Interest on unpaid dividend tax – Section 115P

According to section 115-O every domestic company is required to pay Dividend tax at the prescribed percentage (at present 12.5% + surcharge) of the dividend within 14 days from the date of declaration or distribution or payment of dividend whichever is earlier.

Section 115P provides for the levy of interest on unpaid tax on the distributed profits. As per this provision the principal officer of a domestic company or the company fails to pay the whole or any part of the tax on distributed profits within the time specified u/s. 115-O (3) then he or it shall be liable to pay interest u/s. 115P in addition to dividend tax.

The interest u/s. 115P is a simple interest @ 1.25% per month or part thereof, of the tax (as reduced by the amount if any paid within the time) for the period commencing from the next date after the last date of payment and ending on the date of actual payment of tax.

The interest u/s. 115P shall be payable on the receipt of notice of demand specifying the sum so payable. The consequence of non-payment of the interest payable shall result in recovery of the same as per the provisions of Sec. 229 of the I.T Act.
 

Allowability of interest u/s. 115-P in computing income

A perusal of the provision would reveal that there is no specific prohibition for not allowing the interest paid u/s 115P. The only prohibition is sub-section 5 of section 115-O and the same reads as under:

"(5) No deduction under any other provision of this Act shall be allowed to the company or shareholder in respect of the amount which has been charged to tax under sub-section (1) or the tax there on."

In view of sub-section (5) of section 115-O, no deduction can be allowed both in respect of the amount which has been charged to tax u/s 115-O (1) as well as the tax thereon. But there is no such specific prohibition in respect of interest u/s 115 P. However one may have to keep in mind the decision of the Supreme Court in the case of Bharat Commerce and Industries Ltd. vs. C.I.T. 230 ITR 733 (SC) wherein it has been held that under the Income-tax Act the payment of interest u/ss 139 and 215 are inextricably connected with the assessee’s tax liability and if the income tax itself is not a permissible deduction u/s 37 any interest payable for default committed by the assessee calculated with reference to the tax on income cannot be allowed as a deduction. Similarly, in the case of Federal Bank Ltd. vs CIT 180 ITR 37 (Ker) it has been held that if income tax paid is not a permissible deduction in view of section 40(a)(ii) of the I.T. Act, then interest payable for non-payment of such tax would assume the same character and therefore no deduction would be available. In this connection one may have also to note that the interest here in is an interest on distributed profit and not income tax as also the case of CIT vs. K.E.C International Ltd. 256 ITR 354 (Bom) wherein it has been held that business tax paid in Thailand is not covered by Section 40 (a) (ii).

Thus there appears to be no specific prohibition in respect of interest payable u/s. 115 P.
 

Interest on unpaid tax on income distributed by certain specified mutual funds – Section 115S

According to section 115R, any person responsible for making payment of income distributed by the specific company or a Mutual Fund fails to pay the whole or any part of the tax payable within the specified time then he or it shall be liable to interest in addition to the tax on the distributed income.

Section 115S provides for the levy of interest on unpaid tax on income distributed by the specified company as well as by a mutual fund to the respective unit holder.

According to section 115R specified company as also a Mutual Fund have to pay tax at the prescribed percentage (at present 12.5% + surcharge) of the income distributed to the unit holders within 14 days from the date of distribution or payment of such income whichever is earlier.

The interest chargeable under this section is a simple interest @ 1.25% per month or part thereof of the tax (as reduced by the amount paid within time) for the period commencing from the next date after the last date of payment and ending on the date of actual payment of such tax.

The interest u/s. 115S shall be payable on the receipt of notice of demand specifying the sum so payable. The consequence of non payment of the interest payable shall result in recovery of the same as per the provisions of sec. 229 of the I.T Act.
 

Allowability of interest u/s.115S in computing income

A perusal of the provision would reveal that there is no specific provision for not allowing the interest paid u/s 115R. The only prohibition is sub-section (4) of section 115R and the same reads as under:

" (4) No deduction under any other provision of this Act shall be allowed to the Unit Trust of India or to mutual fund in respect of the income which has been charged to tax under sub-section (1) and sub-section (2)."

In view of the above no deduction can be allowed in respect of the amount that has been charged to tax u/s. 115R. However, there is no specific prohibition to allow deduction of the tax charged or the interest thereon. This is apparently due to the fact that income of Mutual Fund is exempt u/s 10(23D) of the I.T Act. Thus, when the whole income is exempt, there can be no question of allowing any expenditure. Hence the interest payable u/s. 115S will not be available as a deduction.
 

