Decoding Section 234B of the Income Tax Act, 1961: Interest Charged by the Income Tax Department
- sortingtax2
- Apr 24, 2023
- 3 min read
Updated: May 31, 2023
Introduction to Section 234B of the Income Tax Act, 1961
The Income Tax Department may, at its discretion, apply fines and/or penalties on a taxpayer, in case such taxpayer defaults on the timely payment of their advance tax. Section 234B of the Income Tax Act, 1961 governs the provisions with respect to the levying of interest by the Income Tax Department.
What is the meaning of “advance tax” under the Income Tax Act, of 1961?
‘Advance Tax’, also called PAYE (Pay As You Earn) refers to the income tax Service that a taxpayer is liable to pay in advance on its estimated income for a particular financial year (previous year). If a taxpayer is liable to pay at least Rs. 10,000 in income taxes (estimated) on its income to be earned in a financial year, he must pay advance tax. Such tax must be made within the specified timelines and deadlines of the Income Tax Department.
In case a taxpayer defaults in the payment of their advance tax, they may be subject to payment of interest on such advance tax as per Section 234B.
Applicability of Advance Tax
Who is required to pay Advance Tax?
When the tax liability of an assesses, after deducting TDS, is estimated to be Rs 10,000 or more, such assesses are liable to deposit their advance tax with the IT Department. An assessment for this purpose shall include salaried employees, professionals with independent business practice (i.e., non-salaried persons), entrepreneurs, etc., i.e., anyone whose estimated tax payable for a financial year is Rs.10,000 or more.
However, it should be noted that resident senior citizens, having no income from business or profession are not liable to pay advance tax on his income earned from any other source.
When is Section 234B applicable?
An assesses may be required to pay interest u/s 234B if:
1. The taxpayer did not pay any advance tax, and their estimated tax liability for the financial year is Rs 10,000 or more, after deduction of TDS; or
2. The taxpayer has paid advance tax, which amounts to less than 90% of its ‘assessed tax’
On what amount shall interest be charged u/s 234B?
· In case no advance tax was paid, interest shall be charged on the entire ‘Assessed Tax’- Interest to be charged on ‘Assessed Tax’.
· However, if the advance tax that was paid by the assessee is less than 90% of the ‘Assessed Tax’- Interest is to be paid on the difference between the ‘Assessed Tax’ and the advance tax paid.
· Furthermore, Finance Act 2022, inserted Section 140B. For the purposes of this article, we shall focus on Section 140B (4).
The computation of interest under Section 234B of the Act on the tax on revised returns is outlined in Subsection (4) of Section 140B of the Act. According to this provision, interest due under section 234B of the Act is to be calculated on either the assessed tax or the amount by which the advance tax paid is less than the assessed tax.
Therefore, the insertion merely confirmed that only the difference between the assessed tax and the advance tax was subject to interest payment.
The ITAT in Dhirendra Narbheram Sheth v. ITO (2023) held that interest charged under Section 234B, is of compensatory nature and not of penal nature. Hence, interest on the assessee is imposed till the date of self-assessment only. Such imposition cannot go beyond this period.
How much interest shall be charged on the assesses under Section 234B?
The assessee, who has defaulted on his payment of advance tax, shall be liable to pay interest at a rate of 1%, for every month or fraction of a month they do not pay their advance tax liability due. It is to be noted that for calculation purposes, any fraction of a month is rounded off to a full month. Furthermore, the calculated interest is rounded off to ignore fractions of a hundred.
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