2005 (11) TMI 388 - AT - Income Tax

Adjustment towards interest payable u/s 234B(2)(ii) - Calculation of interest under sections 234B and 234C by invoking section 140A - Interpretation of Statute - Calculation of interest on interest - HELD THAT - Section 234B and section 140A both are separate and independent sections of the Act, section 234B(1) provides general situation of calculation of interest. The period for which interest under this section leviable is from the 1st day of April next following financial year to the date of determination of total income u/s 143(1)/regular assessment. The amount on which interest payable is equal to the assessed tax or the amount by which the advance tax paid falls short of the assessed tax. The facts of controversy under consideration is not related to the above general calculation of interest but falls under section 234B(2). This sub-section (2) of section 234B provides the calculation of interest where tax is paid by the assessee under section 140A or otherwise before the date of determination of total income u/s 143(1)/completion of a regular assessment. The interest shall be calculated as provided general calculation in section 234B(1). The important thing provides is that simple interest u/s 234B(1) is to be calculated at the prescribed rate. The difference in calculation interest in that section 234B(1) and in section 234B(2) is that in section 234B(2) the simple interest is to be calculated up to the date on which the tax is so paid. At the time of filing return of income, Explanation to section 140A is required to consider. The newly inserted (with effect from 1-4-1989) Explanation to section 140A(1) takes care of a situation where the amount paid by the assessee u/s 140A(1) falls short of the aggregate of the tax and interest as mentioned therein. In such a situation, the amount, so paid is first to be adjusted towards the interest payable and the balance, if any, is to be adjusted towards the tax payable. Since the assessee has made short payment, therefore, interest is leviable on Rs. 5,81,520 in accordance with section 234B(2)( ii ). This provision is reproduced as above. Thus, this provision required to calculate interest by the prescribed rate on the balance amount by which the tax so paid together with the advance tax paid falls short of the assessed tax. We are of the considered view that adjustment towards interest payable u/s 234B is to be considered only at the time of filing return of income i.e., when payment of self-assessment u/s 140A is required to be made. Before that interest u/s 234B is independently required to be calculated only in accordance with the provisions provided in section 234B( i ). If at the time of filing return it is found short payment after adjustment of interest out of tax paid u/s 140A, further interest is required to calculate in accordance with section 234B(2)( ii ), on balance amount which is assessed tax minus advance tax and ad hoc payment. Thus, we find that approach of revenue for calculation of interest u/s 234B is not correct, therefore, the orders of lower authorities are set-aside and the claim of the assessee is allowed. The Assessing Officer is directed to calculate interest u/s 234B as per above discussion. In the result, appeals are allowed.

Summary

Issues Involved:

1. Calculation of interest under sections 234B and 234C.
2. Application of Explanation to section 140A.
3. Whether the calculation of interest amounts to charging interest on interest.

Issue-Wise Detailed Analysis:

1. Calculation of interest under sections 234B and 234C:

The primary issue in these appeals is the method of calculating interest under section 234B. The Assessing Officer (AO) calculated the interest as follows:

- Tax at the rate of 50%: Rs. 50,80,495
- Surcharge at the rate of 15%: Rs. 7,62,075
- Total: Rs. 58,42,569
- Less TDS: Rs. 1,82,573
- Less Advance tax: Rs. 23,20,000
- S.A. payment made on 29-9-1992: Rs. 33,00,000
- Adjusted towards interest payable on return under section 234B (up to September 1992): Rs. 4,00,800
- Adjusted towards interest under section 234C: Rs. 1,78,288
- Balance: Rs. 27,20,912

The AO's calculation included interest under section 234B at 2% per month for various periods, resulting in a total interest of Rs. 5,61,381, adjusted by S.A. payment, leading to a demand of Rs. 37,132.

The appellant contested this calculation, arguing that the interest should be calculated after giving due credit for the payment made under section 140A. The appellant provided an alternative calculation method, which resulted in no outstanding balance.

2. Application of Explanation to section 140A:

The appellant argued that the Explanation to section 140A should only be applied at the time of filing the return, not at the time of ad hoc payments. The Explanation states that where the amount paid falls short of the aggregate tax and interest, the payment should first be adjusted towards interest and then towards tax.

The AO applied this Explanation at the time of ad hoc payments, leading to the disputed calculation. The appellant argued that this adjustment should be made at the time of filing the return, as section 234B(2) provides credit for payments made under section 140A until the due date.

3. Whether the calculation of interest amounts to charging interest on interest:

The appellant contended that the AO's calculation method effectively charged interest on interest, which is not contemplated by law. The appellant relied on the Supreme Court judgment in Central Provinces Manganese Ore Co. Ltd. v. CIT [1986] 160 ITR 961, which allows an appeal against the manner of charging interest.

Judgment:

The Tribunal examined the relevant provisions and concluded that the adjustment towards interest payable under section 234B should be considered only at the time of filing the return, when payment under section 140A is required. Before this, interest under section 234B should be calculated independently according to section 234B(1).

The Tribunal found that the AO's approach was incorrect and set aside the orders of the lower authorities. The AO was directed to recalculate the interest under section 234B as discussed, allowing the appellant's claim.

Conclusion:

The appeals were allowed, and the AO was instructed to recalculate the interest under section 234B, considering the proper application of section 140A and avoiding the charging of interest on interest.