VIP Road Chartered Accountants Association

Introduction and Overview

1. Sanctions for non-payment of taxes

Every fiscal statute will have to provide for sanctions, for not paying fiscal levies, in time prescribed for such payment. For an effective levy of tax such sanctions are necessary. Such sanctions, for non-payment of proper taxes within the time prescribed are normally of three kinds. One a compensatory sanction, which is normally by levy of interest for non-payment or for delayed payment of taxes. By non payment of taxes within the prescribed time limit, one is depriving the State of its legitimate dues, and for such delay, for the period of delay one is called upon to pay interest on the amount due and payable. It is treated as a loan advanced by the State to the person from whom taxes are payable and on such loans which are payable, from the due date till the payment is made, an interest is charged for the delayed payment for the duration of the delay. It is compensatory in nature. The State must be compensated for being deprived of its legitimate dues. As against that, to have a deterrent effect for non-payment of taxes within the prescribed time, by way of punishment, penalty may be levied for non-payment of taxes in time. Its purpose is to deter the assessees from non payment of taxes in time. Unlike levy of interest, levy of penalty is not compensatory in nature. It is with a view to have deterrent effect on the tax defaulters. In addition to penalties, in major cases, of non- compliance with tax obligation, defaulter is prosecuted for tax offences. The object of prosecution for certain offences is, to give exemplary punishment, to deter others from committing similar offences.

2. Nature of interest

Interest in its nature is compensatory. It is a compensation for using the Government dues by not paying them in time. It is treated as a loan given by the State at interest. As it is compensatory in nature, it is normally obligatory and automatic. The default for levying interest need not be deliberate or accompanied by mens rea. As such, once the conditions of levy are fulfilled, it is obligatory on the Officer to levy interest and no discretion is vested in him not to levy. As interest provisions are mandatory by nature, they being mandatory, the question of giving notice or an opportunity of being heard will not arise. Being compensatory and obligatory in nature the question of reasonable cause for not paying the taxes in time, or bonafides of the defaulter are not relevant. Interest provisions not being penal in nature, various principles like mens rea doctrine of double jeopardy, hearing etc. will not be applicable.

3. Taxes and interest

Under the provisions of the Income-tax Act, 1961, taxes are payable at various stages. One has to pay advance tax, one has to, on filing the return of income pay self-assessment tax. On assessment being made by the Officer, whether by summary assessment or on regular assessment, one has to pay taxes as per notice of demand issued. In addition to payment of one’s own taxes, in certain circumstances one has to deduct taxes on behalf of others, by way of deduction of taxes at source. There are also provisions to collect taxes at source. As such, at all stages of payment of taxes, obligation to pay interest for non-compliance of payment of taxes within the time prescribed are provided. As such, liability to pay interest, under the provisions of the Act arises under the following circumstances:

i. Interest u/s 139(8) for not filing the return of income within the prescribed time from due date till the filing of the return. (Up to Asst. Year 1988-89).

ii. For the same default of not filing the return, interest is levied u/s 234A. (From A.Y. 1989-90 onwards provisions of s. 139(8) are replaced by provisions u/s 234A).

Defaults attracting charge of interest under section 234A –

The defaults, which attract charge of interest under section 234A, are as under:

i) Furnishing of a return of income for any assessment year –

– under section 139(1) or

– under section 139(4) or

– in response to a notice under section 142(1)

after the due date [which means the date specified in section 139(1) as applicable in the case of the assessee concerned. [S. 234A(1)].

ii) Non-furnishing of a return of income for any assessment year –

– under section 139(1) or

– in response to a notice under section 142(1) [S.234A(1).

iii) Furnishing of a return of income for any assessment year which is required to be furnished by a notice under section 148 issued after –

– the determination of income under section 143(1)

or

– the completion of an assessment under –

– section 143(3) or

– section 144 or

– section 147

after the expiry of the time allowed under such notice [S. 234A(3)].

iv) Non furnishing of a return of income for any assessment year which is required to be furnished by a notice under section 148 issued after –

– the determination of income under section 143(1) or

– the completion of an assessment order under –

– section 143(3) or

– section 144 or

– section 147 [ S. 234A(3)

These defaults, hereinafter, referred to as defaults (i), (ii) (iii) and (iv) above.

