INTEREST SHOULD BE ON THE BASIS OF INCOME AS PER RETURN OF INCOME - a point of view with reasoning

[CA DEV KUMAR KOTHARI]

S.234A Interest for defaults in furnishing return of income.

S.234B. Interest for defaults in payment of advance tax.

S.234C  Interest for deferment of advance tax.

Interest payable by assesse/ tax payer:

Assesse computes his income as per understanding of law, with assistance of experts, as and when considered necessary. He computes his income and file Return of Income. Based on such return he is expected to pay instalments of advance tax, and self- assessment tax. In case of short fall and delay in payment of instalments of advance tax and delay in payment of self-assessment tax, interest is to be calculated based on income as per return (Returned Income – say RI).  

Interest is payable by assesse in various circumstances under provisions of the Income-tax Act, 1961.

As income-tax is payable by assesse, at his own, based on his income  estimated  during the previous year and finally determined as per Return, there is no reason that interest should be payable by assesse based on income as assessed. There is no reason that  once assessment is made by the AO under scrutiny assessment, and huge  additions and disallowances are made to raise demand, that assesse is burdened with interest payable as per income so assessed although demand is raised much  later after filing of return.

 How interest can be demanded based on an amount for period prior to such ascertainment and demand raised? Is the primary question.

Reasons for interest should be based on income as per Return of assesse:

a. As discussed earlier assesse is required to pay tax as per RI inROI and to pay interest in case of delay and shortfalls as per RI.Therefore, there should not be any other basis to levy interest up to period of any further demand is raised by the tax officer (AO).

b. Tax laws are very complex and there are many un-certainties, Even after a judgment of the Supreme Court, contingencies can continue by way of review of judgment, and amendments in law. Therefore, when assesse files is ROI as per law as understood by him the tax as per ROI should only be basis for levy of interest, for period till a demand is raised on assessment by the AO.

c. More than 95% of ROI are accepted as per ROI filed by assesses. Therefore, in such cases RI and assessed income (AI)are the same. That means there is no dispute between assesse and tax department. In such situation, if AO find any short falls and delays in payment of instalments of advance tax, of self-assessment tax, interest is computed based on RI which is equal to AI.

d. In case assesse had committed some mistakes, which are corrected by way of prima facieadjustments which can be made by the AO, more or less and on principal RI and AI are same.

e. There should not be any difference in case of a lucky assesse whose ROI is accepted and a un-lucky assesse whose ROI is selected for scrutiny and who faces contingencies for additions and disallowances which are many times made just for sake of raising demands and harassing assesse.

f. Major part of additions made in scrutiny assessments are deleted, and ultimately income assessed is near about income as per return. In fact, in many cases, when additional claims are allowed, by the AO or in appeal,income assessed is less than income returned.

g. When up to the stage of filing of ROI assesse is required to pay interest, if any as per Returned income, there is no reason that on making a regular assessment assesse should be called upon to pay interest as per income assessed by the AO.

h. When interest u/s 234C is levied on basis of income as per Return, there is no reason why interest u/s 234Aand 234B should be on basis of assessed income.

i. Levy of interest based on income assessed and levy of penalty in case income assessed is higher than income returned, are major threats assesse faces and is also threatened by many officers for such powers. These powers are very handy for harassment and bribery.

j. Interest is compensatory in nature, and is not penal in nature. Therefore, unless assessed income is determined and demand is served to pay, interest should not be levied based on income assessed.

Provisions for interest payable by assesse:

Assesse is required to pay interest under sections 234A, 234B and 234C in different situations.

When assesse files return, interest under three provisions is computed based on income as per Return.

Even during processing of Return in case of e-filing, auto calculations are made based on income as per data in ROI.

The computation can only be according to data fed in ROI,There cannot be computation on any other basis.

Forms of ROI are also designed that it ensure that ROI is made as per law and many of computational and conceptual mistakes are detected while data entry in ROI. However, law being very complex, there can be different treatment and computations under various provisions.

At this time what income the AO will assess is not known and is uncertain. Applying probability theory, in case of most of assesses the probability of more than 90% is that ROI and self-assessment shall be accepted. Only large cases, and cases involving disputes and large specified type of transactions are expected to be scrutinize.

Scrutiny assessment:

We find that as per provisions interest u/s 234A and 234B interest is payable by assesseon income as per Assessed income. Whereas interest u/s 234C is payable based on Returned Income.

When as assessment is made either u/s 143.1 or 143.3 or 247/ 143.3 etc. the assessed income may be higher than the RI.

Ground reality is that in many cases huge additions are made by AO and more than 80% of such additions are deleted in course of appeal proceedings if properly pursued by assesse.

In such situations there is no justification of levying interest based on income assessed by the AO for interest u/s 234A and 234B.

Therefore, interest should be levied only on the basis of income as per Return. In case assesse is found to have concealed income or furnished inaccurate particulars of income then he can be penalized.

Only after income is determined, and assesse is served, with notice of demand, interest should be demanded based on income assessed after allowing period of one month for payment of demand.

If the assesse has filed ROI without any basis or patently wrong basis and not as per law prevailing at the time of filing of ROI,and there is provedcharge of concealment of income or furnishing of inaccurate particulars of income then AO can impose penaltyfor such concealment or furnishing of inaccurate particulars of income. But there should not be interest due to assessed income being higher than returned income at least for the period up to the date of making of assessment

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Section 234A

Section 234B

Section 234C

Section 234D

Section 234E

Section 234F