Advance tax is payable with respect to the income earned during a financial year. However, such income is assessable in the subsequent financial year called the assessment year. While computing advance tax, income-tax on the current income has to be first determined and the tax on such income has to be determined. From such tax, the amount of tax deductible or collectible at source during the financial year is to be reduced and the balance amount after reducing TDS and TCS is liable to be paid as advance tax. As per section 208, advance tax shall be payable in every case where the amount of tax payable by the assessee during that year is in excess of Rs. 5,000/-. As per section 211, advance tax is payable by companies in four instalments; i.e., not less than 15% is payable on or before 15th June, not less than 45% is payable on or before 15th September, not less than 75% is payable on or before 15th December, and the whole amount of such advance tax is payable on or before the 15th March. In the case of a non-corporate assessees, advance tax is payable in three instalments. Not less than 30% of the advance tax is payable on or before 15th September, not less than 60% is payable on or before 15th December and the balance tax is payable on or before the 15th March. In cases where advance tax paid is more than the assessed tax, the assessee would be entitled to refund along with interest. However, for non-payment of tax or deferment of tax, interest would be payable. Up to assessment year 1989–90, interest was payable for late filing of return u/s. 139(8), interest for short payment of advance tax and/or for deferment of advance tax was payable as per sections 215 to 217 of the Income tax Act. Apart from interest, AO could also levy penalty under section 273. However, from assessment year 1989–90, interest and penalty provisions have been clubbed and interest for delay in filing return of income is payable u/s. 234A, interest for shortfall in payment of advance tax is payable u/s. 234B and interest for deferment of advance tax is payable u/s. 234C. The provisions of levy of interest u/ss. 234B and 234C of the Act are discussed in this article.
 

Interest u/s. 234B is payable for non-payment of advance tax or for short payment of advance tax. If an assessee either fails to pay the whole of advance tax or where the advance tax paid by him is less than 90% of the assessed tax, he shall be liable to interest @ 1% per month (@ 1.25% up to 7-9-2003) or part of the month from the 1st April of the assessment year to the date of determination of total income u/s. 143(1) and where regular assessment is made, to the date of such regular assessment. No interest is payable if the advance tax paid is 90% or more of the assessed tax. Explanation 1 to section 234B specifies that the words "assessed tax" to mean the tax on the total income determined under sub-section (1) of section 143 or on regular assessment as reduced by the amount of tax deducted or collected at source on any income which is subject to such deduction or collection. Accordingly, if an assessee is liable to pay say Rs. 1,00,000/- as advance tax for assessment year 2004–05 and it has not paid any tax for the said assessment year, he would be liable to pay interest u/s. 234B @ 1% on Rs. 1,00,000/- from the 1st April, 2004 till the determination of income u/s. 143(1) or till the date of regular assessment. Accordingly, if the determination of income u/s. 143(1) takes place on 15th December, 2004, interest would be payable @ 1% for 9 months on Rs. 1,00,000/-. Similarly, if in the above case, if the assessee has paid tax of Rs. 75,000/-, as the tax paid is less than 90% of the assessed tax; i.e., Rs. 1,00,000/-, he would be liable to interest on Rs. 25,000/- from the 1st April till the determination of his income or till the date of regular assessment. Interest would be payable @ 1% p.m. from the 1st April, 2004 till the date of determination of income u/s. 143(1) or till the date of regular assessment, if no tax is paid by the assessee thereafter. However, if before the date of determination of income or regular assessment, if the assessee has paid self assessment tax, interest would have to be paid as under as per sub-section (2) to section 234B :

1. on the shortfall @ 1% p.m. (1.25% up to 7-9-2003) from the 1st April till the date of payment of self assessment tax;

2. thereafter, interest is payable @ 1% p.m. (1.25% up to 7-9-2003) from the date of payment of self assessment tax till the date of determination of income u/s. 143(1) or till the date of regular assessment.

Sub-section (3) to section 234B provides for levy of additional interest in cases of reassessment or assessment u/s. 153A. However, in such a case, interest is payable only for the period subsequent to the date of determination of income u/s. 143(1) or on regular assessment till the date of reassessment or assessment u/s. 153A. Accordingly, no interest is payable on the additions made in the reassessment order for the period from 1st April till the date of determination of income u/s. 143(1) or on regular assessment. This is explained by way of the following example.