From the above, it is clear that s. 234A(1) makes the default of an assessee in filing, or filing on the due date, his return of income under section 139(1), section 139(4) or in response to a notice under section 142(1), the foundation for the levy of interest [Union Home Products Ltd. vs. Union of India, (1995) 215 ITR 758, 765 (Karn).

4. Interest payable u/s 234b

For default in non-payment, late payment or short payment Advance Tax interest is payable under the provisions of S. 234B under the following circumstances:

a) Failure to pay advance tax during a financial year which an assessee is liable to pay under s. 208.

b) Failure in payment of advance tax under s. 210 by an assessee which is less than 90% of assessee’s tax.

In respect of short payment of advance tax installments

Amounts on which interest payable u/s 234B are:

4.1 Period for which interest is to be charged

The period for which interest is to be charged under section 234B(1) is, ordinarily, to commence from the 1st day of April next following the relevant financial year and to end -–

– on the date of determination of total income under section 143(1) and

– where a regular assessment is made, on the date of such regular assessment.

For this purpose, an assessment made for the first time under section 147 is to be regarded as a ‘regular assessment’ (Explanation 2).

4.2 Amounts on which interest is to be charged

The amounts on which interest is to be charged under section 234B(1) are as under:

i) For default of failure to pay advance tax, such interest is to be charged on an amount equal to the ‘assessed tax.’

The expression ‘assessed tax’, for this purpose means, –

– for the purposes of computing the interest payable under section 140A, the tax on the total income as declared in the return referred to in that section 140A;

– in any other case, the tax on the total income determined under section 143(1) or on regular assessment

as reduced by the amount of tax deducted or collected at source in accordance with the provisions of Chapter XVII on any income -–

– which is subject to such deduction or collection and

– which is taken into account in computing such total income [Explanation 1]

ii) for default of short-payment, such interest is to be charged on the difference between –

– the ‘assessed tax’ [as defined] and

– the amount of advance tax paid by the assessee.

For the above purposes, the ‘additional income-tax’ if any payable under section 143 is not to be taken into account [Explanation 3].

4.3 Proportionate increase or decrease to be made

Section 234B(4) makes provisions for proportionate interest or reduction of the amount of interest payable under section 234B(1) or 234B(3), if the amount of tax on which such interest was payable has been increased or reduced as a result of any of the orders mentioned in section 234B(4).

The orders mentioned in section 234B(4) are –

– an order of rectification under section 154 or

– an order of rectification under section 155 or

– an appellate order passed by the first appellate authority under section 250 or

– an appellate order, etc., passed by the Appellate Tribunal under section 254 or

– an order in reference proceedings under section 260 or

– an appellate order under section 262 passed by the Supreme Court against a reference decision or

– a revisionary order under section 263 or 264 or

– a settlement order under section 245D(4)

5. Interest u/s. 234C

Interest is payable under s. 234C, in respect of short payment, in respect of instalment payment of Advance tax.

6. After assessment order

Interest is payable for non-payment of demanded amount under a notice of demand issued on assessment under the provisions of s. 156 of the Act (S. 220(2).

7. Interest for non-payment of taxes deducted/collected at source.

8. Interest payable for default u/s 115-O

Interest payable by company/mutual funds for not paying taxes as per provisions of S. 115-O.

9. Interest payable by the Government

If taxes are not paid in time assessee has to pay interest. As against that, if taxes are paid or collected in excess, the assessee is entitled to claim interest, for the period such excess payment or collection of taxes remains with the Government. This excess collection is treated as a loan from the assessee, on which the Government is obliged to pay interest. However, it must be noted if and only if such interest is provided under the provisions of the statute the assessee is entitled to interest.

Under the provisions of s. 244A interest is payable in respect of refunds available to the assessee under the provisions of the Act.

9.1 Section 237 generally provides for refunds of taxes paid in excess of one’s liability . Section 239 provides for procedure to be following for claiming refund. Section 240 provides for refund, becoming due on appeal, revision etc. Under S. 241, under certain circumstances, power is given to withhold refunds. Section 243/244 (up to Asst. Year 1988/89). Section 244A provide for interest on payment of refunds. Section 245 provides for circumstances under which refund could be adjusted against the taxes payable.

