Understanding tax on interest payable under section 234 with latest case laws.

Discipline in Income tax return is very important. Failing which, taxpayer will be liable to file additional penalties on the amount due. However, there are plenty of issues that can result in failure of tax deposits. These issues can be related to individuals or companies. For taxpayer, it can occur due to failure to deposit advance tax or payment of tax which is less than the actual tax liability or can be due to delay in payment of self assessment tax.  In this respect let us understand  the interest payable under section 234 of the income tax act 1961 with latest case laws.     

 CONSEQUENCES OF SUBMISSION OF RETURN AFTER DUE DATE

If a return is submitted after the due date, the following consequences will be applicable:

1. The assessee will be liable for penal interest under section 234A.

2. A penalty of Rs 5,000 may be imposed under section 271F if belated return is submitted after the end of the assessment year.

3. If the return of loss is submitted after the due date, a few losses cannot be carried forward.

4. If the return is submitted belated, deductions allowable under certain sections will not be available.

INTEREST U/S. 234-A FOR LATE OR NON-FURNISHING OF INCOME TAX RETURN

For     defaults in furnishing Return of income

Simple interest @ 1% for every month or Part thereof from the due date of filing of the Return to the date of furnishing of the return & in case return is not filed, it is upto the date of completion of assessment u/s 144. The interest is calculated on the amount of the tax on the total assessed income as determined under sub-section (1) of section 143 or on regular assessment u/s 143(3) as reduced by the Advance Tax, if any, paid and any tax deducted or collected at source.

IS TAX TO BE PAID DURING THE FINANCIAL YEAR ON THE BASIS OF PAY AS YOU EARN?

Yes, Such payments have to be made in installments and are known as ‘Advance-Tax’ payments. However the liability for payment of advance tax arises only where the amount of such tax payable by the assessee during that year is Rs. 10,000 or more.

The due dates and the percentage of installments of Advance Tax for assessees other than Companies are as below :-

Due Date of installments	Amount payable
1st on or before 15th September.	Amount not less than 30% of such advance tax.
2nd on or before 15th December.	Amount not less than 60% of such advance tax after deducting amount paid in earlier installment.
3rd on or before 15th March.	Entire balance amount of such advance tax.

 In case of companies, there are 4 installments of advance tax payable on or before 15th June (15%); 15th Sept. (45%); 15th Dec. (75%); & balance amount of Advance Tax payable by 15th March. Also, any amount paid by way of Advance Tax on or before the 31st March of that year, is treated as Advance Tax Paid during that Financial Year. The percentages of 45% and 75% specified with reference to dates of 15th Sept. and 15th Dec. include the amount of advance tax paid earlier during the year.

IF THE TAX PAYER FAILS TO PAY 90% TAX PLUS APPLICABLE INTEREST THEN HOW IS INTEREST FOR SHORT PAYMENT OF SUCH ADVANCE-TAX CALCULATED?

INTEREST U/S. 234-B FOR SHORT PAYMENT OF ADVANCE TAX
Shortfall in payment of Advance tax of more than 10%.	Simple interest @ 1% for month or part thereof is chargeable w.e.f. 1st April of the Assessment Year to the date of determination of income u/s.        143(1)   or regular assessment u/s        143(3)   on the  assessed tax.
	‘‘Assessed tax’’ means the tax on the total income determined under sub section (1) of section No. 143 or on regular assessment u/s 143(3), as reduced by the amount of tax deducted or collected at source.

 HOW IS INTEREST FOR DEFERMENT OF ADVANCE-TAX CALCULATED?