Mr. A had filed his return of income for Assessment Year 2000–01 on 30th June, 2000. As per the said return, Mr. A was liable to tax of Rs. 25,000/-. He had paid advance tax of Rs. 18,750/-. He paid self assessment tax of Rs. 6,250/- on 31st May, 2000. In this case, Mr. A would be liable to interest u/s. 234B from 1st April, 2000 to 31st May, 2000 on Rs. 6,250/- @ 1.5%; i.e., Rs. 188/-. As section 140A specifies that self assessment tax paid would first be adjusted against interest and thereafter towards tax, Mr. A would be liable to interest on Rs. 188/- till the determination of income u/s. 143(1) say 31st December, 2000. If in this case, an order of reassessment is made on 31st March, 2004 and the tax liability as per this order comes to Rs. 40,000/-, Mr. A would be liable to interest on the differential tax; i.e., on Rs. 15,000/- from 1st January, 2000 till the date of reassessment; i.e., 31st March, 2004. No interest would be payable on the amount of Rs. 15,000/- for the period 1st April, 2000 till 31st December, 2000.

Sub-section (4) to section 234B provides for increase or decrease of interest on account of rectification, appeals effects, revision orders u/s. 263 or 264, etc.

1. Whether a specific order is required for levying interest ?
   In the case of Uday Mistana Bhandar 222 ITR 44 (Patna)), the Hon’ble Patna High Court had taken a view that unless and until a specific order is passed by the Assessing Officer to levy interest, no interest could be charged through the notice of demand. This order was affirmed by the Hon’ble Supreme Court in CIT vs. Ranchi Club 247 ITR 209 (SC). In view of the above decision, a view was being taken that in absence of a speaking order for levying interest, no interest could be levied. The Hon’ble Supreme Court had in the case of CIT vs. Damani Brothers 259 ITR 475 and CIT vs. Hindustan Bulk Carriers 259 ITR 449 held that interest u/ss. 234A, 234B and 234C is mandatory and the Settlement Commission had no power to reduce or waive such interest. In view of these decisions of the Hon’ble Supreme Court which were rendered after the decision in case of Ranchi Club (supra) a view was expressed that no speaking order was required for levying interest, as it was mandatory. The Hon’ble Supreme Court has recently admitted a Special Leave Petition filed by the department [264 ITR 199 (St)] against the decision of the Hon’ble Delhi High Court wherein it was held that no substantial question of law was involved where the Tribunal deleted interest following the decision of the Hon’ble Supreme Court in Ranchi Club’s case 247 ITR 209.

2. Where there is a bona fide dispute regarding taxability of a particular income, whether interest u/s. 234B can be levied?
   Interest u/s. 234B is for shortfall in payment of advance tax or non-payment of advance tax. Where due to bona fide disputes regarding taxability of a particular income, advance tax may not be payable, it has been held that interest u/s. 234B cannot be levied. In this connection, the Hon’ble Uttaranchal High Court has in the case of CIT vs. Sedco Forex International Drilling Co. Ltd. 264 ITR 320 (Uttar) held as under:

   "… Secondly, although section 191 of the Act is not overridden by sections 192, 208 and 209(1)(a)(d) of the Act, the scheme of sections 208 and 209 of the Act indicates that in order to compute advance tax the assessee has to, inter alia, estimate his current income and calculate the tax on such income by applying the rates in force. That under section 209(1)(d) the income-tax calculated is to be reduced by the amount of tax which would be deductible at source or collectible at source, which in this case has not been done by the employer company according to the law prevailing for which the assessee cannot be faulted. As stated above at the relevant time there were conflicting decisions of the Tribunal. A bona fide dispute was pending. The assessee had to estimate his current income. The words used under section 209(1)(a) make the assessee estimate his current income and since a bona fide dispute was pending, imposition of interest under section 234B was not justified without hearing and without reasons. Accordingly, we answer this question in the affirmative, i.e., in favour of the assessee and against the Department."

   Similarly, the Delhi Tribunal has in the case of Haryana Warehousing Corpn. vs. DCIT 75 ITD 155 (Del) (TM) held that the condition precedent for invoking 234B is that assessee must be fastened with liability to pay advance tax u/s. 208 and merely because on the basis of a subsequent decision, assessee becomes liable to pay advance tax in an earlier year, no default u/s. 208 could be said to have committed which would attract interest. In Priyanka Overseas Ltd. vs. DCIT 79 ITD 353 the Delhi Tribunal held that the assessee was not liable to interest u/ss. 234B and 234C where the assessee did not pay tax on cash compensatory support (CCS) as per law as it then existed and which was amended with retrospective effect by Finance Act, 1990. In Dr. (Mrs) Devinder Kaur Sekhon vs. ACIT 67 ITD 407 (Del), the assessee received in financial year 1992–93 interest on enhanced compensation for acquisition of land which was spread over A.Ys. 1986–87 to 1992–93. As the assessee could not have forseen receipt of interest during earlier years, it was held that no interest could be levied for earlier years.

