SEMINAR ON DIRECT TAXES ON 2ND JUNE,2017

SIRC OF ICAI, CHENNAI

INTEREST UNDER THE INCOME TAX ACT, 1961

BY CA.T.V.MUTHU ABIRAMI

Scope

Section 234A, Section 234B, Section 234C, Section 234D, Section 234E, Section

234F, Section 220(2), Section 244A, Section 201(1A), Section 206C(7)

Section 234A

Where no return of income is furnished or return of income is furnished after

due date.

Calculation of interest

Rate of interest –simple interest of 1% per month or part of month

Period for which interest is payable – commencing on the date

immediately following the due date for filing the return of income and

ending on

(a) the date of furnishing the return (where return has been filed after the

due date) or (b) the date of completion of assessment u/s.144 (where no

return has been furnished)

Amount on which interest is payable.

(a) Find out the tax on total income as determined under section 143(1) or

on assessment under section 143(3), section 147 or 153A (if the

assessment is made for the first time under section 147 or 153A). If

interest has to be calculated under section 234A for the purpose of self

assessment under section 140A, tax on returned income shall be

taken.

(b) From the tax so determined advance tax paid, tax deducted or

collected at source, relief under section 90 / 90A / 91 and MAT credit

under section 115 JAA (but not tax paid under section 140A) shall be

deducted.

Interest in the case of reassessment – section 234A(3) is applicable if

return of income is not submitted or submitted belatedly in the course of re

assessment proceedings. Interest in such a case is payable by the

assessee @ 1% per month (or part thereof) for the period of default. The

period of default commences on the date immediately following the expiry

of time given by notice under section 148 or 153A and ends on the date of

furnishing of return (or on the date of completion of reassessment under

section 147 or 153A where no return has been furnished). Interest is

payable on the amount by which the tax on the total income as reassessed

exceeds the tax on the total income determined on the basis of the earlier

assessment.

Increase / reduction in interest - if as a result of an order under section

154,155,250,254,260,262,263,264 or 245D(4), the tax payable is

increased or reduced, as the case may be, the interest shall be increased /

reduced accordingly.

Section 234B – interest for default in payment of advance tax.

When interest is

payable

Amount on which

interest is

payable

Rate of interest Period for which

interest is

payable

An assessee who

is liable to pay

advance tax, has

failed to pay such

tax

Interest is payable

on assessed tax

Simple interest

@1% for every

month or part

thereof

From April1 of the

assessment year

to the date of

determination of

total income

u/s.143(1) or

where regular

assessment is

made to the date

of regular

assessment.

Wherever a

regular

assessment is

made u/s.143(3),

date of intimation

u/s.143(1) is not

relevant and

interest u/s.234B

would be charged

up to date of

regular

assessment-

Manish D.Shah v

CIT (2009) 185

taxman 247

(Bom.)

An assessee who

has paid advance

tax but the amount

Assessed tax

minus advance tax

Simple interest

@1% for every

month or part

From April1 of the

assessment year

to the date of

of advance tax

paid by him is less

than 90% of the

assessed tax

thereof determination of

total income

u/s.143(1) or

where regular

assessment is

made to the date

of regular

assessment.

Assessed tax ‘means the tax on the total income determined under section 143(1)

and where regular assessment is made, the tax on total income determined under

such regular assessment as reduced by

(a) Tax deducted / collected at source on any income which is subject to such

deduction or collection and which is taken into account in computing such

total income,

(b) Relief / deduction of tax claimed under section 90 or 91 on account of tax

paid in a country outside India,

(c) Relief of tax claimed u/s 90A on account of tax paid in any specified territory

outside India, and

(d) Tax credit claimed under section 115JAA or 115JD

Adjustment when tax is paid before regular assessment under section

140A –if before the date of determination of total income under section

143 (1) or completion of a regular assessment, tax is paid on the basis of

self-assessment under section 140A, the interest shall be calculated as

under;

(a) up to date of payment of tax under section 140A – interest will be

calculated as mentioned in the table above; and

(b) From the date of payment of tax under section 140A, interest will be

calculated on the amount by which advance tax and tax paid under

section 140A falls short of the assessed tax.

(c) From the amount of interest computed above, amount paid under

section 140A towards interest chargeable under section 234B be

deducted.

Adjustment in the case of reassessment /re- computation under section 147

or 153A - if as a result of reassessment /re- computation under section 147 or

153A, the amount on which interest was initially payable is increased, interest

has to be calculated as follows – rate – 1% per month (or part thereof),

amount – as determined by re-assessment / re-computation minus amount

determined as per 143(1) / regular assessment. Period will be calculated as

given below.

a) up to May 31,2015 –for the period starting from the date of determination

of total income under section 143(1) or regular assessment and ending on

the date of reassessment / re-computation.

b) From June 1,2015 –for the period commencing on the first day of the

assessment year and ending on the date of reassessment / re-

computation.

Assessment for the first time under section 147 or 153A - If there is no

determination of tax under section 143(1) /(3) and the assessment is made for

the first time under section 147 or 153A, such assessment is also treated as a

regular assessment and interest is payable from the first day of April of the

assessment year till the date of such assessment order. However, if

proceedings under section 147 are initiated in a case where there is

determination of tax under section 143(1)/ (3), then the order passed under

section 147 is treated as an order of reassessment or re-computation , the

interest is leviable not from the first day of April of the assessment year ,but

from the date of determination of tax under section 143(1) / (3) till the order of

reassessment –[2011] 201 taxman 366 (Kar.) ,[2009] 185 taxman 247 (Bom.)

– this position is now changed as a result of the amendment.

