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Waiver Petition - Interest u/ss. 220(2), 234A, 234B & 234C

2. Waiver – interest u/ss. 234A, 234B & 234C

   1. Relevant Provisions

      Section 234A imposes interest for omission to furnish or delay in furnishing the return of income. Section 234B imposes interest for failure to pay advance tax or paying advance tax which in the aggregate is less than 90 per cent of the assessed tax and section 234C imposes interest for paying a lower instalment of advance tax than that payable on 15th June, 15th September or 15th December. Application for waiver of interest levied u/s. 234A, B, C may be made to the Chief Commissioner of Income-tax or the Director General (Investigation) who have been empowered to reduce to waive interest upon the fulfilment of the conditions set out in Board Circular F.No. 212/495/92-IT-A-II dated 2nd May, 1994 and the Press release dated 21st May, 1996.

      Departmental Circular F.No. 212/495/92-IT-A-II dated 2-5-1994

      Waiver of penal interest under sections 234A, 234B and 234C of the Income-tax Act in respect of decretal income, etc., relatable to past. – In exercise of the powers conferred under clause (a) of sub-section (2) of section 119 of the Income-tax Act, 1961, the Central Board of Direct Taxes hereby directs that in cases where any income accrues or arises for any previous year due to the operation of any order of a court, statutory authority of the Government (other than an order of assessment, appeal, reference or revision passed under the provisions of the Income-tax Act, 1961) passed after the close of the said previous year (such income and the order hereinafter referred to as the 'relevant income' and the 'relevant order, respectively), interest under sections 234A, 234B and 234C shall be reduced or waived by the Chief Commissioner of Income-tax/Director General of Income-tax mentioned hereunder, namely:-

      1. Conditions:

      (a) the relevant income is disclosed in a return of income furnished for the said previous year or is otherwise disclosed to the Assessing Officer; and(b) the tax attributable to such income has been paid.

      2. Period:

      (a) in respect of interest under section 234A, from the date immediately following the due date for furnishing the return of income for the relevant assessment year till the end of the month in which the relevant order giving rise to the relevant income is passed;(b) in respect of the interest under section 234B, from the first day of April of the relevant assessment year till the end of the month in which the relevant order giving rise to the relevant income is passed;(c) in respect of interest under section 234C, for the period mentioned in that section;

      3. Extent of interest to be reduced or waived

      The quantum of interest to be reduced or waived shall be the difference between –
       

   (a) the interest computed for the period mentioned at (ii) above with reference to the tax on the total income inclusive of the relevant income; and(b) the interest computed for the same period with reference to the tax on the total income as reduced by the relevant income.

   2. Waiver or reduction under this order shall be allowed with reference to the relevant orders passed on or after the 1st day of April, 1989.

      1. Press Release dated 21st May, 1996

         Chief Commissioners and Directors-General (Investigation) empowered to reduce or waive penal interest for late filing of return of income, etc., imposable under sections 234A, 234B and 234C.

         'The Chief Commissioners and Directors-General (Investigation) empowered to reduce or waive penal interest for late furnishing of return of income, non-payment or inadequate payment of advance-tax, etc.

         Prior to 1989, tax-payers who had failed to furnish the return of income within the specified time-limit or had paid inadequate or not paid advance tax within the stipulated time-limit were charged penal interest for such defaults and also subjected to penalty proceedings. The Direct Tax Laws (Amendment) Act, 1987, inserted new sections 234A, 234B and 234C in the Income-tax Act from assessment year 1989-90 to provide for penal interest at higher rates for the defaults in late furnishing of the return of income, defaults in payment of advance tax and for deferment of advance tax respectively and omitted separate penalty provisions for these defaults. The interest payable under these sections was mandatory and there was no provision for reduction or waiver of the penal interest, as was provided specifically in this behalf prior to 1989. As a result, several tax-payers faced unintended hardships in certain circumstances.
          

      2. The Central Board of Direct Taxes, in exercise of the powers specified in section 119(2)(a) has decided to authorise the Chief Commissioners and Directors-General (Investigation) to reduce or waive penal interest charged under the aforesaid sections in the following circumstances, namely:

         1. Where, in the course of search and seizure operations, books of account have been taken over by the Department and were not available to the tax-payer to prepare his return of income;

         2. Where, in the course of search and seizure operations, cash had been seized which was not permitted to be adjusted against arrears of tax or payment of advance tax instalments falling due after the date of the search;

         3. Any income other than "capital gains" which was received or accrued after the date of the first or subsequent instalment of advance tax, which was neither anticipated nor contemplated by the tax-payer and on which advance tax was paid by the tax-payer after the receipt of such income;

         4. Where, as a result of any retrospective amendment of law or the decision of the Supreme Court after the end of the relevant previous year, certain receipts which were hitherto treated as exempt, become taxable. Since no advance tax would normally be paid in respect of such receipts during the relevant financial year, penal interest is levied for the default in payment of advance tax;

         5. where the return of income is filed voluntarily without detection by the Income-tax Department and due to circumstances beyond the control of the tax-payer such return of income was not filed within the stipulated time-limit or advance tax was not paid at the relevant time.