3. Whether interest can be levied where payer of income did not deduct tax?
   Advance tax is payable by an assessee after considering the tax deductible or collectible at source. Questions have arisen as to whether where the payer of income does not deduct tax, whether the assessee could be fastened with liability of interest where otherwise they were not liable to tax. The Delhi Tribunal has in the case of Sedco Forex International Drilling Inc. vs. DCIT 72 ITD 415 (affirmed in CIT vs. Sedco Forex International Drilling Co. Ltd. 264 ITR 320 (Uttaranchal) and Mitsui Engg. & Shipbuilding Co. Ltd. vs. ACIT 79 ITD 481 held that in such cases no interest could be levied.

4. Where cash seized by department is not adjusted against liability towards advance tax, whether interest could be levied?
   Prior to the deletion of section 132(5), the Tribunals have taken a view that if after the passing of order u/s. 132(5), there was some surplus and the department did not adjust it against the advance tax dues, no interest could be charged. In this connection, reliance is placed on the following decisions:

   1. Sushil Kumar Mittal vs. ACIT 120 Taxman 121 (Chd) (Mag)

   2. Vipul D. Doshi vs. ACIT 118 Taxman 30 (Mum) (Mag)

   3. Satpaul D. Agarwal (HUF) vs. ACIT 62 TTJ (Mum) 98

   4. Gian Chand Gupta vs. DCIT 80 ITD 548 (Del)

   5. ACIT vs. Rajesh Cotton Co. 79 TTJ (Mum) 202.
       

Interest u/s. 234C

Interest u/s. 234C is payable for deferment of tax. As per section 211, advance tax is payable by companies in four instalments and by non-corporate assessees in three instalments. In cases of corporate assessees, advance tax is payable as under:

Due date of instalment    Amount payable
On or before 15/6             Not less than 15%
On or before 15/9             Not less than 45%
On or before 15/12           Not less than 75%
On or before 15/3            The whole amount or 100%

If an assessee fails to pay the amount as above or if the amount paid falls short of the amount payable as under, he would be liable to interest @ 1.25% p.m. up to 7-9-2003 and @ 1% p.m. from 8-9-2003 for a period of 3 months with respect to the first three instalments and for one month for the fourth instalment. This is explained by way of an example. Say ABC Ltd. is required to pay advance tax of Rs. 1,50,000/- for Assessment Year 2003–04. This advance tax is payable as under :

On or before 15/6 not less than 15% of Rs. 1,50,000/-    = Rs. 22,500/-
On or before 15/9 not less than 45% of Rs. 1,50,000/-    = Rs. 67,500/-
On or before 15/12 not less than 75% of Rs. 1,50,000/-  = Rs. 1,12,500/-
On or before 15/3 not less than 100% of Rs. 1,50,000/-  = Rs. 1,50,000/-

M/s. ABC Ltd. has paid advance tax as under :

On or before 15/6                 = Rs. 10,000/-
Between 15/6/ and 15/9/       = Rs. 40,000/-
Between 15/9/ and 15/12       = Rs. 85,000/-
After 15/12/ but before 15/3   = Rs. 5,000/-

As the advance tax paid by M/s. ABC Ltd. before 15/6 is less than Rs. 22,500/-, it would be liable to interest on the difference of Rs. 12,500/- @ 1.25% for a period of 3 months; i.e., interest of Rs. 469/-. Similarly, as the advance tax paid by M/s. ABC Ltd. up to 15/9/ is less than 45% of total tax payable; i.e., it has paid only Rs. 50,000/- as against amount payable of Rs. 67,500/-, it would be liable to interest on Rs. 17,500/- (Rs. 67,500/- less Rs. 50,000/-) @ 1.25% for 3 months; i.e., interest of Rs. 656/-. As the total advance tax paid by M/s. ABC Ltd. before 15/12/ is more than 75% of total tax payable; i.e., tax paid of Rs. 1,35,000/- as against total tax payable of Rs. 1,12,500/- there is no shortfall in payment of the third instalment and hence no interest would be payable. However, there is once again a shortfall in payment of the last instalment. As against the cumulative amount of Rs. 1,50,000/- M/s. ABC Ltd. have only paid tax of Rs. 1,40,000/-. Accordingly, it would be liable to interest @ 1.25% for one month; i.e., Rs. 125/-.

