Court Rules Amended Interest Rates Not Retroactive

The court held that the amended interest rate of six percent under section 220(2) of the Income-tax Act, 1961, could not be applied retrospectively to the petitioner as the period for payment specified in the notice of demand ended before April 1, 1965. The court found the arrangement for a five percent interest rate under section 220(3) to be valid and unaffected by the amendment. Consequently, the court quashed the notices of demand based on the six percent rate, restrained the respondent from demanding interest higher than five percent, awarded costs to the petitioner, and ordered the refund of the outstanding security deposit.

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Issues Involved:

1. Applicability of the amended interest rate under section 220(2) of the Income-tax Act, 1961.
2. Validity of the arrangement under section 220(3) of the Income-tax Act, 1961.
3. Retrospective effect of the Finance Act, 1965.

Issue-wise Detailed Analysis:

1. Applicability of the amended interest rate under section 220(2) of the Income-tax Act, 1961:

The petitioner-company contested the applicability of the amended interest rate of six percent under section 220(2) of the Income-tax Act, 1961, as introduced by the Finance Act, 1965. The company argued that the amendment should not affect the interest rate agreed upon in the arrangement made with the Income-tax Officer on January 16, 1965, which stipulated a five percent interest rate. The court examined the language of section 220(2) and concluded that the liability to pay interest is determined by the rate in force "from the day commencing after the end of the period mentioned in sub-section (1)." Since the period for payment specified in the notice of demand ended before April 1, 1965, the court held that the amended rate of six percent could not be applied retrospectively to the petitioner. The court emphasized that applying the amended rate to periods before April 1, 1965, would effectively give the amendment a greater retrospective effect than intended by the Finance Act, 1965.

2. Validity of the arrangement under section 220(3) of the Income-tax Act, 1961:

The petitioner argued that the arrangement made with the Income-tax Officer under section 220(3) for payment of tax in installments with a five percent interest rate was a "settlement" that could not be altered by the subsequent amendment to section 220(2). The court noted that section 220(3) allows the Income-tax Officer to extend the time for payment or allow payment by installments, subject to conditions, but this is "without prejudice to the provisions contained in sub-section (2)." The court interpreted this to mean that any conditions imposed under section 220(3) must not violate the provisions of section 220(2). Since the original interest rate under section 220(2) before the amendment was four percent, the condition of paying five percent interest did not prejudice the provisions of section 220(2). Therefore, the court found that the arrangement for a five percent interest rate was valid and not affected by the amendment.

3. Retrospective effect of the Finance Act, 1965:

The court considered whether the amendment to section 220(2) by the Finance Act, 1965, which raised the interest rate to six percent, had a retrospective effect. The Finance Act, 1965, specified that the amendment would take effect from April 1, 1965. The court held that the amendment could not be applied to periods before this date. The court reasoned that the liability to pay interest is determined by the rate in force on "the day commencing after the end of the period mentioned in sub-section (1)." Thus, the amendment could not impose a higher interest rate for periods before April 1, 1965, without giving it an unintended retrospective effect. The court concluded that the petitioner was liable to pay interest at the agreed rate of five percent, as this did not prejudice the provisions of the unamended section 220(2).

Conclusion:

The court allowed the petitions and quashed the notices of demand issued to the petitioner based on the six percent interest rate. The respondent was restrained from demanding or recovering interest at a rate higher than five percent per annum. The petitioner was awarded costs, and the outstanding amount of security deposit was ordered to be refunded.

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