3. The Chief Commissioners and Directors-General are being authorised to reduce or waive penal interest under sections 234A, 234B and 234C with reference to the assessment year 1989-90 and any susbsequent assessment year subject to certain specified conditions. This is a major step taken by the Central Board of Direct Taxes to mitigate the hardships in deserving cases.

   Draft Petition

   24th July, 1999

   To

   The Chief Commissioner of Income-tax
   Aayakar Bhavan, M. K. Road,
   Mumbai – 400 020

   Respected Sir,

   Sub: Application for Waiver of Interest levied u/s. 234B and section 234C of the I.T. Act, 1961 in pursuance of Press Release dated 21st March, 1996.

   Re : ABC Sugar Mills Ltd. A.Y. 1996-97

   With reference to the above application, we have to state, submit and pray as under:

   1. The abovenamed applicant is a company incorporated and registered under the Companies Act, 1956. The applicant filed its return of income for A.Y. 1996-97 declaring loss of Rs. 3,00,00,000/-. The Assessing Officer (the A.O.) completed the assessment of the applicant for A.Y. 1996-97 u/s. 143(3) of the Income-tax Act, 1961 (hereinafter called the Act). The A.O. determined the total income of the applicant at Rs. 2,50,00,000/- and raised a demand of Rs. 1,99,62,867/- the break-up of which is given hereunder:

      Income-tax Rs. 98,97,579.00

      Interest u/s. 234B Rs. 70,65,288.00

      Interest u/s. 234C Rs. 30,00,000.00

   2. It is submitted that as the return of income was filed voluntarily by the applicant without any detection by the Income-tax Department and as the advance tax was not paid due to circumstances beyond the control of the applicant (as explained hereunder) this is a fit case for waiver of interest levied u/s. 234B and sec. 234C of the Act and hence this waiver application is being made before your Honour in pursuance of para 2(v) of the Press release dated 21st May 1996. Hereto annexed and marked as Annexure "A" is copy of the said Press release dated 21st May, 1996.
       

   3. The brief facts leading to this waiver application are given hereunder:

      1. The applicant was carrying on the business of manufacturing of sugar from its factory in Ahmednagar District with licence under the Industrial Development Act.

      2. The applicant had, over the years, availed of several credit/loan facilities from Bank of Maharashtra Ltd. ("the Bank"). As security for the dues, the applicant had mortgaged/pledged its movable and immovable assets and properties with the bank. As the Applicant was unable to repay the dues and interest thereon on account of acute financial crisis, the bank in 1985 instituted a civil suit against the applicant. The Hon'ble Bombay High Court vide its order dated ------ appointed a Court Receiver in respect of the movable and immovable assets and properties of the applicant's sugar Mills. The Court Receiver, in pursuance of the Court Order, took possession of the assets and properties of the Applicant. The unit of the applicant was subsequently closed down.

      3. As the applicant had no income, no returns were filed for A.Y. 1985-86 to A.Y. 1994-95, the applicant filed a loss return of Rs. 13,03,560/- for A.Y. 1995-96 which was accepted by the Department u/s. 143(1). Subsequently the Government of Maharashtra introduced a scheme for co-operativisation and restructuring of closed private sector sugar mills. On account of paucity of sugarcane and aggressive competition from the co-operative sector, it was not possible nor prudent to run the sugar mill at the present location and any public auction of the properties of the applicant by the Court Receiver may have turned out to be fatal and prejudicial to the interest not only of the Shareholders but also of the creditors and the company. It was in these circumstances that it was felt prudent to agree to co-operativisation of the unit. During the previous year relevant to A.Y. 1996-97, in pursuance of the scheme formulated by the Government of Maharashtra for co-operativisation and re-structuring of closed private sector sugar mills, the applicant sold its Industrial Licence under Industries Development (And Regulation) Act along with its plant, machinery and stores to the Government allottee.

         M/s. XYZ and received, as consideration, Rs. 451.13 lakhs less Rs.260 lakhs paid by M/s. XYZ directly to the bank as mandated by the Government.
          

      4. The balance amount of Rs. 191.13 lakhs was paid towards liquidation of the following liabilities in pursuance to the Government Resolution dated .... in respect of the co-operativisation scheme.

         i	Payment to workers (towards outstanding dues)	Rs. 90.00 lakhs
         ii	Payment to Sugar Cane Growers (towards outstanding dues)	Rs. 80.00 lakhs
         iii	Payment towards Income-tax (arrears)	Rs. 21.13 lakhs
         		Rs. 191.13 lakhs

      5. During the previous year relevant to A.Y. 1996-97 the applicant suffered loss and filed its return of income for A.Y. 1996-97 on 28-11-1996 declaring loss of Rs. 2,00,00,000/-.
          

