N.L. Kalra, Accountant Member
1. The revenue has filed this appeal against the order of learned Commissioner of Income-tax (Appeals) – VI, Bangalore dated 24th Aug, 2005. The first grievance of the revenue is that learned CIT(A) has erred in holding that surcharge is not leviable.
2. This issue stands covered by the decision of Spl. Bench as well as by the decision of the High Courts. It has been held in the following cases that surcharge is not leviable in respect of the search initiated before 1.6.02, i.e the date from which proviso to Section 113 is applicable.
(1) M/s Merit Enterprises, Hyderabad, DCIT, Central Circle 101 ITD 1, Spl. Bench.
(2) CIT v. Roshan Singh Makker 287 ITR 160, P&H.
(3) CIT v. Niotec Co. 291 ITR 27, Mad
Respectfully, following the above decision, it is held that learned CIT (A) was justified in holding that surcharge is not leviable in this case, as search in this case was initiated on 21.3.02 i.e before 1.6.02.
The next grievance of the revenue is that the learned CIT (A) has erred in directing the AO to recompute the interest Under Section 158BFA(1), after reducing cash seized from the tax.
3. The AO in his order has mentioned that Section 158BFA(1) was introduced in the statute book in order to compel the assessee to honour his commitment Under Section 132 by filing return of undisclosed income in Form No.- 2B. The Apex Court in the case of Imperial Chit Funds (P) Ltd. 219 ITR 498 held that the legislative history and intent for which a section has been introduced is to be taken into consideration, while interpreting provision in the statute. In the instant case, a notice Under Section 158BD was issued on 5.3.04 and was served on 11th Mar, 04. The last day for filing return was 9th Apr, 04. The assessee has filed a return only on 2nd Feb, 05. Hence, the interest is leviable on the tax of undisclosed income. The learned CIT(A) referred to the provisions of Sections 234A, 234B and 234C and stated that interest is to be charged after deducting pre-paid taxes. The learned CIT(A) was of the opinion that interest Under Section 158BFA is to be calculated on the balance amount of tax after reducing the cash seized form the tax. The learned CIT (A) has referred to the decision of Delhi Tribunal in the case of Gopal Chand Khandelwal v. ACIT 52 ITD 661, in which, Delhi High Court held that appeal is maintainable, as cash seized is more than the amount of self assessment payable and hence provisions of Section 249(4) stand complied with.
4. During the course of proceedings before us, the learned AR has filed written submissions. The written submissions are reproduced for ready reference.
Section 2(43) defines tax as income tax chargeable under the provisions of this Act. Section 4 is the charging section as per which tax can be charged as per the provisions of the Act. In terms of Section 132 if any income is undisclosed and is found in the form of cash at the time of search, it can be seized. In this case, the seizure of Rs. 16,50,000/’- was on 21.3.2002. It was in the custody of the department. A sum of Rs. 20,00,000/- was paid on 22.4.2002 by way of tax. It is noteworthy that in respect of the tax of Rs. 14,10,000/- levied in block assessment, it is entirely covered by this single payment leave alone other sums. In this circumstances, in respect of the demand raised on 22.3.05, tax had been paid as early as 22.4.02. The Hon’ble Delhi High Court in the case of Dr. Pranoy Roy have referred to the meaning of the term interest and held that: by its very nature it is compensatory in nature and so if no tax is to be realized can there be levy of interest on a sum which is not due at all. It is respectfully submitted that the intension of parliament cannot be as stated by the AO. In this connection, reference may be made to the decision of the Apex Court in Sandvik Asia reported in 280 ITR page, 643. Therein, at page 676 they have commented on this aspect of charging interest. As stated earlier, Under Section 132B whatever money is not adjusted towards taxes has to be refunded with interest and it is not known when the refund was issued and if interest was paid Under Section 132B or Under Section 244A at all and whether the refund included any interest at all leave alone interest on interest.
As held by various courts, interest is compensatory in nature to compensate for the loss caused to the State by delayed payment of tax. IF on the other hand the entire tax has been paid, it will have to be treated as tax pre paid in advance or other wise and no interest can be charged. The march of law is such that if cash is kept in preventive custody and not adjusted at all, the assessee is entitled to interest and interest on interest to the refund made ultimately. Vide Bhagwan Prasad Agarwal, Allahabad High Court 282 ITR Page 189. The view of the Apex Court expressed in Sandwik Asia 280 ITR Page 669 that even if there is no provision to compensate an assessee it has to be read into the Act is apposite in this context.
It is therefore respectfully submitted that when no tax was payable at all there can be no levy of interest because the term interest itself prohibits such levy it being compensatory in nature. As there is no loss caused to the State, the question of compensation by way of interest does not arise.
It is precisely for this reason that the settlement commission had been treating the sums seized at the time of search or other prepaid taxes as tax paid for calculating interest Under Section 234A and 234B. The view taken by the said authority has not been challenged in appeal and so the decision of the Apex Court in Berger Paints would apply. It is to be noted that the words ‘tax determined’ appear in both the sections and the omission of self assessment tax and advance tax is in the context of the said sections only. Further, in the context of block assessments made after a search, the term ‘determined’ had to be read as meaning tax payable because when cash is seen in the course of search and it is felt that it is necessary to seize the same to cover future taxes it is adjusted after assessment and the balance refunded with interest form the date of seizure. In this case, even apart from the sum of Rs. 16,50,000/’-seized, another sum of Rs. 20,00,000/-was voluntarily paid to the department through pay order (page no of this compilation and this sum more than covered the taxes.