Interest on unpaid amount of tax specified in notice u/s 156

According to section 220(1) any amount of tax specified as payable in a notice of demand issued u/s. 156 shall be paid within 30 days of the service of the notice.

Section 220(2) provides for the levy of interest on unpaid amount of tax demanded in terms of notice u/s. 156 of the I. T. Act, 1961.

As per this section if any assessee fails to pay any tax penalty etc. within 30 days from the receipt of demand notice shall be liable to pay simple interest @1.25% on the outstanding amount for every month or part thereof. The interest is payable from the day immediately following the expiry of the 30 days of specified period mentioned above and ending with day on which the amount is paid.

It has also been provided that if the amount on which interest payable has been reduced on account of order passed u/s 154 or 155 or 250 or 254 or 260A or 264 or 245D(4) the interest u/s. 220(2) shall be reduced accordingly.

The interest u/s. 220(2) shall be payable on the receipt of notice of demand specifying the sum so payable. The consequence of non-payment of the interest payable shall result in recovery of the same as per the provisions of sec. 229 of the I.T Act.

In addition to the above, the following points may also have to be noted.

1. Section 220(2A) provides for waiver/ reduction of interest u/s 220(2).

2. The demand notice must be valid and there must be a proper service of the same as interest is chargeable only on failure to pay tax as per Notice of demand issued u/s 156. In the case Murlidhar Jalan vs. I.T.O. 41 ITR 80 (Assam) it has been held that an assessee cannot be regarded as defaulter if the notice of demand is not in proper form.

3. Interest u/s 220(2) is payable on delayed payment irrespective of whether the time for payment has been extended or not.

4. Interest u/s 220(2) is not chargeable in respect of delayed payment of Advance tax.

5. Where an assessment order is cancelled u/s 146 or cancelled / set aside by an appellate authority and the cancellation / setting aside becomes final, then no interest can be charged pursuant to original demand notice interest can be charged only after the expiry of 30 days from the date of service of demand notice pursuant to such fresh assessment order. This is as per Circular No. 334 dated 3-4-1982 (135 ITR (ST) 10).
   However where the original assessment order is varied or set aside by one appellate authority and on further appeal the original order is restored fully or partly the interest payable u/s. 220 (2) has to be computed w.r.t. the tax finally determined and the due date shall be taken as from the original demand notice although there was no tax liability during the intervening period. This is as per Circular No. 334 dated 3-4-1982. However in the case of Vikrant Tyres Ltd. vs. First I.T.O. (2001) 247 ITR 821(SC), it has been held that if the assessee deposits the demand though in appeal, the appellate authority decides the appeal in favour of the assessee and thereafter, the tax collected is refunded then, no interest u/s 220(2) is chargeable. It is because interest is chargeable only where the demand mentioned notice is not satisfied and section 3 of Taxation Laws (Continuation and Validation of Recovery Proceedings) Act, 1964 only revives notice of demand which had never been satisfied. In other words where the tax demand is satisfied the original demand notice does not get revived. Thus this judgment is against the Circular No. 334 to the extent it provides for charging of interest in case where the original order is restored back on appeal either partly or wholly.

6. Appellate Tribunal has the power to grant stay of recovery of interest demanded u/s. 220(2) Bhoja Reddy vs. CIT 231 ITR 47 (A.P.).

7. Section 220(2) is inoperative in case of a company which is in liquidation by the orders of the winding up court – CIT vs. Golcha Properties Pvt. Ltd. 167 ITR 737 (Raj).

8. Section 220(2) cannot apply to company in liquidation, as the company would be governed by the provision of Companies Act. ITO vs. Official Liquidator 158 ITR 791 (Ker).
    

This is an interest levied for delayed payment of income tax and the same is a part and parcel of income tax liability and therefore cannot be allowed as deduction while computing income as income tax itself is not allowable in view of section 40(a)(ii) of the I. T. Act, 1961. Please see the following case laws.

1. CIT vs. Ashoka Mills Ltd. 218 ITR 526 (Guj).

2. Federal Bank Ltd. vs. CIT 180 ITR 37 (Ker).

3. Bharat Commerce & Industries Ltd. vs. CIT 230 ITR 733(SC).

From the above cases, it would be very clear that interest payable for non-payment of tax can not be allowed as deduction.