The Hindu Business Line : Anomalies of interest

Any discussion or debate on the charging of interest and granting of interest under the Income-Tax Act, 1961 leads to absurd results and illogical conclusions. Assessees have, for long, been arguing that it is patently unjust to tax the interest received, while interest charged is not tax deductible. But somehow this has not found favour with the authorities.

At present, the rate of interest charged by the Department for various defaults amounts to 12 per cent per annum, even as the interest granted is 6 per cent per annum; straightaway, there is a 6 percentage point difference. Added to this, the interest charged by the Department is not tax deductible, while that granted by the Department is. Clearly, there is no level-playing field. The introduction of Section 234D by the Finance Act, 2006 has added a new dimensionThe starting point of litigation is the regular assessment order. At this point, tax is determined by the Department and payable by the assessee.

Big companies have resorted to paying sufficient advance tax and, get refunds at the initial stage — via Section 143(1), that is. At the time of regular assessment, invariably additions are made and there is a demand. In other words, the refund obtained is called back. Effective June 1, 2003, this refund has to be paid back by the assessee with 6 per cent per annum interest under Section 234D when the regular assessment results in a demand. It must be noted that the levy of interest under Section 234D is restricted only to the point of regular assessment and does not apply to subsequent assessment proceedings as held by the Commissioner of Incomer Tax (Appeals) in ITA No 474/2005-2006.

Financial impact

The Table illustrates granting/charging of interest and the financial effect thereon. It clearly demonstrates that an assessee having conservatively paid advance tax gets the refund and the post-tax yield is around 4 per cent. When the refund is called back with the interest already received, the assessee is forced to pay interest under Section 234D. Since this interest is not tax deductible, the effective cost to the assessee is 6 per cent.

Basically, the interest levied under various provisions of the Act are compensatory in nature. One needs to consider the vagaries of business and the uncertainty in interpreting various provisions of the law. Any overpayment of advance tax is to insure against interest and penal consequences. Courts have also taken the stand that interest is compensatory in nature. That being so, it is time to amend the law and treat interest charged by the Department as an allowable deduction. This alone will provide the much-needed level-playing field. Like the cost of living index for capital gains, the rate of interest chargeable or to be granted can be prescribed through notifications at periodical intervals instead of being specified in the Act itself.

(The author is a Chennai-based chartered accountant.)

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