Facts of the Case

The Assessee, engaged in network design, management, and communication services, filed its return for AY 2004–05 declaring income of ₹29.30 crore. The Assessing Officer (AO) assessed income at ₹32.15 crore.

  • The matter travelled through CIT(A) and ITAT.
  • The ITAT (first round) set aside the original assessment order dated 28.12.2006 and remanded the case to the AO.
  • The AO passed a fresh assessment order dated 29.03.2016 under Section 143(3) read with Section 254.
  • While issuing demand, the AO levied interest under Section 220(2) based on the original assessment order.

The Assessee challenged this levy of interest.

Issues Involved

  1. Whether interest under Section 220(2) of the Income Tax Act can be levied from the date of the original assessment order when such order has been set aside by appellate authorities.
  2. Whether interest can relate back to the original demand when a fresh assessment order is passed after remand.

Petitioner’s Arguments (Revenue)

  • Interest under Section 220(2) should run from the original demand notice (2006).
  • The original assessment was not completely annulled, and additions remained substantially the same.
  • Relied on Vikrant Tyres Ltd. v. First ITO (2001) 3 SCC 76 to argue that interest liability survives.
  • Contended that only reduction of interest is envisaged under proviso to Section 220(2), not complete deletion.

Respondent’s Arguments (Assessee)

  • Once the ITAT set aside the original assessment, the demand arising from it ceased to exist.
  • A fresh demand notice dated 29.03.2016 was issued after reassessment.
  • Interest under Section 220(2) can only be charged after expiry of 30 days from fresh demand notice.
  • Relied on:
    • CBDT Circular No. 334 dated 03.04.1982
    • CIT v. Rajesh Kumar Dinesh Kumar (325 ITR 346)
  • Argued that levy of interest for period prior to fresh demand is illegal.

Court Findings / Order

  • The original assessment order ceased to exist once it was set aside by ITAT.
  • Interest under Section 220(2):
    • Cannot be levied with reference to the original demand notice
    • Must be computed only from the fresh demand notice issued after reassessment
  • The Court upheld the orders of CIT(A) and ITAT deleting the interest.
  • The Revenue’s appeal was dismissed.

Important Clarifications by Court

  • Section 220(2) applies only when there is default in payment of a valid demand.
  • If an assessment order is set aside, the original demand:
    • Gets extinguished
    • Cannot be used for computing interest
  • Fresh assessment order becomes the only subsisting order.
  • CBDT Circular No. 334 clearly states:
    • No interest can be charged based on original demand when assessment is set aside.

Sections Involved

  • Section 220(2) – Interest on delayed payment of tax demand
  • Section 143(3) – Assessment
  • Section 254 – Orders of ITAT
  • Section 260A – Appeal to High Court

Link to download the order -https://delhihighcourt.nic.in/app/showFileJudgment/58917112022ITA4282022_182601.pdf


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