5. On the other hand, the learned DR stated that plain reading of Section 158BFA shows that interest is leviable on the amount of tax on the undisclosed income determined irrespective of the position of either short payment or excess payment of tax by the assessee. If the provision of Act are clear and there is no ambiguity, then it is not open to the judiciary to interpret the law keeping equity in mind.
6. We have heard both the parties. Before dealing with the issue, we would like to re-produce the relevant sections.
Section 58BFA (1):
Where the return of total income including undisclosed income for the block period, in respect of search initiated Under Section 132 or books of account, other documents or any assets requisitioned under Section Clause (a) of Section 158BC, is furnished after the expiry of the period specified in such notice, or is not furnished, the assessee shall be liable to pay simple interest at the rate of [one] percent of the tax on undisclosed income, determined under Clause (c) of Section 158BC, for every month or part of a month comprised in the period commencing on the day immediately following the expiry of the time specified I the notice, and-
The Assessing Officer shall proceed to determine the undisclosed income of the block period in accordance with this Chapter, shall pass an order of the assessment and determine, the tax payable by him on the basis of such assessment.
Notice of Demand
When any tax, interest, penalty, fine or any other sum is payable in consequence of any order passed under this Act, the Assessing Officer shall serve upon the assessee a notice of demand in the prescribed form specifying the sum so payable.
Form No. 7:
1. This to give you notice that for the assessment year…a sum o Rs…details of which are given on the reverse, has been determined to be payable by you.
2. The amount should be paid to the Manager, authorized bank/State Bank of India/Reserve Bank of India…within  days of the service of this notice. The previous approval of the [Joint Commissioner] of Income-tax has been obtained for allowing a period of less than  days for the payment of the above sum. A challan is enclosed for the purpose of payment.
3. If you do not pay the amount within the period specified above, you shall be liable to pay simple interest at one per for every month or part of a month from the date commencing after end of the period aforesaid in accordance with Section 220(2).
7. As per Section 158BFA(1), interest is to be determined on the tax of undisclosed income determined under Clause – c of Section 158BC. Section 158BC(c) requires the AO to- determine the tax payable on the basis of block assessment. It does not indicate that tax on undisclosed income is to be determined. It only say that tax payable is to be determined by the AO at the time of completion of block assessment. When any tax is payable, notice of demand is to be issued Under Section 156 of the Income-tax Act. Such notice of demand is to be issued in the prescribed Form No. 7. As per Clause-3 of Form No. 7, simple interest is leviable on the amount, which is not paid as per the notice of demand within the specified period. Thus, the tax, if any, paid are excluded for determining the sum payable. This is clear from Clause-(3) of form No. 7. It, therefore, suggests that tax payable determines under Sub-clause of (c) of Section 158BC is the tax, which is payable after adjustment of prepaid taxes. In the instant case, a sum of Rs. 16, 50, 000/- was seized. The assessee has enclosed a challan showing payment of Rs. 30 lakh on 28th Mar, 02. Copy of challan show that the same has been paid for the assessment year 2002-03 and, therefore, the same cannot be considered to have been paid against the block assessment. Along with the paper book, the assessee has field copy of letter dated 2003, vide which, the assessee claimed refund. Another Letter was filed on 22.3.05 as per this letter, the assessee has claimed the refund as under:
Ref: PA No. AAFFK 7479L, Asst. Year 2002-03
We have paid the following amounts towards taxes for the asst. year 2002-03.
1) On 28.3.2002 Rs. 30,00,000/- Advance tax 2) At the time of search cash seized from My Residence 16,50,000 Cr. to P.D A/c Mr. Peter Caddy 8,00,000 (on our behalf) 3) Tax paid on 22.4.02 20,00,000 --------- Total 74,50,000 ---------
From block assessment we will get refund from advance-tax paid. We request your honour to adjust the refund to our regular assessment. Kindly adjust the balance demand amount out of tax paid and adjusted to P.D Account by your good-self.
As much more amount has been got paid from us, kindly refund the amount with interest at your earliest and oblige.
8. From the above letter, it appears that the assessee is claiming credit of Rs. 20 lakh paid on 22/4/02 against tax for the assessment year 2002-03. In the paper book, the assessee has attached copy of pay order of Rs. 20 lakh. The pay order is in the name of Commissioner of Income-tax, Central Circle, Bangalore. Such pay order has been handed over to the Dy. Director of Income-tax. Such pay order does not indicate that amount has been paid towards tax dues for the assessment year 2002-03. Apparently, the sum has been paid towards block assessment. The sum of Rs. 20 lakh is not the undisclosed cash but has been deposited by the assessee on 22.2.02. Notice Under Section 158BD has been issued on 5th Mar, 04. Thus, the sum of Rs. 20 lakh was available for adjustment against the tax. to be determined in respect of undisclosed income.
9. Tax determined on the basis of block assessment is only Rs. 14, 10,000/-. Hence, tax deposited in the year 2002 is much more than the tax determined in block assessment, the proceedings for which, assessment was initiated on 5th Mar, 04. Hence, interest; is not leviable Under Section 158BFA(1). In case, the AO has given credit of Rs. 20 lakh against tax determined for the assessment year 2002-03, then the AO will give an opportunity to the assessee to ascertain as to whether the credit of Rs. 20 lakh is to be given. Apparently, the sum has been paid in the form of pay order to the Dy. Director of Income-tax and it shows that it was to be adjusted against tax on undisclosed income. With these directions, this ground of appeal is disposed off. In the result, the appeal is allowed.