Where an application for settlement is made under section 245C(1) - where

an application for settlement is made under section 245C(1) ,the assessee

shall be liable to pay simple interest at the rate of 1 per cent for every month

(or part of a month ) comprised in the period commencing on the first day of

April of such assessment year and ending on the date of making such

application, on the additional amount of income-tax. Further ,where as a result

of an order of the Settlement Commission under section 245D(4)for any

assessment year, the amount of total income disclosed in the application

under section 245C(1) is increased, the assessee shall be liable to pay

simple interest at the rate of 1per cent for every month (or part of a month)

comprised in the period commencing on the first day of April of such

assessment year and ending on the date of such order, on the amount by

which the tax on the total income determined on the basis of such order

exceeds the tax on the total income disclosed in the application filed under

section 245C(1). Where ,as a result of a rectification order under section

245D(6B),the amount on which interest was payable under the above

provision has been increased or reduced, as the case may be, the interest

shall be increased or reduced accordingly.

Adjustment in the case of rectification/revision /modification under section

154,155,250,254,260,262,263,264,245D(4)- If as a result of an order under

section 154,155,250,254,260,262,263,264,or 245D(4)the amount on which

interest was payable under section 234B(1)(3) has been increased/reduced ,

the interest shall be increased /reduced accordingly. In the case of increase in

interest liability, the Assessing Officer will serve on the assessee a notice of

demand specifying the sum payable. In the case where interest is reduced ,

the excess interest shall be refunded.

Tax deductible but not actually deducted - If tax is deductible at source but the

payer has not deducted it, the recipient cannot be burdened with interest

under section 234B and 234C. However, section 209 has been amended from

the financial year 2012-13 to the effect that where a person has received any

income without deduction or collection of tax, he shall be liable to pay

advance tax in respect of such income.

Section 234C

Interest is payable under section 234C if an assessee has not paid advance

tax or underestimated instalments of advance tax.

For all assessees who are liable to pay advance tax (excluding an eligible

assessee covered by section 44AD and section 44ADA)

When interest is

payable under

section 234C

Rate of interest Period of interest Amount on which

interest is

payable

If advance tax paid

on or before june

15 is less than

12% (a-b)

Simple interest

@1 per cent per

month

3 month 15% (a-b)-c

If advance tax paid

on or before

September 15 is

less than 36% (a-

b)

Simple interest

@1per cent per

month

3 month 45% (a-b)-d

If advance tax paid

on or before

December 15 is

less than 75% (a-

b)

Simple interest @

1 per cent per

month

3 month 75% (a-b)-e

If advance tax paid

on or before march

15 is less than

100%(a-b)

Simple interest @

1 per cent

- 100%(a-b)-f

a) Tax on the total income in the return filed by the assessee.

b) Total of (i) deducted / collected at source on any income which is subject to

such deduction or collection and which is taken into account in computing

such total income.(ii) relief / deduction of tax claimed under section 90or 91 on

account of tax paid in a country outside India.(iii)relief of tax clamed under

section 90A on account of tax paid in any specified territory outside India and

(iv) tax credit claimed under section 115JAA or 115JD

c) Amount of advance tax paid on or before June 15 of the financial year

immediately preceding the relevant assessment year.

d) Amount of advance tax paid on or before September 15 of the financial year

immediately preceding the relevant assessment year.

e) Amount of advance tax’ paid on or before December 15 of the financial year

immediately preceding the relevant assessment year.

f) Amount of advance tax’ paid on or before March 15 of the financial year

immediately preceding the relevant assessment year

For eligible assessees covered by section 44AD or 44ADA, who are liable to pay

advance tax

When interest is

payable under

section 234C

Rate of

interest

Period of interest Amount on which

interest is payable

If advance tax paid

on or before march

15 is less then

100%(a-b)

Simple interest

@1per cent

-

100%(a-b)-c

a) Tax on the total income declared in the return filed by the assessee.

b) Total of (i) tax deducted /collected at source on any income which is subject to

such deduction or collection and which is taken into account in computing

such total income (ii) relief / deduction of tax claimed under section 90 or 91

on account of tax paid in a country outside India,(iii) relief of tax claimed

under section 90Aon account of tax paid in any specified territory outside

India; and (iv) tax credit under section 115JD

c) Amount of advance tax paid on or before march 15 of the financial year

immediately preceding the relevant assessment year.

SHORT PAYMENT OF ADVANCE TAX IN CASE OF CAPITAL

GAINS/CASUAL INCOME- No interest will be levied in

respect of any shortfall in the payment of advance tax due on the returned

income if

a) The shortfall is on account of an underestimate or failure to estimate the

amount of capital gain or income of the nature referred to in section

2(24)(ix) (i.e, lottery income, gambling income, etc.) or income from a new

business or dividend income from domestic companies; and

b) The assessee has paid the whole of the amount of tax payable in respect

of such income, as part of the remaining instalments of advance tax which

are immediately due (after accrual of such income) , or if no instalment is

due , then such tax is paid before the end of the financial year

Issues

Self assessment tax paid before the due date and return submitted after due

date - interest would not be payable in a case where tax has been deposited

prior to due date of filing of income tax return even if the return of income is

filed after the due date of furnishing such return - CIT vs Dr.Prannoy Roy

(2009) 179 taxman 53 (SC). It is not open to the Assessing Officer to charge

interest under section 234 in a situation where the assessee has paid due

taxes and merely filing of income tax return is delayed.

When assessment is made for the first time under section 147 - a belated

return cannot be submitted after the expiry of one year from the end of the

assessment year. If an assessment is made for the first time under section

147, then the assessee cannot be made liable to pay interest for the period

during which it was not possible on the part of the assessee to file return, (ie

after one year from the end of the assessment year) till issuance of notice

under section 148 - Priti Pithawala vs ITO (2003) 129 taxman 79 (Bom.)

No opportunity of hearing - the liability to pay interest under section 234A,

234B, 234C is automatic and the question of granting opportunity of being

heard does not arise – CIT v Ramalingair (2000) 108 taxman 1 (Ker.)

