The discretion to reduce or waive interest under Section 139(8) and Rule 117A of the Income Tax Act, 1961 must be exercised judiciously and fairly, considering relevant factors such as the compensatory nature of the interest levy and the loss to the government due to delayed payment of tax. The exercise of discretion is open to judicial review and may be struck down if found to be arbitrary, unreasonable, or based on irrelevant circumstances.

Viswanatha Iyer, J.

This appeal is by the assessee against the dismissal of its writ petition. The assessee had challenged the order of the Commissioner of Income Tax refusing substantially its payer for waiver of the interest levied under S.139(8) of the Income Tax Act, 1961 (the Act). The learned Single Judge did not find any merit in the writ petition and dismissed it. The judgment is reported at page 266 of Volume 145, Income Tax Reports. (Kerala State Cashew Development Corporation Ltd. v. Income Tax Officer).

2. The assessment year in question is 1975-76 corresponding to the accounting year ending March 31,1975. The appellant is a company owned by the State of Kerala, running thirty four cashew factories in the State. The appellant is an assessee on the files of the first respondent Income Tax Officer, C Ward, Trivandrum. The return for the assessment year 1975-76 was due on July 31,1975 under S.139(1) of the Act. The appellant applied for and obtained extension of time for furnishing the return up to September 30, 1975, but actually furnished it only on January 23,1976. The tax payable on self assessment under S.140A was Rs. 74.24 lakhs. The assessment was completed on December 6,1977, disallowing certain claims for deduction and making some additions to the income returned. The Appellate Assistant Commissioner modified the assessment on appeal. But we are not concerned in this appeal with the details of the assessment or its modification. Copies of the order of assessment and of the revised order giving effect to the appellate order are Exts. P1 and P2.

3. By and under the assessment, the Income Tax Officer made demand for an amount of Rs. 5,57,515/- as interest under S.139(8) for the period from August 1 to December 31,1975 for the delayed furnishing of the return. This stood reduced to Rs.5,09,770/- because of the modification in appeal. The appellant applied for waiver of the interest under the proviso to S.139 (8) read with 117A(v) of the Income Tax Rules (the rules) by its application Ext.P3 dated August 25,1978. The ground stated in support of the application was the delay in the audit having regard to the large volume of accounts involved. The Income Tax Officer however rejected the application by his proceedings Ext.P4 dated September 5,1978 stating: -

"In case you had found by the end of September 1975 that the audited Balance Sheet etc. would not be ready by 30-9-1975 you could have filed a provisional return showing the income as per the pre-audited balance sheet and P & L Account and then revised it if necessary after the audit. That you did not do this means that the matter had not been been given the attention it deserved and that too without any reasonable cause. In the circumstances I am unable to come to the conclusion that you were prevented by sufficient cause from furnishing the return in time."

The appellant challenged the order Ext.P4 in revision under S.264 of the Act before the Commissioner of Income Tax by the petition Ext.PS.

4. In the meanwhile, the Income Tax Officer imposed penalty on the appellant under S.271 (1)(a) of the Act for failure without reasonable cause to furnish the return within the time allowed. The penalty was however cancelled in appeal by the Commissioner of Income Tax (Appeals) by his order Ext.P7 dated January 14,1980. The Commissioner held that the fact that the audit of the appellant's accounts had not been finalised in time to enable the return to be furnished before the prescribed date was sufficient to hold that there was no default without reasonable cause on the part of the appellant.

5. The appellant's revision petition Ext.P5 was thereafter disposed of by the order Ext.P5 dated May 27,1980. It was partly allowed reducing the interest charged by rupees one lakh. It was the appellant's contention before the Commissioner that since the penalty imposed under S.271(1)(a) was cancelled finding reasonable cause for the failure to furnish the return in time, the i