COMMISSIONER OF INCOME TAX Vs. NAGRI MILLS LIMITED

JUDGEMENT

(1.) THE Revenue being aggrieved by the judgment and order passed by the ITAT ("Tribunal" for short) refusing to refer the following question to us for our opinion, has filed this application under S. 256 (2) of the IT Act, 1961, ("Act" for short) :

(2.) THE ITO framed an assessment by his order dt. 26th Feb., 1982 and directed to charge interest under ss. 215 and 216 of the Act. In this application, we are concerned only with the interest charged under S. 216 of the Act. While giving direction to charge interest under S. 216, the ITO did not record a finding that the assessee had under estimated the advance tax payable by it and thereby reduced the amount payable in either of the first two instalments. It is the case of the Revenue that the assessee had become liable to pay interest under S. 216 as it had underestimated the advance tax payable by it. The assessee being aggrieved by the direction given by the ITO to charge interest contended before the CIT(A) before whom it had preferred an appeal against the assessment made by the ITO that there was no justification to charge interest. It was submitted that the assessee had filed estimate of advance tax which he had reason to believe to be correct because it was based on estimated profits at the time of filing the estimate. According to the assessee, subsequently there was sudden increase in its income which resulted in increase in profit and consequently the tax payable also increased. In substance the contention of the assessee was that it had not underestimated the advance tax payable by it. The Commissioner was of the view that since the interest was not illegally levied, it was not open to him to go into the issue whether the estimate filed by the assessee was correct or not. It would appear that the Commissioner had not fully appreciated the contention which was raised by the assessee before him. However, in the view which he took, the Commissioner rejected the assessee's contention. In the further appeal before the Tribunal, the assessee reiterated its contention. The Tribunal held that the ITO had not recorded finding which he was required to do under S. 216 before levying interest and that he had only mechanically mentioned in the order to charge interest under S. 216. The Tribunal relying on the decision of Andhra Pradesh High Court in the case of Addl. CIT vs. Vazir Sultan Tobacco Company Ltd. (1980) 122 ITR 251 (AP) : TC4R.816 further held that where the underestimate of advance tax is because of underestimation of income, provisions of S. 216 are not attracted. In the result the Tribunal directed the ITO to delete interest levied under S. 216 of the Act. The Revenue being dissatisfied with the view taken by the Tribunal applied to the Tribunal to refer to this Court, the question set out above for its opinion under S. 256(1) of the Act. The Tribunal, however, declined to refer the question because finding in respect of levy of interest under S. 216 was "lacking". The Revenue has, therefore, approached this Court by way of this application.

(3.) ON a plain reading of S. 216 it is clear that interest could not have been levied under that section unless the ITO found that the assessee had underestimated the advance tax payable by it. The finding that there was underestimate of the advance tax payable by the assessee was a pre condition for levy of interest. And unless such a finding was recorded, no interest could have been levied. Now the section says "he (ITO) may direct that the assessee shall pay simple interest". This clearly shows that the ITO has a discretion to levy or not to levy interest. The discretion has no doubt to be exercised judicially and not arbitrarily. The question of exercising such discretion would arise only when the ITO finds that the assessee had underestimated the advance tax payable by him. It is needless to say that the finding which the ITO is required to record has to be backed by reasons. It is interesting to compare the provisions of S. 216 with the provisions of ss. 215 and 217 which also provide for levy of interest. Under ss. 215 and 217, if the conditions laid down therein are satisfied, it is incumbent upon the ITO to levy interest. Under both these provisions, if they are applicable, the assessee is under an obligation to pay interest. In other words, payment of interest is mandatory, if the circumstances as mentioned in those provisions exist. While on the other hand, whether, or not to levy interest under S. 216 is discretionary. However, as observed above, no interest would be leviable without recording a finding that the assessee has underestimated the advance tax payable by it. It is also important to note that the order levying interest under S. 216 is appealable under S. 246(m). How would the appellate authority be able to determine whether or not interest levied under S. 216 is correctly levied unless a finding as required under S. 216 is recorded by the ITO? The ITO is therefore also required to record such finding which is backed by reasons. What he is required to find is that the assessee had underestimated the advance tax payable by it. The term "underestimate" indicates that he must find that the assessee had made too low an estimate. The estimate can be said to be an "underestimate" if it is deliberate or intentional. There has to be lack of bona fides on the part of the assessee. The finding of underestimation, therefore, cannot be made without appreciation of the facts which are pleaded or which are on record. It is on appreciation of the facts on record that the ITO is required to reach the conclusion that when the assessee filed estimate of advance tax, he underestimated it. It is, therefore, necessary for the ITO to record a finding that the assessee had underestimated the advance tax payable by it and unless he records such a finding, the question of levy of interest would not arise. Therefore, the answer to the question sought to be raised by the Commissioner is self evident. In our opinion, therefore, the Tribunal was right in declining to refer the question as suggested by the Commissioner to us for our opinion. In the result, we reject this application and discharge the rule. No order as to costs.