Interest must be charged in the assessment order- While charging interest

under section 234A, 234B, 234C, the Assessing Officer is required to pass a

specific order to this effect in the assessment order. When the assessment

order is silent, as to whether any interest is leviable, the notice of demand

under section 156 cannot be beyond the assessment order and the assessee

cannot be served with any such notice demanding the interest. Interest cannot

be charged by mere observation like 'charge interest as per law'. It has to be

by means of a speaking order. CIT v Inchcape India Private Limited (2002)

124 taxman 744 (Del.), CIT v Ranchi Club India (2001) 247 ITR 209 , Tej

Kumari v CIT (2001) 247 ITR 210

Books of account in custody of income tax authority - During the period when

the books of account are in the custody of the concerned Income Tax

authorities, it is not possible for the taxpayer to submit the return of income.

Consequently, he cannot be saddled with liability to pay penal interest under

section 234A for that period. Paras Bansilal Patel v B.M.Jindel (2004) 135

taxman 125 (Guj.)

When such levy under this section (234B) is contested in the quantum appeal,

a revision petition pertaining to interest before the Commissioner under

section 264 is not maintainable – 240 ITR 617.

The Karnataka High Court in Kwality Biscuits v CIT 243 ITR 519 has held that

since the liability of MAT under section 115J is not crystallized till the accounts

are audited, and the words ‘for the purpose of this section’ in the explanation

to subsection 1A of that section cannot be construed to extend beyond the

computation of the liability of tax. Interest under this section and section 234C

cannot be charged where tax is payable on account of that section. However,

Madhya Pradesh High Court in ITARSI Oils v CIT 250ITR 686 has held that

there is no specific exclusion in these sections in so far as liability under

section 115J is concerned and whenever there is a liability to pay advance tax

irrespective of section 115J, interest is to be paid when the advance tax paid

is less than 90 percent of assessed tax. However, the Supreme Court has

now decide the issue in favour of the assessee and upheld the view of

Karnataka High Court – 284 ITR 434 (SC).

The Assessing Officer must treat the tax credit under section 115JAA as

equivalent to advance tax and charge interest under section 234B and C after

giving credit of the deduction u/s.115JAA – 330 ITR 226(SC).

These sections compel an assessee to comply with the provisions therein,

and upon the failure to do so they require the revenue to be compensated –

234 ITR 764. Therefore these provisions cannot be called penal in nature. In

actual application, there may be situations where the levy of interest under

these provisions overlap. Interest under these sections s mandatory – 252

ITR 1 and automatic – 215 ITR 758 and crystallizes when it is proved that a

default within the scope of any of these section is committed – 215 ITR 758.

Interest is also chargeable under section 234B when the assessee who

agrees to pay taxes in installments, but fails to pay such installments – 298

ITR 88. The section do not envisage the grant of hearing or any relief in so far

as the levy of interest is concerned and the principles of natural justice has no

application, since the statute by implication excludes the grant of such an

opportunity – 298 ITR 88. However, when the assessment order does not

mention the levy of any interest, it cannot be later levied – 285 ITR 84.

However, the legislature has provided a mechanism for reducing hardship in

cases where the same deserves to be mitigated – in appropriate cases,

u/s.119(2)(b) the Board may relax the rigour of these provisions and issue

general or special orders on the subject in respect of any class of incomes or

class of cases – 222 ITR 375. Therefore the provisions are not arbitrary or

violative of the Constitution – 234 ITR 764.

The order to charge interest is to contain a specific direction, giving reference

to the section under which such interest is to be charged – 247 ITR 209(SC) –However, the true test to be applied is that the assessee must be made to

know that the Assessing Officer , after applying his mind has ordered the

charging of interest under the specific sections and so long as this test is

fulfilled , levy of interest under these sections is valid in law, if interest is levied

in the notice of demand with the direction in the assessment order to “charge

interest as per law” – 253 ITR 578

When an application for waiver of interest is made, the Commissioner ought

to apply his mind and the mere fact that the return was filed and tax was paid

only after the issuance of a notice u/s.148 is no good ground to refuse an

application – 234 ITR 444

Interest u/s.234B has to be waived where the amount that was exempted from

tax had become taxable due to subsequent amendment and the assessee

had paid such tax voluntarily – 284 ITR 36.

Where the assessee has not filed its return and paid taxes on time because

his books of account were seized by the Department, interest cannot be

levied for the time period that the books were kept with the Department. If the

reasons for financial hardship and difficulty for payment of interest

u/s.234A,B,C expressed by the assessee does not find a place within the

conditions specified in the notification (F.No.400/234/95-IT(B), May 3,1996),

the CCIT does not have power to grant waiver – 275 ITR 72.

The Supreme Court in CIT v Anjum Ghaswala 252 ITR 1 has held that the

fact such power of waiver has not been conferred on the Settlement

Commission indicates that so far as the payment of interest under these

sections is concerned, the same is outside the purview of the Settlement

contemplated under Chapter XIX-A. The court further held that the applicants

before the Settlement Commission are also entitled to seek waiver or

reduction of levy of interest from the Board upon the fulfilment of the specified

terms and conditions. Where an application for waiver of interest is made and

stay has been granted upon fulfilment of the conditions, such stay should

continue pending disposal of the application by the Board. 214 ITR 183. In

case of shortfall of advance tax in respect of a case before the Settlement

Commission, the interest is payable up to the date of the order of the

Settlement Commission under section 245D(4) -259 ITR 449 (SC).

The statute has not provided an appeal against the levy of interest; however,

in the quantum appeal against the assessment order, such levy can be

challenged – 222 ITR 44. The levy of interest can also be challenged by a writ

petition, but where a petition is filed after a long lapse of time without the

explanation of the delay, and where returned income is same as income

assessed, such petition is not maintainable – 56 ITR 106.