      6. The A.O. completed the assessment u/s. 143(3) of the Act and determined the total income at Rs. 2,50,00,000/- by making the following addition/disallowances:

         1. Capital Gains

            a	Short-term Capital gain on sale of plant and machinery	Rs.3,63,20,003
            b	Short-term Capital gain on sale of miscellaneous items	Rs. 2,47,000
            c	Long-term Capital gain on sale of store material	Rs. 17,81,683
            	Total	Rs. 3,83,48,686

             

         2. Excess provisions (claimed but disallowed in the respective assessment years) written back
            
             

            a	Provision for Gratuity Reserve	Rs. 10,81,287
            b	Provision for Bonus	Rs. 10,07,118
            c	Government grant in aid for road construction	Rs. 91,104
            d	Additional liability for levy sugar	Rs. 24,28,768
            e	Additional C.E. duty on levy sugar	Rs. 1,70,812
            f	Sugar cane purchase tax	Rs. 12,25,605
            	Total	Rs. 60,04,694

             

      7. Consequent to the above additions, the A.O. raised a demand of Rs. 1,99,62,867/- (including interest levied u/s. 234A and section 234B aggregating to Rs. 1,00,65,288/-.

4. It is submitted that for the reasons given below the above additions made by the Assessing Officer are wholly unjustified.

   1. The consideration of Rs. 451.13 lakhs was received towards the surrender of Industrial Licence as the same was the nucleus of the co-operativisation scheme without which the co-operative sector would not have been interested in taking over the plant, machinery, stores of the applicant. It is submitted that as the surrender of licence had impaired the profit making structure of the applicant the consideration in respect of the same was a capital receipt and therefore the entire receipt of Rs.451.13 lakhs is not taxable. Alternatively, as the cost of the Industrial Licence was unascertainable, in view of the decision of the Hon'ble Supreme Court in the case of B. C. Srinivasa Setty 128 ITR 294, it is submitted that the surplus (i.e., Rs. 451.13 lakhs less the written down value of plant and machinery, stores and other miscellaneous items) of Rs.2,83,48,686 which is attributable towards the sale of Industrial Licence is not taxable. The Assessing Officer however did not attribute any part of consideration towards the industrial licence which was the nucleus of the co-operativisation scheme without which the co-operative sector would not have been interested in taking over the plant, machinery, stores of the applicant. It is submitted that the Assessing Officer has erred in not accepting the correct, legal and bonafide stand adopted by the applicant in respect of the licence. It is submitted that had the Assessing Officer accepted the stand of the applicant there would neither be any demand nor any levy of interest as the applicant's total income would be determined at a loss notwithstanding the other additions.

   2. Out of the sale consideration payment of Rs. 260 lakhs was paid directly to the bank as per terms of Government Resolution and the Agreement dated ..., 1995 entered into between the Applicant and M/s. XYZ due to the bank's overriding title over the movable and immovable assets and properties of the applicant. It was not possible to take possession of the assets and properties of Applicant from the Court Receiver and transfer the same to M/s. XYZ unless the dues of the bank was settled. An amount of Rs. 365 lakhs (including approximately Rs. 265 lakhs on account of interest) was due from Applicant to the bank. The Bank on receipt of Rs. 260 lakhs agreed for discharge of the Receiver who was in possession of the plant, machinery, stores of the applicant and consent terms in respect of the above settlement were filed in the Hon'ble Bombay High Court. During the assessment proceedings the applicant made an alternate claim for deduction of Rs. 260 lakhs (paid directly by M/s. XYZ to the bank) a cost of acquisition/improvement of the assets transferred. The Assessing Officer however disallowed the said deduction of Rs. 260 lakhs by relying on the decision of the apex court in V.S.M.R. Jagdishchandran vs. CIT 227 ITR 243.

      It is submitted that had the Assessing Officer accepted any of the above stands of the applicant in (i) or (ii) above which apart from being bonafide are also correct in law, the applicant's income would be assessed at loss notwithstanding the other addition and consequently there would be neither any demand of tax nor levy of interest u/s. 234B section 234C.

   3. The applicant had credited the excess provisions made in earlier years (see para 5(ii) for details) in its profit and loss account for the year ending 31st March, 1996. It is submitted that as the said provisions were disallowed in earlier assessment years the same could not be brought to tax again in A.Y. 1996-97.

      Thus, as is evident from the above, it is submitted that the above additions resulting in the demand of tax and interest u/s. 234B and sec. 234C are wholly baseless and unjustified.
       

