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January 16, 2021

From which Assessment Year interest leviable u/s 234B in Income Tax?

by CA Shivam Jaiswal in Income Tax

From which Assessment Year interest leviable u/s 234B in Income Tax?

Advance tax is the tax that is paid in advance for the income of a particular financial year. The normal expectation is that tax has to be paid only when the income is earned but under the tax provisions the tax payer has to actually estimate the income for the entire year and based on this pay advance tax at specific time intervals. A person shall be liable to pay advance tax only if Tax Liability exceeds Rs. 10,000 i.e., a person shall be exempt from payment of advance tax If tax liability does not exceed Rs. 10,000.

Interest on default in paying advance tax

Interest under section 234B is applicable when:

Tax liability after reducing TDS for the financial year is more than Rs 10,000 and one does not pay any advance tax.

or

One has paid advance tax, but advance tax paid is less than 90% of ‘assessed tax’. In any one of the above cases, interest under section 234B shall be applicable. Interest is calculated @ 1% on Assessed Tax less Advance Tax. Part of a month is rounded off to a full month. The amount on which interest is calculated is also rounded off in such a way that any fraction of a hundred is ignored.

Let us refer to the case of M/s Huawei Technologies Co. Ltd (ITAT Delhi), which pertained to the applicability of interest u/s 234B.

Facts of the Case:

  • Appellant was a company incorporated in People’s Republic of China and was primarily engaged in the business of supplying (on offshore basis) non-terminal products, i.e., advanced tele-communication network equipment, namely, core and access network equipment, mobile network equipment and data communications equipment etc. for use in fixed and mobile phone networks and terminal products, that is, mobile phone handsets to various customers (including customers in India).
  • As alleged, the said supplies were made on principal-to-principal basis and property in equipment was transferred to Indian customers outside India.
  • The appellant company, Huawei China (HC) had subsidiary in India, namely, Huawei Telecommunications India Company Private Ltd. (HI).
  • The issue raised was in respect of charging of interest under section 234B of the Act.

Observations of ITAT

  • As per the provisions of section 234B of the Act, an assessee who is liable to pay advance tax under section 208 will be liable to interest under section 234B of the Act, if he fails to pay such tax, or the advance tax paid by him falls short of 90% of the assessed tax.
  • In ITAT’s understanding of the law, an assessee must first be liable to pay advance tax under the provisions of section 208 of the Act.
  • As per the provisions of section 208 read with section 209(1)(d) of the Act, advance tax payable has to be computed after reducing from the estimated tax liability the amount of tax deductible/ collectible at source on income which is included in computing the estimated tax liability
  • Under section 195 of the Act, tax is deductible at source from payments made to non-residents.
  • Appellant was a non-resident and thus, tax was deductible at source from the payments made to it under section 195 of the Act.
  • Since tax was deductible at source on all the payments made to Appellant, no advance tax was payable as per the provisions of the Act
  • The Delhi High Court in the case of DIT v. GE Packaged Power Inc wherein the High Court held that no interest under section 234B of the Act could be levied on the assessee-payee on the ground of non-payment of advance tax because the obligation was upon the payer to deduct the tax at source before making remittances to them.
  • Amendment to the provisions were brought by the Finance Act, 2012, w.e.f. 1.4.2012 by which a proviso below section 209(1)(d) of the Act was added but applicable from A.Y 2013-14.

Therefore, ITAT directed the Assessing Officer not to charge interest u/s 234B of the Act upto A.Y 2012-13. Interest could be levied as per provisions of law from A.Y 2013-14 onwards

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