Payment by cheque – A harmonious reading of provisions of rule 7 of the

Central Government Account (receipts and payment) rules, 1983 and rules 79

and 80 of the Treasury Rules of the Central Government, makes it clear that

government dues can be presented in the form of cheque into the accredited

bank. Upon tendering of a cheque, if it is not dishonored later, it shall be

deemed that payment has been made on the date when it was handed over to

the government’s bankers- (1989) 4 SCC 527 (SC), 128 ITR 617, (2000) 110

taxman 378

Shortfall because of legal interpretation If short payment of advance tax is

mainly because of bona fide dispute regarding interpretation of law, interest

under section 234B is not applicable – (2004) 134 taxman 109

Interest under section 234Band 234C in the case of non-resident assessee –

In the case of a non –resident / foreign company, all payments received from

Indian sources are subject to TDS and hence, such assessee is not liable to

interest under section 234B/234C- (2010) 129 TTJ (Delhi )177

Waiver or reduction of interest under section 234A, 234B and 234C which

arises due to operation of any order of court

In exercise of the powers conferred under section 119(2)(a) , the Central Board of

Direct Taxes have directed (vide order dated May 2, 1994 vide notification

F.No.212/495/92-IT(A -II) 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 or of

the government ( other than an order of assessment appeal, reference or revision

passed under the provisions of the Income Tax Act) 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 section

234A, 234B and 234C shall be reduced or waived by the Chief Commissioner/

director general subject to certain conditions.

Conditions

The following conditions shall be satisfied-

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

Period

Reduction/ waiver of interest is given in respect of the following 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 and

c) In respect of interest under section 234C , for the period mentioned in that

section .

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 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.

Chief Commissioner / Director General Investigation to reduce penal

interest in certain cases- Notification F.No.400/29/2002-IT(B) dt 26/06/2006.

The Central Board of Direct Taxes has decided to authorize Chief

Commissioners and Directors General Investigation to reduce or waive penal

interest under section 234A, 234B and 234C. However no reduction or waiver of

such interest shall be ordered unless the assessee has filed the return of income

for the relevant assessment year and paid the entire income tax (principal

component of demand) due on the income as assessed. The Chief

Commissioner of Income–tax or Director General of Income-tax may also impose

any other condition as deemed fit for the said reduction or waiver of interest.

Penal interest charged under the aforesaid section may be reduced or waived in

the following circumstances, namely;

1. Where, in the course of search and seizure operation, books of account have

been taken over by the Department and were not available to the taxpayer to

prepare his return of income – 234A alone can be waived.

2. Any income other than capital gains which was received or accrued after the

date of first or subsequent instalment of advance tax, which was neither

anticipated nor contemplated by the taxpayer and on which advance tax was

paid by taxpayer after the receipt of such income – 234C alone can be

waived.

3. Where as a result of any retrospective amendment of law or the decisions of

the Supreme Court , 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 – 234B and 234C alone can be waived.

4. Where a return of income is filed voluntarily without detection by the

department and due to circumstances beyond the control of the taxpayer such

return of income was not filed within the stipulated time –limit or advance tax

was not paid at the relevant time – 234A alone can be waived.

5. CBDT has power to make relaxation in cases covered by sections 234A,

234B, 234C and where assessee makes an application for waiver of interest

under these sections, Board cannot decline the assessee ‘s request by a

cryptic order that it was unable to interfere in matter – Sant Lal v UOI 222 ITR

375.

Instances were illustrative and not exhaustive – 97 taxman 58 (ITSC)

Section 201(1A)/206C(7)- for failure to deduct or collect and pay tax at source.

Default - interest is payable in respect of any of the following defaults –

1. If the person responsible for deducting / collecting tax at source does

not deduct / collect tax at source, wholly or partly, under sections 192 to

196C and 206C.

2. After deducting / collecting tax, he fails to pay the same as required by

the Act.

Interest for failure to deduct tax at source - section 201(1A) –

In the above two cases, the person responsible for deducting tax at source

is liable to pay interest as follows

Rate of interest - 1%.

period for which interest is payable - from the date on which tax what

deductible to the date on which tax is actually deducted.

Rate of interest - 1.5%.

period for which interest is payable - from the date on which tax was

actually deducted to the date on which tax is actually paid

Interest for failure to collect tax at source - section 206C(7).

Rate of interest - 1% per month or part thereof.

Interest is payable on short payment or non payment

Period for which Interest is payable - from the date on which such tax was

collectible to the date on which the tax is actually paid.

Relief applicable from July 1, 2012 - the Finance Act 2012 has amended the

aforesaid provisions with effect from July 1st 2012. Relief for default in tax

deduction - after this amendment, the payer shall not be deemed to be an

assessee in default if

the resident recipient has included such income in the return submitted

under Section 139 and the recipient has paid tax on such income; and

the payer submits a certificate in Form 26A to this effect from a chartered

accountant.

In such a case, interest shall be payable at the rate of 1% from the date on

which tax was deductible to the date of furnishing of return of income by

the resident recipient.

Relief for default in tax collection - similar rule is applicable from July 1st

2012 in the case of non collection of tax at source. However, the certificate

of Chartered Accountant should be taken in form 27BA.

Date of applicability of relief - the aforesaid relaxation given by the Finance

Act 2012 is applicable only when the recipient or the purchaser in the case

of tax collection is resident and the default pertains to the period

commencing on or after July 1st 2012. If the recipient or the purchaser in

the case of tax collection is a non resident or if the recipient / purchaser is

a resident but default pertains to the period prior to July 1st 2012, the

amendment made by the Finance Act 2012 is not applicable. In such a

case one can take shelter of judicial rulings where the Courts held that

interest cannot be recovered for non deduction or short deduction from the

payer for any period which falls after the date of payment of tax by the

recipient - CIT v Rishikesh Apartments Co-op Housing Society Ltd (2001)

119 taxman 239 (Guj.) , CIT v Eli Lilly & Co. (India) P Ltd. (2009) 178

taxman 505 (SC).