(A) INTEREST U/S. 234-C FOR DEFERMENT OF ADVANCE TAX (Non Corporate assessees)
1. If no advance tax is paid or the advance tax paid in 1st installment on or before 15th September is less than 30% of the tax payable on the returned income as reduced by taxes deducted at source.	Simple interest @ 1% p.m. is chargeable on the amount of shortfall for a period of 3 months.
2.  If no advance tax is paid or if the advance tax paid in 2nd installment on or before 15th December is less than 60% inclusive of 1st installment of the tax payable on the returned income as reduced by taxes deducted at source.	Simple interest @ 1% p.m. is chargeable on the amount of shortfall for a period of 3 months.
3. If the advance tax paid on the current income on or before the 15th day of March is less than the tax due on the returned income.	Simple interest @ 1% is chargeable on the  amount of shortfall from the tax due on the returned income.
B. INTEREST U/S 234C FOR THE CORPORATE ASSESSEES
1. If advance tax paid on or before June 15th is less than 12%.	Simple interest @ 1% p.m. is chargeable on the amount of shortfall for a period of three months.
2. If advance tax paid on or before Sept. 15th is less than 36%.	Simple interest @ 1% p.m. is chargeable on the amount of shortfall for a period of three months.
3. If advance tax paid on or before Dec., 15th is less than 75%.	Simple interest @ 1% p.m. is chargeable on the amount of shortfall for a period of three months.
If advance tax paid on or before March 15th is less than tax due on returned income (100%).	Simple interest @ 1% is chargeable on the amount of shortfall from the tax due on the returned income.

However, no interest is leviable if the short fall in payment of advance-tax is on account of under estimation or failure to estimate the amount of capital gains or any income from winnings from lotteries, crossword puzzles, races, and other games including an entertainment program on television or electronic mode, in which people compete to win prizes etc., and the assessee has paid the tax on such income as part of the remaining instalments of advance tax which are due or if no instalment is due, by 31st March, of the Financial Year.  

Given below few important court rulings in respect of section 234.

 

·         Retrospective Amendment : The disallowance was in this case due to retrospective amendment and hence tax liability increased. There cannot be any disallowance in this respect.  Refer, West Coast Paper Mills Ltd. v. Addl. CIT, VOL 33 PG 560.  

 

Similar decision provided in the case of Dy. DIT .v. MGB Metro Group Buying HK Ltd., 146 ITD 343 where it had been held that where assessee was not liable to  deposit advance tax, no interest u/s. 234B could be charged.  The same also confirmed in the case of DCIT v. Indo Rama Textiles Ltd., 53 SOT 515.

 

Tribunal held that the assessee is entitled to credit of cash recovered during search as advance tax and  held that amended explanation w.e.f. 1/6/2013 is prospective and not retrospective. Tribunal followed  decision in the case of Shreeji Prints (P) Ltd. (ITA No. 359/Ahd./2012 order dt. 20-4-12). Refer, Kanishka Prints (P) Ltd. ACIT, 159 TTJ 699.

 

·         Book Profit : Interest can be charged on tax calculated on book profits. Refer, Hotel and Allied P. Ltd. .v. Dy. CIT, 361 ITR 184.  Same was also decided in the case of Lyka Labs Ltd. v. Asst. CIT, VOL 36 PG 364.  

 

In the case of CIT .v. Cadila Pharmaceuticals Ltd, 221 Taxman 155, held that The High Court following the decision of the Rajasthan High Court in the case of CIT v. M.A. Presstressed Works (1996) 220 ITR 226 held that interest u/s. 234B had to be calculated after allowing credit of MAT. 

 

·         Tax deducted at source : Interest cannot be levied if entire income liable to deduction of tax at source and hence matter remanded. Refer, Pirelli Cavi E Sistemi Telecom S. P. A. (India Project Office) v. Asst. CIT, VOL 34 PG 41.  

 

Similar decision provided in the case of The Tribunal following the decision of Hon’ble High Court in the case of DIT .v. NGC Network Asia  LLC (2009) 313 ITR 187 (Bom.) held that the levy of interest is mandatory but in the instant case, the  income of the assessee is liable for deduction of tax at source under section 195, it is consequential. Refer, Addl. DIT .v. Valentine Maritime (Gulf) LLC, 159 TTJ 706.   The same further confirmed in the case of Addl. DIT .v. Lucent Technologies GRL LLC, 159 TTJ 589 and ITO (International Taxation) v. Linklaters and Paines, VOL 36 PG 558. 

