Interest u/s 220(2) Cannot Be Charged Without an Enforceable Demand: ITAT Mumbai

Samsara Shipping Pvt. Ltd. v. ITO (ITA No.: 6724/Mum/2025)

Facts:
1. The assessee filed its return declaring income of ₹55.22 crore. Assessment Order u/s 143(3) r.w.s. 144B enhanced income to ₹204.90 crore.

2. However, due to a computation error, the AO calculated tax on the original returned income. He issued a demand notice u/s 156 showing “zero” demand, and even determined a small refund.

3. Almost two years later, based on audit objection, the AO passed a rectification order u/s 154, raised tax demand, and levied interest u/s 220(2) amounting to ₹32.54 crore for the prior period.

Issue before ITAT:
Whether interest u/s 220(2) can be levied retrospectively, when no enforceable demand existed earlier due to a nil demand notice u/s 156.

ITAT Mumbai held as below:
1. Section 220(2) can be triggered only if a valid demand notice u/s 156 exists and the assessee fails to pay the demanded amount within the stipulated time u/s 220(1).

2. In the present case the original demand notice showed “zero” demand. Hence, no payment obligation arose.

3. The assessee cannot be treated as a defaulter for a period when no demand was legally enforceable.

4. A demand created later through rectification u/s 154 operates prospectively, not retrospectively. Interest, if any, can run only after expiry of 30 days from the fresh demand notice.

5. Levy of interest u/s 220(2) for a period prior to issuance of a valid demand notice is impermissible in law.

The copy of the order is as under:

1766481948-3Se7Mk-1-TO