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Income-tax Case No. 78 of 1969, decided on 10th March 1976.

---Ss. 18-A(6) & (8)--Additional tax--Penal interest--Failure of assessee to pay advance tax--Levy of additional tax by way of penalty Formal order under S. 18-A(8), a prerequisite--Incorporation of penal interest in assessment Form 1.T.30, not a substitute for an order under S. 18-A(8).

Under subsection (8) of section 18-A of Income-tax Act, 1922 if the Income-tax Officer finds, on making of the regular assessment, that no payment of tax had been made in accordance with the provisions of section 18-A the interest calculated in the manner laid down under subsection (6) is to be added to the tax as determined on the basis of regular assessment. There has to be an order by the Income-tax officer holding that advance tax in terms of section 18-A was not paid by the assessee, and calculation of interest on the advance tax not paid in the manner laid down in subsection (6) of section 18-A which is to be added to the tax as determined on the basis of regular assessment.

---S. 29--Demand notice--Formal order is condition precedent to validity of such notice.

Under section 29 of the 1922 Act a notice of demand can only be served provided tax, penalty or interest is due in consequence of an order passed under the Act. Therefore, the condition precedent to the validity of the notice of demand under section 29 must be an order passed under the Act and the notice is merely consequential upon that order. Therefore, if there is no order under the Act, no notice can be served under section 29. In the absence of such an order there is no liability of an assessee to comply with a notice under section 29.

S.A. Nusrat for Applicant.

Ali Athar for Respondent.

Date of hearing: 26th February, 1976.

.--This is an application by the Commissioner of Income-tax (Karachi) West, Karachi under subsection (2) of section 66 of the Income-tax Act, 1922 requiring the Tribunal to refer the following two questions of law to this Court for decision:--

(1) Whether in the facts and circumstances of the case the Tribunal were legally justified in entertaining the assessee's appeal against the interest charged under subsections (6) and (8) of section 18-A

(2) If the answer to the above question is in the affirmative, then whether the Tribunal were justified in holding that a regular order under section 18-A of the Act was a prerequisite to the levy of interest under subsections (6) and (8) of section 18-A

2. It is conceded that under the amended law if the question raised are a questions of law, we will have to proceed to answer the same.

3. The first question is not pressed by Mr. S.A. Nusrat, the learned counsel for the Department and accordingly we are only concerned with the second question.

4. The facts giving rise to this Reference are that the Income-tax Officer in respect of assessment year 1958-59 issued a notice under section 18-A(1) of the Income-tax Act to the respondent assessee on 23-5-1957 to pay advance tax of Rs.89,995 in four instalments. The assessee did not make this payment. The regular assessment was completed on 20th March, 1963 where in the total income of the respondent was determined at Rs.2,04,384 as against the returned income of Rs.1,29,151. A demand notice was accordingly served on the respondent alongwith the duly filled in I.T. 30 Form in which demand was also made of penal interest of Rs.28,801 under section 18-A(8) calculated in the manner laid down under section 18-A(6) and which was added to the tax determined on the basis of regular assessment. The respondent went in appeal and the Appellate Assistant Commissioner knocked off the amount of penal interest on the ground that the imposition of penal interest was not based on any order and that the assessee's failure to pay the advance tax did not come within the purview of subsections (6) and (8) of section 18-A of the Act. This order was maintained by the Income-tax Appellate Tribunal, Karachi Bench in appeal filed by the Department. The Tribunal held that the levy of penal interest was not based on the order contemplated by section 29 of the Act and the demand of penal interest was, therefore, illegal.

5. The Department then moved an application under section 66(1) of the Income-tax Act requiring the Tribunal to refer the aforesaid. Two questions to this Court. The application was not granted. The view taken by the Tribunal is that the second question could only arise if the first question raised by the Department was misconceived and factually incorrect but since it was not so, proceeded to dismiss the application.

6. We may at once point out that the second question is in fact independent of the first question inasmuch as it would arise notwithstanding the fact that the first question was either misconceived or factually incorrect.

7. Mr. S.A. Nusrat, the learned counsel for the Department, contended that subsections (6) and (8) of section 18-A of the Act were only machinery sections providing for calculation of interest and nowhere it is provided that a formal order by the I.-T.O. is necessary for levying the interest. In the present case the assessee had been issued notice by the I.-T.O. for payment of advance tax under subsection (1) of section 18-A and subsection (6) of section 18-A will become relevant to enable the I.-T.O. to calculate the interest in the manner laid down therein payable by the assessee by reason of his failure to pay advance tax. Under subsection (8) of section 18-A if the Income-tax Officer finds, on making of the regular assessment, that no payment of tax had been made in accordance with the provisions of section 18-A the interest calculated in the manner laid down under subsection (6) is to be added to the tax as determined on the basis of regular assessment It is obvious therefore, that there has to be an order by the Income-tax Officer holding that advance tax in terms of section 18-A was not paid by the assessee, and calculation of interest on ,the advance tax not paid in the manner laid down in subsection (6) of section 18-A which is to be added to the tax as determined on the basis of regular assessment. Admittedly, no such order was made in the present case and the Income-tax Officer proceeded to issue demand notice for the same under section 29 of the Income-tax Act which reads as follows:--

"29. When any tax, penalty or interest is due in consequence of any order passed under or in pursuance s of this Act, the Income-tax Officer shall serve upon the assessee or other person liable to pay such tax penalty or interest a notice of demand in the prescribed form specifying the sum so payable."

Under the above section a notice of demand can only be served provided tax, penalty or interest is due in consequence of an order passed under the Act. Therefore, the condition precedent to the validity of the notice of demand under section 29 must be an order passed under the Act and the notice is merely consequential upon that order. Therefore, if there is no order under the Act, no notice can be served under section 29. In our view in the absence of such an order there is no liability of an assessee to comply with a notice under section 29.

8. Faced with this situation Mr. Nusrat, the learned counsel for the Department, contended that the order of assessment under subsection (3) of section 29 coupled with the incorporation of penal interest in the assessment Form I. T. 30, duly signed by the I.T.O. was a sufficient order in the eye of law which can be made a basis for issuance of a notice of demand against the assessee under section 29 of the Act. The assessment order has been produced and is significantly silent as regards any tax liability of the assessee for his failure to pay advance tax. Significantly, the assessment Form I.T. 30 has not been produced before us. Be that as it may, this Form, which is prescribed under rule 20 of the Income-tax Rules, as is apparent from its plain reading, cannot be a substitute for an order under subsection (8) of section 18-A, levying additional tax by way of penalty for non-payment of advance tax under section 18-A of the Income-tax Act.

9. The result is that we are in agreement with the Tribunal that the second question has to be answered in the affirmative. The assessee will be entitled to cost of these proceedings.

M.B.A./C-1/K Question answered accordingly.

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