 

In the case of Since the entire amount received by the assessee were taxable under the head 'Income from salaries', the   assessee shall be entitled to take into account the amount of tax deductible though not actually deducted.  Accordingly, we direct the Assessing Officer to delete the interest levied under section 234B of the Act. Refer, CIT .v.Anil Kumar Nehru, 364 ITR 26.

 

However, in the case of DIT(IT) v. Alcatel Lucant USA, INC, 264 CTR 240, heldf that non resident cannot escape the liability for interest on the  ground that it was for the Indian payers to have deducted the tax and if they had not done so  the assesse cannot be Liable to pay interest-Held liable to pay interest.   

 

 

·         Settlement commission: Interest under sections 234B and 234C not chargeable beyond stage of section 245D(1). Refer, C. M. Smith and Sons v. Asst. CIT, 367 ITR 701.

 

·         Special case: Even though the assessee was a notified person under the Special Court (Trial of Offences Relating to Transactions in Securities) Act, 1992, it was liable to pay interest u/s. 234A, 234B, 234C. Merely because the assets and properties were attached did not mean that liability to pay interest would not arise. Refer, CIT .v. Cascade Holdings P. Ltd, 365 ITR 84.

 

·         Non Resident: Assessee being tax resident of Denmark was not liable to Indian taxes, no interest could be levied on it u/s. 234. Refer, A.P. Moller Maersk .v. Dy. DIT149 ITD 434.  

 

·         Mandatory: Charging of interest under sections 234A, 234B and 234C mandatory and no discretion with Assessing Officer in that matter. Refer, Nandini Delux v. Asst. CIT, VOL 37 PG 52.  

 

·         Search: The contentions of the assessee that the additional income voluntarily disclosed in the course of search  proceedings and such additional income was not related to any incriminating document or material found  during search action under section 132 of the Act and that since the additional income was offered in the  course of search action, the assessee was not aware of the income at the time of payment of advance tax  and therefore interest under section 234B and 234C of the Act is not acceptable. ( ITA No. 446 to  448/Bang/2013, dt. 5.12.2014.). Refer, NandiniDelux .v. CIT, Bang ITAT.

 

·         Other: The question before the Court was whether the department is entitled to charge interest under section 234B of the income-tax Act,1961 ,on the bringing forward the tax credit balance in to the year of account relevant year . Following the case in CIT v. Tulsyan NEC Ltd (2011) 330 ITR 226 (SC) , the civil appeals of the department were dismissed. Refer, CIT v. Sage Metals Ltd , 210 Taxman 582.  

 

Interest under section 234B cannot be charged in notice of demand issued under section 156 in absence of any specific order demanding interest in assessment, reassessment or rectification order. Refer, CIT v.Ruchira Papers Ltd., 212 Taxman 9 (HP)(High Court).

 

·         MAT credit: The Tribunal held that while calculating, interest under sections 234B and 234C no credit of MAT including Surcharge and education cess could be given. Refer, Richa Global Exports (P.) Ltd. v. ACIT, 54 SOT 185 ( Delhi) (Trib.).

 

·         Waiver: That interest under sections 234A and 234B could be waived by the Chief Commissioner, only if the conditions specified in Notification F. No. 400/29/2002-IT (B), dated June 26, 2006, are satisfied. The first condition requires seizure of documents in search and seizure operations and the second condition was applicable only where interest is charged under section 234C. The third condition was applicable only in cases where the statute has been amended retrospectively and the fourth condition was applicable only where the return is filed voluntarily. None of these grounds were applicable and in spite of this, one-third of the interest had been waived up to the assessment year 1992-93. Since the conditions specified in the notification were not available, the assessee could not seek waiver of interest levied under sections 234A and 234B. Therefore, the order rejecting waiver of interest had to be sustained. Refer, K. C. Mohanan v. Chief CIT, 350 ITR 461 (Ker)(High Court).