One-way rationalisation of interest provisions

One-way rationalisation of interest provisions

TN PANDEY

Clauses 79, 81 and 82 of the Finance Bill, 1999 propose to amend certain sections in the Income Tax Act relating to charging of interest from taxpayers for delayed compliance in regard to filing of returns and payment of taxes.

The changes proposed to be made in this regard are as under:

Section 201 (1a) of the IT Act, 1961, relates to defaults regarding deduction of tax or payment of the same in time. The existing provision provides that a defaulter will be liable to pay simple interest at 15 per cent per annum on the amount of tax from the date on which such tax was deductible to the date on which it is actually paid to the credit of the central government. It is proposed to increase the rate of interest from 15 per cent to 18 per cent.

Under section 234A, simple interest at the rate of two per cent per month ie, 24 per cent annually is chargeable for defaults in furnishing returns of income beyond the prescribed dates. This rate is proposed to be reduced from two per cent per month to 1.5 per cent per month ie, from 24 per cent per annum to 18 per cent per annum.

Section 234B prescribes for payment of simple interest at the rate of two per cent per month for defaults in payment of advance tax for every month from April 1 of the assessment year to the date of determination of income under section 143(1) or on regular assessement. This rate is also proposed to be cut to 1.5 per cent per month ie, 18 per cent annually.Taxpayers are charged interest at the rate of 18 per cent in the following situations also.

Under section 234C simple interest at 1.5 per cent per month is payable in regard to the deferment of tax which was payable as advance tax in installments in the manner laid down in the section.

Under section 220(2) failure to pay any tax (other than advance tax) specified in a demand notice within 30 days of the service of notice of demand is liable to interest at the rate of 1.5 per cent for every month or part of a month from the expiry of 30 days of the service of demand notice.

The impact of the proposed changes to be made vide clauses 79, 81 and 82 in the Income Tax Act, 1961 by the Finance Bill could be that there would be uniformity in the matter of charging of interest in all the above mentioned five situations. To this extent change is welcome as it leads to equity and simplicity.

The legislative intent behind the changes proposed has been explained in the Explanatory Memorandum to the Finance Bill as under:

"Under the existing provisions, the rates of interest chargeable from the assesses for various defaults vary from 15 per cent to 18 per cent per annum. In order to rationalise these rates the Bill proposes to prescribe a uniform rate of 18 per cent annum for various defaults. Accordingly, it is proposed to decrease the rate from two per cent for every month or part of a month to 1.5 per cent for every month or part of a month in respect of interest chargeable under section 234A for defaults in furnishing return of income and under section 234B for defaults in payment of advance tax. It is further proposed to increase the rate from 15 per cent per annum to 18 per cent per annum in respect of interest chargeable under sub section (1A) of section 201 for failure to deduct and pay tax at source."

However, the process of rationalisation has been only one way traffic. It seems to have been (conveniently) forgotten that besides charging interest from the taxpayers for defaults from their side, the IT department, under the provisions of the IT Act, is also obliged to pay interest in regard to excess amounts found due to the taxpayers. The IT Act provisions which require the IT department to pay interest to the taxpayers are as follows :

Interest under section 132B(4) is payable to the person whose assets have been retained or money seized during the course of search operations and proceeds of assets sold and money retained is found to be in excess of the total tax liabilities against which they are applied. The rate of interest prescribed for such situations remains unchanged at 15 per cent. [The liability to pay interest u/s 132B(4) continues in spite of the fact that section 132(5) has become inoperative after chapter XIV B comes into force from July 1, 1995. This is because of the fact that sub clause (d) of section 158 BC provides that `the assets seized under section 132 or requisitioned under section 132A shall be retained to the extent necessary and the provisions of section 132B shall apply subject to such modifications as may be necessary..." and the references to `regular assessement' or `re-assessment' in section 132B shall be construed as reference to "block assessment"]

Under section 244A interest at the rate of 12 per cent per annum is payable where any refund arises due to any excess payment of tax. Where refund is of tax other than advance tax or tax deducted or collected at source, interest is payable at the rate of one per cent per month or part of month from the date of payment of such tax or penalty up to the date on which the refund is granted.

It is regrettable to find that the process of rationalisation has overlooked the situations where tax payers are entitled to interest. When the department is to charge interest for assessee's defaults at 18 per cent, it would be just fair and equitable to give interest to the taxpayers where sums are found refundable to them at the same rate. The rates of interest at 12 per cent and 15 per cent should also have been stepped up to 18 per cent per annum as in the five situations discussed earlier.

One more aspect in the context of interest requiring rationalisation needs mention. The interest that is charged from the assessees is in the nature of compensatory payment for depriving the exchequer in getting its dues at the earliest possible opportunity. But it is not considered allowable as deduction though interest received by the assessee from the tax department is taxable. The present judicial thinking is that interest/penalties which are intended to compensate for delay in tax payments - and are not tainted with illegality - should be allowed as deduction in computing the taxable income. Thus interest paid on outstanding amount of cess imposed under the UP Sugarcane Cess Act has been considered as allowable expenditure by the Supreme Court in the case of Mahalaxmi Sugar Mills Co vs CIT (1980) 123 ITR 429 (SC). Likewise interest amount paid on arrears of sales tax under section 22(4A) of MP General Sales Tax Act, 1958 has been held to be allowable in the case of CIT vs SS Ratanchand Bholachand (HUF)(1992) 64 Taxman 179 (MP). There are a number of other decisions also affirming this line of thinking. Hence, it seems necessary to provide that while interest received from the IT department would be taxable, interest which is purely of a compensatory nature would be permitted as deduction.

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