2006 (2) TMI 595 - AT - Income Tax

Summary

Issues Involved:
1. Levy of interest under section 234C of the Income-tax Act, 1961.
2. Computation of interest on the deferment of advance tax in the second and third instalments.
3. Nature of interest under sections 234A, 234B, and 234C - whether compensatory or penal.
4. Interpretation of the statutory provisions regarding the period of interest calculation.

Detailed Analysis:

1. Levy of Interest under Section 234C:
The appeal concerns the levy of interest under section 234C of the Income-tax Act, 1961, for the assessment year 2000-01. The Assessing Officer (AO) levied an interest of Rs. 51,02,478, whereas the assessee computed it at Rs. 40,29,918. The dispute centers on the deferment of advance tax in the second and third instalments due on 15-9-1999 and 15-12-1999.

2. Computation of Interest on Deferment of Advance Tax:
The assessee's computation of interest, filed with the return of income, showed a detailed breakdown of the total income, tax, surcharge, and advance tax payments. The shortfall in the second instalment was Rs. 5,47,12,806, with a payment of Rs. 7,50,000 on 1-10-1999, beyond the due date. The AO considered this payment for the third instalment, calculating interest for three months at 1.5% per month. The assessee's calculation differed, considering the actual period of delay.

For the third instalment, the shortfall was Rs. 4,04,38,010. The AO computed interest for three months, disregarding payments made on 15-1-2000 and 25-1-2000. The assessee calculated interest based on the actual delay period.

3. Nature of Interest under Sections 234A, 234B, and 234C:
The assessee argued that interest under sections 234A, 234B, and 234C is compensatory, citing decisions from the Karnataka High Court (Dr. S. Reddappa v. Union of India) and the Delhi High Court (Dr. Prannoy Roy v. CIT). The assessee contended that interest should be charged only for the period of default, not for a fixed three months, aligning with the principle of compensation.

The department's counsel argued that section 234C is clear and unambiguous, requiring interest for three months on any shortfall. The provisions are intended to consolidate compensatory and penal aspects of advance tax deferment.

4. Interpretation of Statutory Provisions:
The Tribunal examined various High Court decisions, including the Bombay High Court (CIT v. Kotak Mahindra Finance Ltd.) and the Karnataka High Court (Dr. S. Reddappa), which held that interest under sections 234B and 234C is compensatory. The Tribunal agreed with the Amritsar Bench's decision in Kailash & Associates v. Dy. CIT, which accepted the assessee's computation method.

The Tribunal concluded that interest should be charged for the actual period of default, not compulsorily for three months. They provided an example illustrating that a taxpayer who pays late should not be worse off than one who does not pay at all. The Tribunal emphasized that the Government benefits from the payment once made, and charging interest beyond the actual delay period is unfair.

Conclusion:
The Tribunal allowed the appeal, directing the AO to accept the assessee's computation of interest under section 234C, emphasizing that interest should be levied for the actual period of default, not a fixed three months. The appeal was thus allowed, aligning with the compensatory nature of interest under the relevant sections.