9.2 S. 244A provides for interest as under

i) Sub-section (1) provides that where in pursuance of any order passed under this Act, refund of any amount becomes due to the assessee then –

a) if the refund is out of any advance tax paid or tax deducted at source during the financial year immediately preceding the assessment year, interest shall be payable for the period starting from 1st April of the assessment year and ending on the date of grant of the refund. No interest shall, however, be payable if the amount of refund is less than 10% of the tax determined on regular assessment;

b) if the refund is out of any tax, other than advance tax or tax deducted at source, or penalty, interest shall be payable for the period starting from the date of payment of such tax or penalty and ending on the date of the grant of the refund.

The interest is to be calculated @ 1.5% "per month or part of a month" comprised in the period of delay for which the interest is payable. The meaning of this expression is that even where the delay is for part of a month, interest @ 1.5% will be charged.

ii) Sub-section (2) provides that for the purposes of computing the period of delay under sub-section (1), any period of delay attributable to the assessee shall be excluded.

iii) Sub-section (3) provides for automatic revision of the amount of interest or refund where the amount of refund is varied as a result of an order of reassessment, rectification, appeal, revision or settlement mentioned in the sub-section.

iv) Sub-section (4) provides that the provisions of this section shall apply to the assessment year 1989-90 and subsequent assessment years.

10. Procedure to calculate interest payable (Rule 119A)

Rule 119A of the Income-tax Rules, 1962 provides procedure to calculate interest payable as under:

"In calculating the interest payable by the assessee or the interest payable by the Central Government to the assessee under any provisions of the Act –

a) where interest is to be calculated on annual basis, the period for which such interest to be calculated shall be rounded off to a whole month or months and for this purpose any fraction of a month shall be ignored; and the period so rounded off shall be deemed to be the period in respect of which the interest is to be calculated;

b) Where the interest is to be calculated for every month or part of a monthly comprised in a period, any fraction of a month shall be deemed to be a full month and the interest shall be so calculated;

c) the amount of tax, penalty or other sum in respect of which such interest is to be calculated shall be rounded off to the nearest multiple of one hundred rupees and for this purpose any fraction of one hundred rupees shall be ignored and the amount so rounded off shall be deemed to be the amount in respect of which the interest is to be calculated.

11. Remedies

Appeal, revision and waiver:

Appeal as such does not lie against charge of interest. However, if one denies liability to pay interest under the respective provisions one can challenge levy by filing an appeal against such levy. It has also been laid down by the Courts that if an appeal is filed on any other ground, charge of interest could be challenged in such appeal.

Against levy of interest revision application under s. 264, to Commissioner of Income-tax could be filed.

Before Assessment Year 1989-90 from which year, provisions of s. 139(8) replaced by s. 234A and provisions of Sections 214 to 217, by s. 234B and s. 234C, the Assessing Authorities were empowered to waive interest payable, under Rule 117A and s. 40. Interest could have been waived by the Commissioner under the provisions of s. 273A. However, these waiver provisions are not operative from Assessment Year 1989-90.

Now, under the provisions of s. 220(2A) of the Income-tax Act, 1961, the Chief Commissioner and Commissioner have been empowered to waive or reduce the interest payable u/s 220(2A). s. 220(2A) of the Act provides as under:

"Notwithstanding anything contained in sub-section (2), the Chief Commissioner or Commissioner may reduce or waive the amount of interest paid or payable by an assessee under the said sub-section if he is satisfied that –

i) payment of such amount has caused or would cause genuine hardship to the assessee;

ii) default in the payment of the amount on which interest has been paid or was payable under the said sub-section was due to circumstances beyond the control of the assessee; and

iii) the assessee has co-operated in any inquiry relating to the assessment or any proceeding for the recovery of any amount due from him.

It may be noted that though the exercise of power under s. 220(2A) is discretionary, still it vests on a quasi-judicial discretion and therefore, must be exercised judicially and reasonably and there should be speaking order to dispose of such application by the CBDT’s power to relax the provisions of sections 234A, 234B and 234C.

In exercise of its powers specified in s. 119(2)(a) of the Income-tax Act, 1961, the Central Board of Direct Taxes has decided to authorise the Chief Commissioners and Directors-General (Investigation) to reduce or waive penal interest charged under the aforesaid sections in the following circumstances, namely –

i) Where, in the course of search and seizure operations, books of account have been taken over by the Department and were not available to the tax-payer to prepare his return of income;

ii) Where, in the course of search and seizure operations, cash had been 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.

iii) Any income other than "Capital gains" which was received or accrued after the date of the first or subsequent instalment 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;

iv) Where, as a 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 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;

v) 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 or advance tax was not paid at the relevant time.

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