The provisions relating to mandatory interest payable by the assessee with reference to the defaults for late filing of return were introduced by the Direct Taxes Laws (Amendment) Act, 1987 w.e.f. 1-4-1989 wherein interest u/s 139(8) and penalty u/s 271(1)(a) for late filing of return has been substituted by interest u/s. 234A. The basic difference between interest and penalty is that in case of the penalty, the discretion was granted to the Assessing Officer to levy penalty or not, while it is mandatory to levy interest u/s. 234A in case of such default. It is not left to discretion to the Assessing Officer.
 

Returns

Every person, other than a company, is required to file his return of income if his total income exceeds the maximum amount which is not chargeable to tax or if total income of any other person in respect of which he is assessable exceeds the maximum amount which is not chargeable to tax as provided in section 139(1) of the Income-tax Act, 1961. On the other hand, every company is compulsorily required to file its return of income every year irrespective of whether the company has made a profit or loss or has carried out operations or not.
 

Due dates

At present, there are two due dates for filing of return:

31st October for:

A company/A person whose accounts are required to be audited/A working partner of the firm and the persons referred to in the first proviso to section 139(1).

31st July for:

Any other person not covered above.

Section 234A lays down that if the return of income is not filed or filed after the due date, the assessee would be liable to pay interest at the prescribed rate per month (1.2% per month at present) or part of the month on the amount of tax on the total income as determined u/s. 143(1) or on regular assessment as reduced by advance tax paid and TDS, but excluding any self assessment tax paid. The period of levy of interest would be from the date immediately following the due date to the date of furnishing return or where no return has been furnished, to the date on which the assessment is completed u/s. 144. The assessee is required to calculate and pay the interest for delay in furnishing the return of income along with self- assessment tax payable u/s. 140A. Where the amount paid as self-assessment tax falls short of tax and interest payable on the basis of the return, the amount paid will be first adjusted against the interest and the balance, if any, against the tax payable.

Section 234A(3) provides for charge and mode of computation of interest where during the course of reassessment proceedings (after an assessment has been completed u/s. 143 (3) or 144 or 147) the return of income is either filed late or not filed in response to a notice under section 148.

Section 234A(4) provides circumstances in which such interest is to be increased or reduced. The section provides that as a result of an order under section 154 or section 155 or section 250 or section 254 or section 260 or section 262 or section 263 or section 264 or an order of the Settlement commission under sub-section (4) of section 245D, if the interest is increased, the Assessing Officer shall serve on the assessee a notice of demand in the prescribed form specifying the sum payable. In a case where the interest is reduced, the excess interest paid if any, shall be refunded.
 

Rate of interest

The following table lists down the interest rate effective from time to time:

1-4-1989 to 31-5-1999   @ 2% for every month or part of a month
1-6-1999 to 31-5-2001   @ 1½ % for every month or part of a month
1-6-2001 to till date       @ 1¼ % for every month or part of a month
 

Powers of C.B.D.T.

The Central Board of Direct Taxes in exercise of powers conferred u/s. 119(2)(a) had issued a notification No. 212/495/92 – IT (A-II) on 2-5-1994, directing the Chief Commissioner of Income Tax / Director General (Inv) to reduce interest in cases where the income accrued or arose for any previous year due to operation of any order of a court, Statutory Authority or Government passed after the close of the said previous year. Subsequently, the C.B.D.T. issued further directions in terms of their order F. No. 400/234/95-IT(B) dated 23-5-1996 enabling the Chief Commissioner of Income Tax / Director General (Inv) to reduce or waive interest u/s. 234A to mitigate the unintended hardships faced by tax-payers in the following circumstances :—

1. Where, in the course of search and seizure operations, or otherwise, books of account and other documents have been seized 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 u/s. 132, cash was 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 instalments 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 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 not taxable (on the basis of the Judgment of the Jurisdictional High Court) become taxable.

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.

Please note that above five instances are illustrative and not exhaustive as held in Dr. Mahesh D. Sanghvi (97 Taxman 58 ITSC). It has also been clarified by CBDT Circular No. 783 dated 18-11-1999 (240 ITR (ST) 183) that waiver will be granted subject to fulfilment of the conditions mentioned in the notification and not as mentioned in Press Note issued on 23-5-1996.

Recently, CBDT has made a modification of Para 2(d) of the said order, deciding that there shall be no condition that the decision of the High Court or the Supreme Court as referred to therein, must be given in the assessee’s own case. Also the condition that any retrospective amendment of law or the decision of the Supreme Court or the jurisdictional High Court must have been made after the end of the relevant year stands withdrawn. It may be noted that if any petition in the past has been rejected because of the Board has not issued this modification, the same may be reconsidered and decided in accordance with this modification read with the order dated 23rd May, 1996. (Order F. N. 400/234/95-IT(B) dated 30th January, 1997).
 

It has been held by the Supreme Court that Settlement Commission being quasi-judicial body has no powers to reduce or waive interest except in accordance with Circular of CBDT in cases and under conditions prescribed. CIT vs. Anjum M. H. Ghaswala and Others 252 ITR 1 (S.C.).
 

1. Interest not to be charged, where the delay is filing return of income is due to departmental strike – Income Tax Bar Association vs. CCIT (1990) 182 ITR 43 (Gujarat) .

2. As levy of interest is compensatory in nature, is automatic and therefore, no opportunity of being heard need be given ordinarily. There is no right of appeal against the levy of interest. However, as held by the Supreme Court in the case of Associated Stone Industrial (Kotah) Ltd. vs. CIT 224 ITR 560 (S.C.) that charging of interest can be challenged in an appeal filed against the assessment and the assessee would be entitled to deny his liability to pay interest while denying his liability be assessed to tax.

3. It has been held by the Karnataka High Court in Union Home Products Ltd. vs. CIT 215 ITR 758 (Kar) that interest being mandatory can be charged without granting an opportunity of being heard.

4. However, in the case of Uday Mistanna Bhandar & Complex vs. Tej Jumari Devi 222 ITR 44 (Patna), it has been held that interest cannot be charged only through a demand notice.

5. Where the last day for filing return of income/loss is a day on which the Income Tax Office is closed, the assessee can file the return on the next day afterwards on which the office is open and, in such cases the return will be considered to have been filed within the specified time limit – Circular No. 639 dated 13-11-1992.
   Likewise if due date for filing of Return is extended by the CBDT, the interest u/s. 234A shall be chargeable after the expiry of the extended date.

6. It has been held by the Allahabad High Court in Kailash Mills vs. CIT (2003) 260 ITR 322 (All) that if the conditions mentioned in clause (c) of section 273A(1) of the I. T. Act, 1961, are satisfied, some relief has to be given to the assessee, though that relief may either be total waiver of interest or reduction of interest depending upon the facts of the case. However, the Commissioner cannot totally reject the waiver application if the conditions mentioned in clause (c) of section 273A(1) are satisfied.