Who is assessee in default under the Income Tax Act and its consequences thereof

Any assessee if fails to pay off whole or part of the demand raised by the Income Tax Authorities under section 156 within 30 days of its receipt, is usually termed as assessee in default.

Consequences of being an Assessee in Default :-

1) Interest u/s 220: Simple interest @ 1% per month is payable on the amount remaining unpaid. The interest shall be charged for the period beginning from the day immediately following the 30 days as aforesaid and ending on the date on which payment is made. (here part of the month is considered as full month)

The interest under section 220 can be reduced or waived by the Chief CIT or CIT subject to certain conditions. This section also provides that if Chief CIT or CIT issues order to reduce the amount to be payable as tax due then the interest shall be reduced accordingly and the excess interest paid, if any, shall be refunded.

2) Penalty u/s 221: If the assessee is deemed as an Assessee in Default then in addition to interest under section 220, he shall be liable to pay a penalty which the Assessing Officer may levy. However such penalty shall not exceed the amount in arrears.

The penalty under section 221 shall not be levied if the assessee proves that the default was for good and sufficient reasons. This section also provides that where as a result of any final order the amount of tax, with respect to the default in the payment of which the penalty was levied, has been wholly or partly reduced, the penalty levied shall be cancelled or partly reduced and the amount of penalty paid shall be refunded.

Please note that the penalty and interest for being an assessee in default is in addition to the interest under sections 234A, 234B & 234C.

Lets understand this with help of a Illustration :

Example: Notice of demand u/s 156 for Rs. 1 Lac is issued by the Assessing Officer on 23rd March, 2013 and is received by the assessee on 25th March, 2013. The assessee pays the demand of Rs. 1 Lac on 29th July, 2013.

In the above case, the assessee should have paid the demand of Rs. 1 Lac by 24th April, 2013. The assessee is deemed as Assessee in Default from 25th April, 2012 and shall be liable to pay interest u/s 220 for four months:

25-04-2013 to 24-05-2013 1 month

25-05-2013 to 24-06-2013 1 month

25-06-2013 to 24-07-2013 1 month

25-07-2013 to 29-07-2013 1 month

Interest u/s 220 = Rs. 1,00,000 × 1% × 4 months

= Rs. 4,000

Assessing Officer can also levy penalty u/s 221 for being an assessee in default and the penalty can be levied upto Rs. 1 Lac.

To Conclude – Thus, it becomes very important for an assessee to do following, upon receipt of any demand order :

Step 1 – Determine if the tax demand is genuine or not

Step 2 -Pay-off taxes within the time allowed if demand is genuine OR communicate to the assessing officer for allowing sometime for paying off the same

Step 3- If the assessee is of the opinion that the demand is not genuine, then, the assessee should take alternative recourse of filing appeal with the higher authority and also intimate the assessing officer to not to treat him assessee in default till the time, the appeal is not disposed off

We suggest that any demand notice should not be taken up lightly and rightful action should be taken within the time. In the recent pat, the IT department has become very stringent and has been enforcing penalty