The Hindu Business Line : Inequity in interest rates

For every month of delay in payment of tax, the assessee is charged interest at one per cent, whereas for delayed payment of refund, the Government pays only 0.5 per cent. Should not the rates be uniform?

The Finance Act, 2006 has addressed a longstanding grievance of taxpayers, which relates to the charging of interest towards deficiencies in payment of advance tax and delay in the filing of the return. Courts have repeatedly pointed out that interest is compensatory and not penal. The Income-Tax Department should take into account all payments made by the taxpayer in the financial year before the filing of the return and charge interest only on the balance tax, if any, payable on assessment.

Under Sections 234A, 234B and 234C of the I-T Act, the assessee is liable to pay simple interest of one per cent for every month, or part of a month, for default in furnishing return of income and payment of advance tax and for deferment of advance tax.

For computing interest, credit for advance tax paid and tax deducted or collected at source is allowed. MAT credit under Section 115JAA, tax relief under Section 90 and deduction under Section 91 are not taken into account while charging interest under the aforesaid sections. Under Section 140A, too, interest is paid on shortfall of advance tax and for delay in furnishing returns.

Representations were made to the Government to the effect that MAT credit is no different from tax paid in advance and such credit should be given against the tax liability determined as a result of assessment while calculating interest payable by the assessee. The same argument holds good for taxes paid in another country.

The Finance Act, 2006 now provides for:

Reduction of tax credit allowed to be set off under Section 115JAA from the tax on the total income; and

Reduction of the amount of tax relief allowed under Sections 90 and 90A and deduction from the Indian income-tax payable, allowed under Section 91, from the tax on the total income.

The credit for these will also be allowed under Section 140A for calculating tax and interest.

Interest calculation

Hereafter, interest will be charged on the tax on the total income as determined under Section 143(1). Where a regular assessment is made, interest will be charged on the tax on the total income determined under the regular assessment.

This is a welcome amendment. Though belated, the Government has conceded the logic behind the rulings of the Benches of the Tribunal in Chemplast Sanmar Ltd vs Deputy CIT (83 TTJ Madras 427) and in Synthetic Industrial Chemicals Ltd vs Deputy (CIT 85 TTJ Cochin 162) holding that MAT credit must be treated as advance tax paid and be adjusted against tax assessed and held as payable.

However, what is disappointing is that the amendment is prospective and not retrospective. What applies to assessments from 2007-08 must apply to earlier assessments as well. Else, needless litigation on whether the amendment is clarificatory will arise. A case in point is the introduction of Section 234D in the I-T Act by the Finance Act, 2003 with effect from June 1, 2003. This provides for collecting interest on excess refunds granted to the assessees.

There is inequity in the matter of charging interest. The rate of interest for delayed payment of tax by the assessee is one per cent for every month of delay. On the other hand, the rate of tax for delayed payment of refund by Government is 0.5 per cent for every month. Shouldn't the rates be uniform?

(The author is a former Chief Commissioner of Income-Tax.)

T. C. A. Ramanujam

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