Issues

No time limit is fixed for passing orders under section 201 (1A) – U.P. State

Industrial Development Corporation Ltd v ITO (2002) 81 ITD 173 (Lucknow),

Thai Airways International Public Co.Ltd v CIT (2005) 2 SOT 389 (Del.).

However, Courts have held that action under section 201 would be possible

by a competent authority under the Act within a period of 4 years – CIT v NHK

Japan Braidcasting Corp. (2008) 172 taxman 230(Del.).

Where the Assessing Officer did not know such default or the assessee

delayed the proceedings, there can be some extension to the said limit of 4

years. The Assessing Officer is required to pass a speaking order for charging

interest under section 201 (1A) - Mittal Bhai Investment (P) Ltd v ITO (2005)

92 TTJ (Jp.) 286

When tax is not deducted under section 192 on a uniform basis for each

month – if there is no overall short deduction of tax under section 192 but a

few months tax deducted is lower as compared to other months, interest on

the basis of monthly shortage cannot be charged under section 201. There is

an express provision under section 192(3) authorizing the person responsible

for deducting tax to increase or reduce the amount to be deducted under

section 192 for the purpose of adjusting any excess or deficiency arising out

of any previous deduction or failure to deduct during the financial year - Hero

Honda Motors Ltd. v ITO (2000) 112 taxman 154 (Del.) , Vinsons v Third ITO

(2004) 89 ITD 267 (mum.)

If performance incentive can be qualified in the month of March of the

financial year and tax is deducted from April to February on the basis of

average rate of tax ( which is calculated without considering the amount of

performance incentive which was not qualified), interest under section

201(1A)for short deduction cannot be imposed. CIT v Marubeni India (P) Ltd.

(2007) 165 taxman 467 (Del.)

Bonafide estimate of income – section 192 is very categorical to state that tax

has to be deducted from income under the head ‘Salaries’ computed on the

estimated income of the assessee under this head. What has to be seen is

whether the employer company has acted bonafide or not while computing

the tax liability of its employees for the purpose of deducting tax at source –

Associated Cement Co. Ltd v ITO (2000) 74 ITD 369. CIT vs Oil & Natural

Gas Corp.Ltd (2002) 125 taxman 698 held that any addition or disallowance in

the hands of the employee does not reflect in any manner on the estimate of

the employer.

The levy of interest under sub-s (1A) is a compensatory measure and is

mandatory and automatic in nature – 249 ITR 447. However, before levying

interest, assessee should be given an opportunity of being heard - 278 ITR

218. Further, the provision for levy of interest and penalty and the provision

for criminal prosecution for failure to deduct tax and pay it are distinct from

each other. – 206 ITR 222. Thus provisions of both the sub – ss (1) and (1A)

must be considered independently without affecting the rights mentioned in

either of the sub-sections – 312 ITR 225.

If the salary is exempt, there is no obligation on the employer to deduct tax

on payment thereof and consequently, no interest can be levied under this

section – 187 ITR 673. Similarly, interest cannot be levied under sub s (1A)

where the entire tax payable by the payee is paid by him as advance tax and

self-assessment tax. – 253 ITR 310. In case of payment of dividend, interest

under this section is to be levied from the date the dividend warrants were

actually sent out and not from the date of the declaration of dividend. – 247

ITR 51.

Where the recipient claimed refund that included tax deducted at source,

there is no justification for charging interest in the hands of the payer for

failure to deduct tax at source – 287 ITR 354. Upon failure of deduction of tax

at source or failure to deposit tax deducted interest liability arises only against

the deductor under sub – s (1A). The liability to pay interest under s 234B is

different and distinct from that of under sub – s (1A) – 334 ITR 79.

Interest on excess refund – section 234D

Interest under section 234D(1)-in any of the following two cases, interest is

attracted under section 234D(1)-

Case one- if any refund is granted under section 143(1) but no refund is

due on regular assessment.

Case two- if any refund is granted to the assessee under section 143(1)

and the refund so granted exceeds the amount refundable on regular

assessment.

For the aforesaid purpose, regular assessment means assessments under

section 143(3)or 144. If an assessment is made for the first time under

section 147 or section 153A, the assessment so made shall be regarded

as a regular assessment.

Computation of interest –in any of the above two cases, interest is payable

under section 234D(1) as follows-

Rate of interest

Period for which interest is payable

Amount on which interest is payable

0.5 per cent per month or part of a

month

The period commencing from the date

of grant of refund under section 143(1)

to date of regular assessment

In case one on whole of the amount

refunded ;in case two on the excess of

amount refunded under section 143(1)

over the amount refundable on regular

assessment

Adjustment under section 234D(2)- Where, as a result of an order under

section 154 or 155 or 250 or 254 or 260 or 262 or 263 or 264 or an order of

the settlement commission under section 254D (4) the amount of refund

granted under section 143(1) is held to be correctly allowed, either in whole or

in part, as the case may be , then the interest chargeable under section

234D(1), shall be reduced accordingly.

For the purpose of section 234D ,where there is no regular assessment , then

assessment made for first time under section 147 or 153 A shall be regarded as a

regular assessment conversely, where assessment had already been completed

under section 143(3) reassessment done under section 147 cannot be held as

regular assessment and in such a case interest under section 234D cannot be

charged- [2011] 13 taxmann.com 37 [2013] 59 SOT 92. Likewise, where refund is

not granted to assessee under section 143(1) but it is granted pursuant to orders

passed by the Commissioner (appeals), section 234Dis not applicable –[2012] 21

taxmann.com 511.

For making late payment of income- tax – section 220(2)

If any assessee fails to pay any tax (other than advance tax ) specified in a

demand notice within 30 days of the service of notice of demand, he is liable

to pay interest at the rate of 1 per cent for every month or a part of a month

from the expiry of 30 days of the service of the demand notice.

