Supreme Court clarifies conditions for waiving interest under Section 220(2A) of the Income Tax Act: B.M. Malani vs. Commr. of Income Tax (2008)

Introduction

Date of the Judgment: October 01, 2008

Citation: [Not Available in Source]

Judges: S.B. Sinha, J., Cyriac Joseph, J.

When can the Income Tax Department waive interest on delayed tax payments? The Supreme Court of India addressed this question in the case of B.M. Malani vs. Commissioner of Income Tax, focusing on the interpretation of Section 220(2A) of the Income Tax Act. The court examined whether the Commissioner of Income Tax was justified in rejecting the appellant’s application for a waiver of interest. The judgment was delivered by a two-judge bench comprising Justice S.B. Sinha and Justice Cyriac Joseph.

Case Background

The appellant, B.M. Malani, was engaged in the business of money lending and trading in shares and securities. On September 4, 1994, a raid was conducted at his residence by income tax authorities under Section 132 of the Income Tax Act. During the raid, shares worth approximately Rs. 61.38 lakhs and a demand draft of Rs. 10 lakhs in the name of PAN Clothing Company Limited were seized.

On December 15, 1994, the appellant made a declaration under Section 132(4) of the Income Tax Act, offering to pay taxes from the seized assets, specifically requesting the expeditious disposal of the shares. The appellant stated he had no further funds and requested that the shares and securities under seizure be sold to meet the tax liabilities.

Despite this request, the shares were not sold. Between January and March 1995, the Income Tax Department demanded and recovered Rs. 40 lakhs from the appellant.

On January 2, 1996, the appellant filed an application before the Settlement Commission under Section 245C(1) of the Income Tax Act, which was eventually decided on December 2, 1999. The demand draft of Rs. 10 lakhs was encashed by the Income Tax Department in July 2000 after revalidation.

On March 8, 2002, the Income Tax Officer levied interest of Rs. 31,41,106 under Section 220(2) of the Income Tax Act for the assessment years 1990-91 to 1995-96. The appellant then filed applications for waiver of interest, which were rejected by the Commissioner of Income Tax on November 26, 2002. The Commissioner opined that the appellant did not meet all three conditions required for a waiver, although cooperation with the department was acknowledged. The Commissioner also noted that the appellant possessed significant assets and was financially sound.

Timeline:

Legal Framework

The case revolves primarily around Section 220(2A) and Section 132 of the Income Tax Act.

• Section 220(2A) of the Income Tax Act: This section grants the Chief Commissioner or Commissioner the authority to reduce or waive interest amounts paid or payable by an assessee. This power can be exercised if the Commissioner is satisfied that:
  ✓ Payment of such amount has caused or would cause genuine hardship to the assessee.
  ✓ Default in the payment of the amount on which interest has been paid or was payable was due to circumstances beyond the control of the assessee.
  ✓ The assessee has cooperated in any inquiry relating to the assessment or any proceeding for the recovery of any amount due from him.
• Section 132 of the Income Tax Act: This section deals with the powers of the income tax authorities to conduct search and seizure operations. Sub-Section (4A) of Section 132 states that when any document is seized, a presumption is raised that the same belongs to the person from whose possession or control it was seized; however, such a presumption is a rebuttable one.

Arguments

Appellant’s Arguments:

• The appellant argued that the non-encashment of the demand draft worth Rs. 10 lakhs and the non-selling of shares and securities caused genuine hardship.
• The appellant contended that had the shares and securities been sold when requested, the tax burden would have been reduced, especially since only Rs. 40.73 lakhs remained due after adjusting Rs. 117.04 lakhs already deposited.
• The appellant relied on the definition of ‘genuine’ from the New Collins Concise English Dictionary, Words and Phrases Permanent Edition Vol. 18, and Black’s Law Dictionary to support the argument that the hardship was real and not a mere pretense.

Respondents’ Arguments:

• The respondents argued that considering the nature and magnitude of the appellant’s business, the appellant did not suffer any genuine hardship.

Issues Framed by the Supreme Court

1. Whether the Commissioner of Income Tax was justified in rejecting the appellant’s application for waiver of interest under Section 220(2A) of the Income Tax Act.

