Tuesday, May 30, 2017

Interest for default in Payment of Advance Tax [Section 234B]

Interest for default in Payment of Advance Tax [Section 234B]

Section 234B provides for levy of interest for default in payment of advance tax.

Basic provisions
Interest under section 234B is levied in following two cases:

a)         When the taxpayer has failed to pay advance tax though he is liable to pay advance tax; or

b)         Where the advance tax paid by the taxpayer is less than 90% of the assessed tax (meaning of assessed tax is discussed later).

As per Section 208 of the Act, advance tax shall be payable by the taxpayer during the financial year if estimated tax liability of assessee during that year is ten thousand rupees or more.

Illustration
Mr. Khushal is running a provision shop. Tax liability of Mr. Khushal for the year is Rs.
38,400. He has not paid any advance tax till 31st March. Entire tax was paid by him at
the time of filing the return of income. Will he be liable to pay interest under section
234B?
**
Interest under section 234B is levied in following two cases:

a)         When the taxpayer has failed to pay advance tax; or

b)         Where the advance tax paid by the taxpayer is less than 90% of the assessed tax. As per section 208 every person whose estimated tax liability for the year is Rs. 10,000 or more, shall pay his tax in advance in the form of “advance tax”.

The tax liability of Mr. Khushal is Rs. 38,400 (i.e., not less than Rs. 10,000), thus, he is liable to pay advance tax. However, he has not paid any advance tax and, hence, he will be liable to pay interest under section 234B (provisions relating to period of interest, rate of interest and amount on which interest is levied are discussed in later part).

Illustration
Mr. Mangal is running a provision shop. Tax liability of Mr. Mangal for the year is Rs. 48,400. He has paid advance tax of Rs. 46,000 till 31st March. Balance tax of Rs. 2,400 is paid by him at the time of filing the return of income. Will he be liable to pay interest under section 234B?
**
Interest under section 234B is levied in following cases:

(a)        When the taxpayer has failed to pay advance tax; or

(b)       Where the advance tax paid by the taxpayer is less than 90% of the assessed tax. In this case, Mr. Mangal has paid 95% of the advance tax (*) i.e. more than 90% and thus, no interest will be levied under section 234B.

(*) The tax liability of Mr. Mangal is Rs. 48,400 and he has paid advance tax of Rs.46,000. The quantum of advance tax paid by him will come to 95% (i.e., Rs. 46,000/Rs.48,400) of the total tax liability.

Illustration
Mr. Raja is engaged in furniture business. Tax liability of Mr. Raja for the year is Rs.58,400. He has paid advance tax of Rs. 35,000 till 31st March. Balance tax of Rs. 23,400 is paid by him at the time of filing the return of income. Will he be liable to pay interest under section 234B?
**
Interest under section 234B is levied in following cases:

(a)        When the taxpayer has failed to pay advance tax; or

(b)       Where the advance tax paid by the taxpayer is less than 90% of the assessed tax. In this case, Mr. Raja has paid advance tax of Rs. 35,000. The quantum of advance tax paid by him is 60% of the total tax liability (*) i.e. less than 90% and hence, he will be liable to pay interest under section 234B.

(*) The tax liability of Mr. Raja is Rs. 58,400 and he has paid advance tax of Rs. 35,000.
The quantum of advance tax paid by him will come to 60% (i.e., Rs. 35,000/Rs. 58,400) of the total tax liability.

Rate of interest
Under section 234B, interest for default in payment of advance tax is levied at 1% per
month or part of a month. The nature of interest is simple interest. In other words, the taxpayer is liable to pay simple interest at 1% per month or part of a month for default in payment of advance tax.

Amount liable for interest
Interest under section 234B is levied on the amount of unpaid advance tax. If there is a shortfall in payment of advance tax, then interest is levied on the amount by which advance tax is short paid. The amount of unpaid/short paid advance tax is computed as follows :

Particulars
Amount
Assessed tax (*)
XXXXX                
Less : Advance tax paid (if any)
(XXXXX)
Amount of unpaid/short paid advance tax
XXXXX

(*) Assessed tax means the amount of tax as determined under section 143(1) and where regular assessment is made, the tax on total income as determined under such regular assessment as reduced by tax deducted/collected at source, relief/deduction of tax claimed under various sections like sections 90/90A/91 and tax credit claimed under section 115JAA/115JD.

Period of levy of interest
Interest under section 234B is levied from the first day of the assessment year, i.e., from 1st April till the date of determination of income under section 143(1) or when a regular assessment is made, then till the date of such a regular assessment.

In a case where the income is increased on account of assessment/re-computation, interest under section 234B will be levied on the differential amount from the first day of the assessment year till the date of assessment/re-computation. In a case where and application is made to Settlement Commission, interest under section 234B will be levied on the differential amount from the first day of the assessment year till the date of making the application. Further, if the income as declared in the application is increased by the Settlement Commission, interest under section 234B will be levied on the differential amount from the first day of the assessment year till the date of such order. If as a result of rectification order of the Settlement Commission, income is increased/decreased, interest will also be increased / decreased accordingly.

If the taxpayer has paid any tax before completion of assessment, then interest will be levied as follows:

(a)        Upto the date of payment of self assessment tax, interest will be computed on the amount of unpaid advance tax.

(b)       From the date of payment of self assessment tax, interest will be levied on the unpaid amount of advance tax after deducting the self assessment tax paid by the taxpayer.

Illustration
Mr. Suraj is a businessman. His tax liability as determined under section 143(1) is Rs.28,400. He has not paid any advance tax but there is a TDS credit of Rs. 10,000 in his account. He has paid the balance tax on 31st July i.e. at the time of filing the return of income. Will he be liable to pay interest under section 234B, if yes, then how much?
**
In this case, the tax liability (after allowing credit of TDS) of Mr. Suraj comes to Rs.18,400 (i.e. Rs. 28,400 – Rs. 10,000) which exceeds Rs. 10,000 and hence, he will be
liable to pay advance tax.

He has not paid any advance tax and hence, he will be liable to pay interest under section 234B. Interest under section 234B will be levied at 1% per month or part of the month. In this case, Mr. Suraj has paid the outstanding tax on 31st July and hence, interest under section 234B will be levied for the period from 1st April to 31st July i.e. for 4 months.

Interest will be levied on unpaid tax liability of Rs. 18,400. Interest at 1% per month on Rs. 18,400 for 4 months will come to Rs. 736.