Zero-demand tax assessment later rectified u/s154: s.220(2) interest blocked until fresh s.156 notice; levy deleted

Where the assessment order was accompanied by a demand notice specifying "zero" demand, the ITAT held that interest under s. 220(2) could not be levied merely because a tax demand was later created through rectification under s. 154. Since no amount was payable under s. 220(1) on the original notice, the assessee could not be treated as in default so as to attract s. 220(2). A demand arising from rectification becomes payable only after expiry of 30 days from service of a fresh notice under s. 156 specifying such demand; interest cannot run for any earlier period, and the assessee cannot be prejudiced by the AO's original computational mistake. The interest levy was deleted.

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1. ISSUES PRESENTED AND CONSIDERED

(i) Whether interest under section 220(2) can be levied when the original notice of demand issued under section 156 pursuant to the assessment specified "zero" demand, and the tax demand was first created only later through a rectification order under section 154.

(ii) Whether interest under section 220(2) can be charged for a period prior to the issuance of a valid, enforceable demand specifying an amount payable, particularly where the earlier computation error was attributable to the Assessing Officer and not to any default by the assessee.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (i) & (ii) (Grouped): Levy of interest under section 220(2) where original demand notice showed nil demand and demand arose only after rectification

Legal framework: The Court examined section 220(1) and section 220(2). Section 220(1) requires payment, within the stipulated time, of the amount specified in a notice of demand issued under section 156. Section 220(2) authorises levy of simple interest only where the amount specified in such notice of demand is not paid within the period prescribed. The Court also applied the settled principle that without a valid notice of demand, no demand is enforceable.

Interpretation and reasoning: The assessment order determined a higher total income, but the computation sheet accompanying it computed tax on the returned income and, after adjustments, even showed a refund; correspondingly, the notice of demand under section 156 specified "zero" demand. On these admitted facts, the assessee was not required to pay any amount under section 220(1) because no payable amount was specified in the original demand notice. The subsequent rectification order under section 154 (passed much later) was the first event that created an actual demand payable. Interest under section 220(2) was nevertheless computed for a period when, by virtue of the existing demand notice, there was no enforceable demand against the assessee. The Court held that the assessee could not be treated as having violated section 220(1) in the absence of any specified payable demand, and the assessee could not be made to suffer interest consequences for a computation mistake committed by the Assessing Officer.

Conclusions: Interest under section 220(2) was held to be impermissible and unsustainable for any period prior to the creation of demand through rectification and the consequent fresh notice of demand specifying the amount payable. The demand would become due only after expiry of 30 days from service of the fresh demand notice issued pursuant to the rectification. The Assessing Officer was directed to delete the interest levied under section 220(2). The additional ground regarding non-mention of DIN in the section 154 order was not decided and was kept open as academic.

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