It has been provided that if the advance tax paid by the company on or before 15th June is not less than 12% or the advance tax paid on or before 15th September is not less than 36%, it would not be liable to interest. Accordingly, if in our above example, the company had paid advance tax of Rs. 19,000/- before 15th June and a further sum of Rs. 35,000/- before 15th September, it would not have been liable to interest.

Similarly, in case of non-corporate assessees, advance tax is payable in three instalments; i.e., not less than 30% is payable on or before 15th September, not less than 60% is payable on or before the 15th December and the whole of advance tax is payable on or before the 15th March. If there is a shortfall in payment of advance tax as above, interest would be payable @ 1.25% up to 7-9-2003 and @ 1% w.e.f. 8-9-2003.

It has been provided that if the shortfall in payment of advance tax is due to failure to estimate capital gains or winnings from lotteries, crossword puzzles, races including horse racing, etc. and the assessee had paid to tax payable with respect to such income in the balance instalments due or where no such instalments are due by the 31st of March, no interest would be payable. Accordingly, if an assessee has sold a capital asset between 15th September and 15th December and pays the tax due on the capital gains in two instalments; i.e., on or before 15th December and on or before 15th March, no interest would be payable on account of the shortfall in payment of advance tax in the 1st instalment; i.e., on or before 15th September.

The decisions quoted in context of section 234B above would equally apply in the context of section 234C.

Whether a company which commences business after 31st December and makes substantial income in three instalments would be liable to interest for shortfall in payment of advance tax on or before 15th June, 15th September and 15th December?

This issue came up before the Hyderabad Tribunal in the case of ACIT vs. Jindal Irrigation Systems Ltd. 56 ITD 164 wherein the Hon’ble Tribunal held that the law cannot envisage a person to do something impossible. Where the company commenced business after 31st December, it could not have estimated income for payment of advance tax in the first three instalments. Hence, it was held that no interest u/s. 234C could be levied for non-payment of advance tax in the first three instalments.
 

Whether interest u/ss. 234B and 234C is payable with respect to income computed u/s. 115JB ?

As per the Act, advance tax is payable on the current income which is to be estimated by the assessee. As the income itself has to be estimated, the Courts have generally taken a view that even the liability as per section 115J or 115JA could be estimated and if tax was not paid on such income, the assessee would be liable to interest u/ss. 234B and 234C of the Income-tax Act. In this connection, reliance is placed on the following High Court decisions wherein it has been held that interest u/ss. 234B and 234C would be liable if the assessee does not estimate the income as per provisions of section 115J and fails to pay tax thereon:

1. Itarsi Oils & Flours (P) Ltd. 250 ITR 686 (MP)

2. Assam Bengal Carriers Ltd. 239 ITR 862 (Gau)

3. Holiday Travels (P) Ltd. 263 ITR 307 (Mad)

4. Karimtharth Tea Estates Ltd. vs. CIT 131 Taxman 149 (Ker)

5. CIT vs. Kotak Mahindra Finance Ltd. 130 Taxman 730 (Bom)

However, the Karnataka High Court has in the case of Kwality Biscuits Ltd. vs. CIT 243 ITR 519 (Kar) held that no interest can be charged where income is determined u/s. 115J.
 

Conclusion

The Government has placed an onerous responsibility on the citizens to estimate its income and pay advance taxes thereon. Further, for shortfall in payment of tax or for deferment in payment of tax, the citizen has been saddled with interest. At the same time, no accountability is being placed on the officers of the department who often pass arbitrary orders and also orders in disregard to decisions of higher authorities. In spite of heavy refunds payable by the Government during the last financial year, collection on the basis of arbitrary orders and on the basis of orders in total disregard to decisions of higher authorities was quite common. It is high time that accountability is introduced in the department and the officers are made answerable for substantial refunds arising on account of appeal effects being given with respect to order passed by them. There cannot be only one sided compliances. The other side; i.e., the department should also be made accountable and should be punished for the arbitrary and high pitched orders passed by them.