5. Without prejudice it is submitted that the above additions apart from being wholly unjustified were totally unanticipated. The applicant was under a bonafide belief that it has no taxable income for A.Y. 1996-97 and that consequently it was under no obligation to pay any advance tax.
    

6. Without prejudice to the above, it is submitted that even otherwise the applicant did not have the funds to pay the advance tax due to the reasons given hereunder.

   1. The applicant had incurred loss of Rs.2,00,00,000/- during the previous year relevant to A.Y. 1996-97.

   2. The entire amount of Rs. 451.13 lakhs in respect of which tax and interest u/s. 234B are levied was paid towards liquidation of the following liabilities in pursuance to the Government Resolution dated 14-12-1994 in respect of the co-operativisation scheme.
       

      i	Payment of Bank of Maharashtra	Rs. 260.00 lakhs
      ii	Payment to workers (towards outstanding dues)	Rs. 90.00 lakhs
      iii	Payment to Sugar Cane Growers (towards outstanding dues)	Rs. 80.00 lakhs
      iv	Payment towards Income-tax (arrears)	Rs. 21,13 lakhs
      		Rs. 451.13 lakhs

   The applicant was under an obligation to make the above payments and as such it did not have much discretion as regards the utilisation of the above funds.

7. Due to continuous losses the manufacturing activity of the applicant had come to a standstill since 1984; i.e., since the last 15 years subsequent to which the applicant has not earned any income resulting in paucity of funds.

8. It is submitted that for reasons given below the non payment of advance tax by the applicant was due to circumstances beyond its control.

   1. the applicant had suffered a loss during the year and there was no question of making any payment towards advance tax.

   2. the additions made by the A.O. (resulting in the demand of Rs. 1,69,62,867/- and consequent interest of Rs. 70,65,288/- u/s. 234B and Rs. 30,00,000 u/s. 234C of the Act) are wholly unjustified.

   3. without prejudice, the applicant was under bonafide belief that it had no taxable income and that consequently it was not under any obligation to pay any advance tax.

   4. without prejudice, it is submitted that even otherwise the applicant did not have the required funds to pay the advance tax because –

      1. of continuous losses the manufacturing activity of the applicant had come to a standstill since 1984; i.e. since the last 15 years. The applicant did not earn income for the last 15 years resulting in paucity of funds.

      2. the amount of Rs.451.13 lakhs (in respect of which tax and interest u/ss. 234B and 234C are levied) was paid towards liquidation of the following liabilities in pursuance to the Government Resolution dated .... in respect of the co-operativisation scheme.
          

   i	Payment of Bank of Maharashtra	Rs. 260.00 lakhs
   ii	Payment to workers (towards outstanding dues)	Rs. 90.00 lakhs
   iii	Payment to Sugar Cane Growers (towards outstanding dues)	Rs. 80.00 lakhs
   iv	Payment towards Income-tax (arrears)	Rs. 21.13 lakhs
   		Rs. 451.13 lakhs

   Thus, though the applicant has been taxed in respect of above sum of Rs. 451.13 lakhs, not a penny therefrom could be retained for reasons beyond the control of the applicant resulting in paucity of funds.
    

9. In view of above and in pursuance of the authorisation granted to your Honour by the CBDT in exercise of the powers specified u/s. 119(2)(a) of the Act to reduce or waive interest charged under u/s. 234B & C in the circumstances mentioned in para 2 (v) of the Press release dated 21st May 1996, the applicant prays to Your Honour to waive the interest levied u/s.234B and 234C of the I.T. Act, 1961 as

   1. the return of income was filed voluntarily by the applicant without any detection by the Income-tax Department and

   2. as the advance tax was not paid due to circumstances beyond the control of the applicant.

10. Alternatively and without prejudice it is submitted that the demand of tax and levy of interest u/s. 234B & C has arisen because the applicant's claim for deduction of Rs.260 lakhs as cost of acquisition/improvement of the assets transferred was disallowed by the Assessing Officer by placing reliance on the decision of the Apex Court in V.S.M.R. Jagdishchandran vs. CIT 227 ITR 240 which was delivered on 9th July 1997; i.e., after the end of the relevant previous year. In view of the above and without prejudice to the applicant's right to challenge in appeal the applicability of the above case law to the facts of the applicant's case, it is submitted that the applicant's case is also covered by para 2 (iv) of the Press release dated 21st May, 1996 and is therefore a fit case for waiver of interest.
     

11. In view of the above and also keeping in mind the background of the applicant and its poor financial and liquidity position, the applicant prays to Honour to kindly waive the interest levied u/s. 234B and 234C and oblige.
     

12. The applicant requests your Honour to kindly grant a personal hearing.
     

13. The applicant most humbly craves leave to make further submissions, if required.
     

    Needless to add if any details, clarification, explanation are required by Your Honour the same shall be submitted forthwith on being so directed.

Director
 

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