Treatment of the Issue by the Court: “The following table demonstrates as to how the Court decided the issues”

Authorities

The court considered the following authorities:

• New Collins Concise English Dictionary: Used to define the term ‘genuine’.
• Words and Phrases Permanent Edition Vol. 18: Used to define the term ‘genuine’.
• Black’s Law Dictionary: Used to define the term ‘genuine’.
• Priyanka Overseas Pvt. Ltd. & Anr. v. Union of India & ors. 1991 Suppl. (1) SCC 102: Cited for the principle that a person cannot take advantage of his own wrong.
• Union of India & ors. v. Major General Madan Lal Yadav (Retd.) (1996) 4 SCC 127: Cited for the principle that a person cannot take advantage of his own wrong.
• Ashok Kapil v. Sana Ullah (dead) & ors. (1996) 6 SCC 342: Cited for the principle that a person cannot take advantage of his own wrong.
• Sushil Kumar v. Rakesh Kumar (2003) 8 SCC 673: Cited for the principle that a person cannot take advantage of his own wrong.
• Kusheshwar Prasad Singh v. State of Bihar & ors. (2007) 11 SCC 447: Cited for the principle that a person cannot take advantage of his own wrong.
• Section 220(2A) of the Income Tax Act: The primary legal provision under consideration, concerning the waiver of interest.
• Section 132(4A) of the Income Tax Act: Pertains to the presumption regarding ownership of seized documents.
• Section 245C(1) of the Income Tax Act: Relates to the application before the Settlement Commission.

Judgment

The Supreme Court allowed the appeal, set aside the impugned judgment, and remitted the matter to the Commissioner of Income Tax for reconsideration.

How each authority was viewed by the Court?

• New Collins Concise English Dictionary, Words and Phrases Permanent Edition Vol. 18, Black’s Law Dictionary: The court relied on these dictionaries to define “genuine” and emphasized that a genuine hardship means a real difficulty, not merely a pretense.
• Priyanka Overseas Pvt. Ltd. & Anr. v. Union of India & ors. [CITATION], Union of India & ors. v. Major General Madan Lal Yadav (Retd.) [CITATION], Ashok Kapil v. Sana Ullah (dead) & ors. [CITATION], Sushil Kumar v. Rakesh Kumar [CITATION], Kusheshwar Prasad Singh v. State of Bihar & ors. [CITATION]: These cases were cited to reinforce the principle that a person cannot benefit from their own wrong. The court noted that this principle should be considered when evaluating whether to waive interest.

What weighed in the mind of the Court?

The Supreme Court’s decision was influenced by several factors:

• Failure to Consider Appellant’s Request: The Court emphasized that the Commissioner and the High Court did not adequately consider the appellant’s request to sell the seized shares to cover tax liabilities. This was seen as a critical oversight.
• Discretionary Jurisdiction: The Court reiterated that the Commissioner’s discretion under Section 220(2A) must be exercised judiciously, considering all relevant factors and ensuring that the conditions for waiver are properly evaluated.
• Genuine Hardship: The Court stressed that the concept of “genuine hardship” should be interpreted practically, considering the specific circumstances of the assessee.
• Principle Against Taking Advantage of Own Wrong: The Court highlighted that the principle that a person cannot benefit from their own wrong should be taken into account when deciding whether to grant a waiver of interest.

Fact:Law Ratio

The court’s reasoning was as follows:

Issue: Whether the Commissioner of Income Tax was justified in rejecting the appellant’s application for waiver of interest under Section 220(2A) of the Income Tax Act.

Logical Reasoning:

Appellant requested to sell seized shares → Commissioner did not act on request → Court: Commissioner’s discretion must be judicious → Court: Failure to consider request is critical → Court: Genuine hardship must be considered → Remit the matter to the Commissioner for reconsideration.

The Court considered the appellant’s request to sell the seized shares, the Commissioner’s failure to act on this request, the discretionary nature of the Commissioner’s power, and the concept of genuine hardship. By remitting the matter, the Court directed the Commissioner to re-evaluate the case, considering all relevant factors.

“Genuine hardship would, inter alia, mean a genuine difficulty. That per se would not lead to a conclusion that a person having large assets would never be in difficulty as he can sell those assets and pay the amount of interest levied.”

“A statutory authority despite receipt of such a request could have kept mum. It should have taken some action. It should have responded to the prayer of the appellant.”

“Unfortunately, this aspect of the matter has not been considered by the learned Commissioner and the High Court in its proper perspective.”

Key Takeaways

• The Commissioner of Income Tax must exercise their discretion judiciously when considering applications for waiver of interest under Section 220(2A) of the Income Tax Act.
• Failure to consider an assessee’s request to use seized assets to pay tax liabilities is a critical oversight.
• The concept of “genuine hardship” should be interpreted practically, considering the specific circumstances of the assessee.
• The principle that a person cannot benefit from their own wrong should be taken into account when deciding whether to grant a waiver of interest.

Development of Law

The ratio decidendi of the case is that the Commissioner of Income Tax must exercise their discretion judiciously when considering applications for waiver of interest under Section 220(2A) of the Income Tax Act, taking into account all relevant factors, including the assessee’s requests and the concept of genuine hardship.

Conclusion

In summary, the Supreme Court’s judgment in B.M. Malani vs. Commissioner of Income Tax clarifies the factors that must be considered when deciding whether to waive interest under Section 220(2A) of the Income Tax Act. The Court emphasized the importance of judicious discretion, consideration of assessee requests, and a practical interpretation of genuine hardship.