The Chief Commissioner (or Commissioner) may reduce or waive the amount

of interest payable by an assessee under section 220(2), if he is satisfied that

payment of such interest would cause genuine hardship to the assessee, the

default in the payment of the amount on which interest was payable due to

circumstances beyond the control of the assessee; and the assessee has co-

operated in any inquiry relating to the assessment or in any proceeding for the

recovery of any amount due from him.

Where an assessment order is cancelled under section 146 or cancelled / set

aside by an appellate /revisional authority and the cancellation/ setting aside

becomes final (i.e, it is not varied as a result of further appeals/ revisions) no

interest under section 220(2) can be charged in pursuance to the original

demand notice. The necessary corollary of this point will be that even when

the assessment is reframed, interest can be charged only after the expiry of

35 days from the date of service of demand notice pursuant to such fresh

assessment order – Circular no.334 dated April 3,1982.

Section 220 has been amended (with effect from July 1, 2012) to provide that

when interest is charged under section 201(1A)on the amount specified in the

intimation issued under section 200A(1) , then no interest will be charged for

the same amount for the same period under section 220(2)

Where the assessment made originally by the Assessing Officer is either

varied or even set aside by one appellate authority but on further appeal, the

original order of the Assessing Officer is restored either in part or wholly, the

interest payable under section 220(2) will be computed with reference to the

due date reckoned from the original demand notice and with reference to the

tax finally determined . the fact that during an intervening period, there was no

tax payable by the assessee under any operative order would make no

difference to this position- Circular no 334, dated April 3, 1982

The observation given in Circular no. 334 does not find support in the judicial

pronouncement given by the apex court in Vikrant tyres Ltd v. ITO (2001) 115

taxman 202. In this case, the assessee deposits the demand made by the

Assessing Officer and goes in appeal. The appellate authority decides the

issue of the assessee and the tax collected is refunded. In further appeal by

the revenue before the High Court, assessee loses the case. Fresh demand

notices are issued to the assessee demanding interest under section 220(2)

for the period commencing from the refund of tax consequent upon the first

appellate order. The assessee disputes the charge of interest from back date

when he has satisfied with all the demands raised from time to time. The

Supreme Court held that for invoking section 220 one of the conditions is that

if there is a default in payment of amount demanded under a notice by the

revenue within the time stipulated therein and if such a demand is not

satisfied, interest is leviable under section 220(2). However, the Court held

that the section cannot be invoked to revive a demand notice, which has

already been fully satisfied. However, landmark ruling of the Supreme Court

has been superseded by the Finance (no.2) Act, 2014 with effect from

October 1, 2014. The amended provisions provide that where any notice of

demand has been served upon an assessee and any appeal or other

proceeding, as the case may be, is filed or initiated in respect of the amount

specified in the said notice of demand, then such demand shall be demand to

be till the disposal of appeal by the last appellate authority or disposal of

proceedings, as the case may be.

Issues

The liability to pay interest at the rate prescribed is absolute and unconditional

and the rate cannot be varied – 101 ITR 457 (SC).

The levy of interest for delayed payment of tax pursuant to a notice of demand

is compensatory in nature and it does not violate Article 14 and 19 of the

Constitution and therefore such a levy is valid – Biyar Rubber vs ACIT 241

ITR 877.

Interest under section 220 is payable from the date of service of notice of

demand under section 156 and after a period of one month thereafter

whereas interest u/s.234B is payable up to the date of regular assessment –

Manish D.Shah v CIT (2009) 185 taxman 247 (Bom.).

Where a demand pursuant to an order of assessment is reduced in appeal,

the original demand remains valid and effective to the extent of liablility finally

determined to be due and payable, and where the tax is not paid as per the

original notice of demand, interest is payable on such reduced demand to the

extent unpaid. In such a case, fresh notice is not necessary for payment of

such reduced demand. – Roopali Dyeing v DCIT 212 ITR 573

In case where appellate authority had set aside the order of assessment and

remanded the matter for fresh assessment, then in such cases due date for

payment of interest under this subsection commences after the expiry of thirty

five days (days mentioned in the demand notice) from the date of

communication of demand notice pursuant to the fresh order of assessment –

271 ITR 570.

In the case of a sick company which is declared as a relief undertaking, there

could be prohibition against recovery during the period of a government

notification; but interest under this section continues to accrue – 190 ITR 164.

Even in cases before the Settlement Commission, the accrual of interest is to

continue after the admission of the application and is to reduce only to the

extent indicated in the Commission’s order – 193 ITR 57.

The levy of interest under this subsection is automatic and hence, an

opportunity of hearing is not necessary before the levy of interest – 244 ITR

74.

Further, the statue does not provide an appeal against the levy of interest –

229 ITR 721.

Subsection 2A – waiver

The provisions of subsection 2A for waiver of interest, which were inserted

with effect from 1, 10, 1984 cannot be construed as retrospective in operation

– 186 ITR 634

Section 220(2A) is not a procedural law but a substantive one – 330 ITR 561

The Calcutta High Court in Apeejay Industries vs CIT 250 ITR 414, has held

that the assessment year is not relevant for determining the applicability of

this subsection, and it can apply to demands for years prior to the date of its

insertion provided that such liability is crystallized after its insertion.

The subsection provides three conditions – and for the interest to be waived,

all these conditions are to be satisfied – 217 ITR 653. The first condition is

that the payment of such amount would cause genuine hardship to the

assessee. However, findings of fact which indicate lack of hardship – 217 ITR

653 or the failure to establish financial difficulties – 236 ITR 883 or the fact

that an expansion is underway – 232 ITR 624 or the fact that the assessee

owns significant immoveable properties have been held not to be cases of

genuine hardship and are therefore, not eligible for waiver – 296 ITR 650.

