Circulars not binding upon courts, asserts HC

Clarifications/circulars/instructions issued by boards/government are not binding upon courts, which are supposed to interpret and rely on statutory provisions. Observing this, the Punjab and Haryana High Court has allowed a writ petition filed by the Karnal Cooperative Sugar Mills against the Income Tax Department, claiming refund of interest amount to the tune of Rs 74,68,389, paid under Section 220 of the Income Tax Act for late payment of tax demand.

A Division Bench comprising Justices Jagmohan Bansal and Harpreet Kaur Jeevan allowed the petition while deciding an important question of law that a demand created pursuant to assessment under the Income Tax Act, set aside in appeal, erases the liability of the assessee to pay the tax demand till such time as further appeal by the Revenue Department is allowed by the Income Tax Department.

The Bench held that the demand would be deemed to have been created from the date of decision of the Income Tax Tribunal when it allows further appeal by the Revenue Department, and would not relate back to the original order of assessment, thus nullifying the demand of interest created by the department from the date of original assessment till its actual payment.

The sugar mills limited said the Income Tax Department assessed a tax of Rs 1,24,40,631. The respondent issued notice under Section 156, whereby the petitioner was asked to pay tax liability by January 13, 1995. In compliance of notice, it had deposited Rs 82,93,600 by February 28, 1995. The petitioner also filed an appeal before the Commissioner of Income Tax (Appeals), who allowed the same.

The respondent department then filed an appeal before the Income Tax Appellate Tribunal, which allowed the appeal of the department . The Assessing Authority, with intent to give effect to the order of appellate tribunal, issued a notice dated September 7, 1998, whereby a demand of Rs 1,31,04,719 was raised. The respondent also raised demand of interest of Rs 74,68,389 under Section 220(2) of 1961 Act on the basis of first notice.

Counsels for the petitioners, Senior Advocate Rajesh Garg contented before the Bench that the assessee had paid and satisfied the demand soon after the original demand was created. Appeal filed by the assessee was allowed by the Commissioner of Income Tax, Appeals. The demand would thus be deemed to have been erased for all purposes. It was only after the Income Tax Tribunal allowed the appeal of the Revenue Department, that the demand would revive and a fresh demand notice was required to be issued. As per the mandate of law, the demand for interest would arise only after non-compliance by the assessee to satisfy the demand, as and when raised.

On the other hand, counsel for the respondent submitted that as per circular dated April 3, 1982, issued by Central Board of Direct Taxes, interest is payable as per first notice under Section 156. The second notice relates back to first notice. Interest is payable considering first notice under Section 156.

The Bench held that a fresh demand notice was required to be issued by the department after its appeal is allowed at any stage, which was then required to be complied by the assessee.