Facts of the Case

The present appeal relates to Assessment Year 1987-88, wherein the original assessment under Section 143(3) assessed income at ₹11.40 crore. Subsequently, the Commissioner of Income Tax (Appeals) reduced the income, and further appellate proceedings before the Tribunal significantly reduced the assessed income.

Later, pursuant to directions concerning AY 1986-87, an addition of excise duty was made in AY 1987-88, and a fresh demand was effectively raised on 15.09.2014. The Assessing Officer levied interest under Section 220(2) for the period from 01.05.1990 to 15.09.2014.

The CIT(A) deleted the interest, holding that no earlier valid demand existed. The Tribunal upheld this view, leading to the present appeal by the Revenue before the Delhi High Court.

Issues Involved

  1. Whether interest under Section 220(2) can be levied for a period prior to issuance of a valid demand notice under Section 156.
  2. Whether an assessment order automatically constitutes a demand for the purpose of charging interest.

 Petitioner’s Arguments (Revenue)

  • The Revenue contended that interest under Section 220(2) is consequential and should apply from the date of original demand.
  • It was argued that the liability existed since the original assessment order dated 29.03.1990.
  • The Revenue challenged the Tribunal’s affirmation of CIT(A)’s order deleting the interest.

 Respondent’s Arguments (Assessee – Modipon Ltd.)

  • The assessee argued that no valid demand notice under Section 156 was issued earlier.
  • The demand arose only on 15.09.2014, and hence interest prior to that date is unsustainable.
  • It was contended that interest liability arises only upon default in payment of a valid demand notice.

 Court’s Findings

The Delhi High Court upheld the findings of the Tribunal and CIT(A), observing:

  • The assessment order dated 29.03.1990 did not translate into a demand notice under Section 156.
  • The first valid demand notice was issued only on 15.09.2014.
  • Section 220(2) clearly stipulates that interest is payable only when the amount specified in a demand notice is not paid within time.

Court Order / Final Decision

  • The Court held that interest under Section 220(2) cannot be levied for the period prior to issuance of demand notice dated 15.09.2014.
  • The order of the Assessing Officer levying interest from 1990 to 2014 was unsustainable in law.
  • No substantial question of law arose.
  • Appeal of the Revenue was dismissed.

 Important Clarification

  • Interest u/s 220(2) is not automatic upon assessment.
  • It is strictly contingent upon:
    • Issuance of a valid demand notice u/s 156, and
    • Failure to pay within prescribed time.
  • An assessment order alone does not trigger interest liability unless backed by a proper demand notice.

Link to download the order -  https://delhihighcourt.nic.in/app/showFileJudgment/RAS06042023ITA1962023_163056.pdf

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