Further, the fact that the assessee pays wealth tax or has paid part of the tax

arrears is not relevant in considering the genuineness of the hardship – 244

ITR 74. Income of the assessee in the period in dispute has to be considered

for determining the genuine hardship in a waiver petition u/s. 220(2A) – 330

ITR 488. Waiver cannot be sought on the ground that stay of demand is

obtained – 220 ITR 349 or that a retrospective amendment is challenged in

the Supreme Court – 250 ITR 761. The third condition is that the assessee

has co-operated in any inquiry relating to the assessment or recovery

proceedings. Pursuit of other remedies available under law – 237 ITR 169 or

the belated filing of returns and non-payment of advance tax – 244 ITR 74

cannot be construed as non co-operation, and refusal of waiver of interest on

such grounds is not valid. Co-operation by the assessee with the department

cannot be the sole ground for allowing an application filed for waiver. It is

necessary that the assessee should prove that there is genuine hardship in

payment of tax and the non-payment of tax demanded in time was under

circumstances beyond the control of assessee – 290 ITR 374. If an

application for waiver of interest is rejected and not challenged, a second

application for such waiver is not maintainable – 234 ITR 655. However, if the

first application is made even before the completion of assessment

proceedings, a second application can be made after the completion thereof –

253 ITR 171.

The Supreme Court has held in Kishan Lal v Union of India 230 ITR 85, that

the power vested in the Commissioner for waiver of interest is quasi – judicial,

and is to be exercised reasonably, and the principles of natural justice are

applicable: a duty is cast upon the Commissioner to pass a speaking order to

establish that he has applied his mind in this regard – 234 ITR 585. The

Supreme Court held that the CCIT on rejecting request for waiver of interest

should pass speaking orders and examine the above-mentioned two grounds

– Malani V CIT 306 ITR 196. When all conditions for waiver have been

fulfilled, the power to waive the interest should be exercised judicially. Waiver

of partial interest is not valid in law – 342 ITR 379. It is not mandatory that the

CCIT should waive or reduce interest, if the condition specified in section

220(2A) are satisfied – 290 ITR 478.

The Supreme Court in CIT v Damani Brothers 259 ITR 475 has held that

when an application is filed before the Settlement Commission, in an

appropriate case, the Commission may direct waiver or reduction of interest

provided that the conditions are satisfied, and the Commission has to

examine whether a case for waiver or reduction is made out. The Court has

further held that although double levy of interest is not permissible if interest is

charged more than once for the same infraction, there is no bar on levying of

interest when the charge of interest operates in different fields.

A writ petition for waiver of interest is maintainable, but where the

Commissioner has recorded a finding of fact that the petitioner has failed to

establish that the default of payment was due to circumstances beyond its

control, such finding cannot be interfered with in writ jurisdiction – 242 ITR

547. The Delhi High Court in Bharat Commerce v Union of India 188 ITR 277,

has held that a writ petition is maintainable for a claim under this sub section

in spite of the fact that a revision petition could be made to the Commissioner;

on the other hand the Kerala High Court in K.C.Joy v TRO 204 ITR 511 has

held that if a request for waiver to the Commissioner has not been made,

there is no cause of action to approach the High Court under Article 226. The

High Court has no jurisdiction to interfere with the discretion of the CCIT; it

can only take a view on whether the decision making process was fair – 290

ITR 717.

The power of the Company Court in respect of the winding up of a company

under section 446 of the Companies Act, 1956 overrides the provision of

subsection (2); the only restriction is that the Court has to satisfy itself on the

fact of the case that the claim for statutory interests under the Act would

amount to hardship, and cause grave injury to the creditors – 259 ITR 252.

Fee for default in furnishing quarterly TDS/ TCS returns - section 234E

Where a person fails to furnish quarterly TDS / TCS return he shall be liable to

pay, by way of fee, sum of RS, 200 for every day during which the failure

continues. This provision will be applicable from July 1,2012 . This fees will be

in addition to other consequences under the Act. However, the fees shall not

exceed the amount of tax deductible / collectible after July 1, 2012. It will not

be possible to submit belatedly quarterly TDS return without payment of fees

under section 234E.

Fee for default in furnishing return of income – section 234F

Failure to furnish return of income within the due date u/s.139(1) – fee of

Rs.5000 if the return is furnished on or before the 31st day of December of

the assessment year. In other cases – Rs.10000. Where the total income

does not exceed Rs.5,00,000/- , fee payable shall not exceed Rs.1000.

Interest payable to assessee (section 244A)

Interest is payable where any refund arises due to any excess payment of tax.

Under the provision, there is no need for making claim for refund. When

refund is of any advance tax (including tax deducted or collected at source)

the interest is payable at the rate of 0.5 per cent per month or part of a month

from the first day of the assessment year to the date of grant of refund. No

interest is, however payable if the excess payment is less than 10 per cent of

the tax determined on regular assessment or under section 143(1)

The Delhi High Court in (2010) 190 taxman 136 and the Kolkata tribunal

(2010) 8 taxman.com 278 held that the assessee is on principle entitled to

interest on self –assessment tax paid in terms of section 244A(1) (b) from the

date of payment of such amount up to the date on which refund is actually

granted. For calculating interest under section 244A(1)(b) relevant date is

date of payment of tax and not date on which amount of tax collection is

credited to account of Central Government by an agent of the Central

Government- (2011) 12 taxmann.com 484(Bom)

Where refund is of tax other than advance tax or tax deducted or collected at

source, interest is payable at the rates given above from the date of payment

of such tax up to the date on which the refund is granted.

PROVISIONS APPLICABLE FROM JUNE 1, 2016

The above mode of computation of interest under section 244 A has been

modified with effect from June 1, 2016 on the following lines-

Category 1- refund out of TDS / TCS and advance tax – where refund

arises out of TDS , TCS or advance tax paid during the financial year

immediately prior to the assessment year, interest shall be calculated at

the rate of 0.5 per cent per month (or part thereof ) for the following period

Situation 1 (if return of income is submitted on or before the due

date of submission of return of income given under section 139 (1)

–in this case , interest is payable from the first day of the

assessment year to the date which refund is granted

Situation 2(in any other case ) in this case , interest is payable

from the date of furnishing of return of income to the date on which

refund is granted .

