to the revenue.

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