Category 2- refund out of self assessment tax paid under section 140A –

Where the refund is out of self assessment tax paid under section 140A , such

interest shall be calculated at the rate of 0.5 per cent per month (or part there

of ) from the date of furnishing of return of income or the date of payment of

self assessment tax, whichever is later, to the date on which the refund is

granted

Category 3- Refund which arises out of appeal effect- where a refund arises

out of appeal effect being delayed beyond the time prescribed under section

153(5) (ie 3 months from the end of the month in which appellate order is

received by CIT), the assessee shall be entitled to receive an additional

interest (over and above interest given under category 1 or category 2).

Additional interest on such refund shall be calculated at the rate of 3 per cent

per annum, for the period beginning from the date following the date of expiry

of the time allowed under section 153(5) to the date on which the refund is

granted. Where extension is granted by the principal CIT/ CIT by invoking

proviso to section 153(5), the period of additional interest if any shall being

from the expiry of such extended period.

No interest in some cases-

No interest under category 1 or category 2 shall be payable , if the

amount of refund is less than 10 per cent of the tax as determined under

section 143(1) or on regular assessment.

Other points - The following points should be noted (where interest is

payable for the period commencing June 1,2016 or otherwise)-

If as a result of an order under section 143(3) ,144,147,154,155, 250,254,

260,265,164,or 245D(4), the amount on which interest was payable has been

increased/ reduced, the interest shall be increased / reduced accordingly. If

interest is reduced, the Assessing Officer will send a notice of demand in the

prescribed form specifying the amount of the excess interest paid and

requiring him to pay such amount.

Vide Instruction no 2/2007, dated march 28,2007 , the Board has reminded

all Assessing Officers that while granting refund to the assessees, care

should be taken to ensure that any interest payable under section 244A on

the amount of refund due should be granted simultaneously with the grant of

refund and there should in no case, be any omission or delay in the grant of

such interest. Failure to do so will be viewed adversely by the Board and the

officer concerned will be held personally accountable inviting appropriate

action from the Board

Issues

Section 244(2) provides that in the event the proceeding resulting in refund

has been delayed for some reasons attributable to the assessee, the period

of delay so attributable shall be excluded from the period for which the

interest is payable . The Bombay high court in the case of CIT v. Larsen

&toubro Ltd (2010)235 CTR (Bom) 108 held that interest under section 244A

could not be denied merely on the ground that the TDS certificates were not

furnished with the return of income –tax (while tax was deducted and

deposited in the exchequer in time)

Mat credit is not refundable. If refund becomes due after credit of MAT, TDS

and advance tax, refund is attributable to refund of TDS and advance tax only.

In such a case , the assessee should be paid interest on such excess

payment of TDS and advance tax –(2010) ITD 445(Chennai)

An assessee is entitled to interest on refund of excess deduction or erroneous

deduction of tax at source - (2014) 222 taxman 225(SC)

Interest is available if mismatch is not attributable to the recipient of income

and the fault solely lay with the deduction – (2014) 225 taxman 198

The right to receive interest in refund does not depend upon the application by

the assessee, but follows as a natural corollary to the right to receive refund. –

253 ITR 12. When a refund is issued to an assessee on his furnishing a bank

guarantee, the interest should also follow the principal amount of refund, and

should be granted on the same conditions. – 194 ITR 517. Interest under this

section cannot be claimed by a person who is not the assessee and the court

cannot make an award of interest to such a person – 186 ITR 226. Where the

money is retained only by way of deposit as a security for meeting the tax

liability and it is not appropriated in discharge of the tax liability, no interest is

payable on such deposit. – 257 ITR 328. The Provision of this section does

not apply in respect of surplus of assets in search and seizure proceedings,

because s. 132 is a self-contained code- 249 ITR 1

Where a show-cause notice was issued under s 263 wherein the reasons for

which the interest was to be withdrawn were not indicated, it was held that the

notice was liable to be quashed- 221 ITR 861.

The Supreme Court held that the assessee is entitled for interest on interest

claimed by it, since the refund were granted after a long time, reversing the

judgement of Bombay High Court which held that there is no provision in the

Act to pay interest on interest due to the assessee – 280 ITR 643. In this

case, the assessee had paid advance tax, but his actual liability to tax was

lower than what he had remitted. Under s 214, he became entitled to interest

of 15% per annum from April 1 of the start of the assessment year until the

date of the regular assessment. The Question was whether, under s 240, the

assessee is entitled to interest of 15% on the interest under s. 214. The Court

held that the words in s 244A are “amount due”, and that this amount would

include the interest under s 214.

However, the Supreme Court later felt that the view needs reconsideration

and has referred the matter to a larger bench. – 348 ITR 319 (SC). The

judgement in Sandvik seems to be correct on a bare reading of s 244A. The

referral order merely restates the provisions of law, and doubts the

correctness of Sandvik, but does not give any reasons for doing so. It is

submitted that the decision in Sandvik must continue to remain the law. The

Delhi High Court has now held that interest on interest is payable only if the

refund was made without interest and there was a delay in payment of interest

– 320 ITR 88

Procedure to be followed in calculation of interest Rule 119A

In calculating interest payable by the assessee or interest payable by the

central government to the assessee, the amount of tax, penalty or other sum

in respect of which interest is to be calculated will be rounded off to the

nearest multiple of RS. 100 ignoring any fraction of RS.100

References/Source

(i) incometaxindia.gov.in / taxmann.com / indiabudget.nic.in

(ii) Kanga & Palkhivala’s The Law and Practice of Income Tax.

(iii) Sampath Iyengar’s Law of Income Tax.

(iv) Taxmann’s Direct Taxes Ready Reckoner.