The High Court explains the law on levy of interest u/s 234B(3) when reassessment is done determing escaped income after issue of refund.

The High Court explains the law on levy of interest u/s 234B(3) when reassessment is done determing escaped income after issue of refund. 

Prelude:
Section 234B(3) of the Income Tax Act, 1961 (the Act) provides for levy of interest where a reassessment or re-computation under Section 147 or 153A is made. As per the clause, if the amount on which interest is payable under sub-section (1) for the deficiency of advance tax (less than 90% of the assessed tax) increased, the assessee shall be liable to pay interest from 1st April to the date of reassessment or recomputation. The interest is payable on the difference of income determined on reassessment over and above the income determined u/s 143(1) or in regular assessment u/s 143(3) as the case may be.

Section 234B(3) however do not envisage a peculiar situation where pursuant to the regular assessment, the advance tax paid by the assessee had already been refunded and in a subsequent reassessment proceedings for escaped income, income is determining higher than the assessed at the regular assessment. The present judgment deals with this peculiar scenario.

Levy of interest u/s 234B(3) when reassessment is done after issue of refund

ABCAUS Case Law Citation:
ABCAUS 2184 (2018) (01) HC

Brief Facts of the Case:
The case pertains to the assessment year 1992-93. The chronology of events are summarised as under:

In giving effect to the order of the High Court determining the total income at Rs. 23,32,002/-.  The AO computed the total demand as under:-

The Tribunal allowed the appeal of the assessee. The ITAT accepted the contention of the assessee that if there is no interest payable under sub-section (1) there would be no liability under sub-section (3)

Tribunal opined that sub-section (3) of Section 234B is a consequential levy from subsection (1) and applies only if there is a liability to advance tax. The Tribunal found that when the regular assessment was made, there was an addition of income, but, however, by the order of the Commissioner of Income Tax in appeal, the final income under regular assessment was determined at Rs.11,080/-, on which income, there was advance tax payment made by the assessee far in excess. Hence, there was no liability to interest under Section 234B(1). Section 147, being a machinery provision, when reassessment was made, the total income was determined at Rs.23,32,002/-. There was payment of advance tax on 31-03-1992 in excess of the tax dues as recomputed by the final re-assessment under Section 147, ultimately finalised on 10-11-2003, as approved by the High Court, which also has acquired finality. The assessee, having paid advance tax in excess of 90% of the tax dues for the year, there was compliance of payment of advance tax and there could be no levy of interest under sub-section (1) of Section 234. There was, hence, no justification in levying the interest on the assessee under Section 234B(3) of the Act, from the date of regular assessment to the date of determination on re-assessment.

The question of Law framed/urged:
(1) Whether, on the facts and in the circumstances of the case is the Tribunal right in deleting the interest under section 243B(3) ?

(2) Is the charging of interest under section 234B(1) in regular assessment a necessary condition for charging interest under section 234B(3) ?

(3) Whether on the facts and in the circumstances of the case the Tribunal is right in law in holding –

(i) the assessee is not liable to pay the interest under section 234B(3) of the Act ?

(ii) the Assessing Officer was not justified in levying interest on the assessee under section 234B(3) of the Act for the period from 31-3-1995 to 14-3-2002.

(4) Ought not the Tribunal, while deleting the interest levied under Section 234B(3), have considered the peculiar facts in this case; of the assessee having received the entire tax deducted at source and advance tax paid, with interest from the Department, which to the extent of the tax sustained on re-assessment required to be retained as advance tax and directed refund of the interest paid on refund to the extent the assessee was to have satisfied advance tax under Sections 208 and 210 ?

Observations made by the High Court:
The Hon’ble High Court expressed its disagreement with the Tribunal that when there is no liability to interest under sub-section (1), there could be no further liability under section 234B(3). It was clarified that sub-section (1) apply where the determination of income is done under Section 143(1) or where a regular assessment is made under Section 143 (3). Whereas Section 234B(3) speaks of a reassessment

The Hon’ble High Court observed that determination of total income or a regular assessment may not give rise to a liability under Section 234B(1) if there is no tax liability or if the advance tax has been paid under Sections 208 and 210. On a re-assessment if the computation of total income is enhanced to the extent of there being created on the assessee an enhanced liability under Sections 208 and 210, then there being no such payment, the liability to interest arises under Section 234B(3). The income determined is for the assessment year and the liability to pay advance tax arises on the 31st March of the previous year. The liability to interest under Section 234B is on the amount, which is deficient from that payable under Sections 208 and 210.

The Hon’ble High Court opined that under Section 234B(3), the words “amount on which interest was payable in respect of shortfall in payment of advance tax for any financial year under sub-section (1) is increased” is not employed to make the levy consequential to the levy under sub-section (1). It is only to specify the amount, as that falling deficient from that stipulated in Sections 208 and 210, which is explicitly stated in sub-section (1) of Section 234B. Otherwise if there is no tax liability on a regular assessment; and if a reassessment is made within the limitation provided under Section 147 and eventually escapement of income is proved, there could be no levy under Section 234B.

The Hon’ble High Court noted that in the present case, however Rs.5,12,984/- was paid as advance tax and TDS on the last day of the previous year. Regular assessment was made determining the total income far in excess of that returned. The regular assessment was challenged in appeal, where considerable reduction of income was made. Later, re-assessments were carried out and there were adjustments made from refunds as also payment made against demand raised on reassessment. Refunds were ordered and disbursed. The refunds were made totaling Rs.10,49,131/-. Hence, the advance tax paid stood entirely refunded to the assessee on the basis of the appellate orders in regular assessment and re-assessment.

It was noted that the re-assessments eventually led to a total computation of income at Rs.23,32,002/- The tax dues with surcharge on such computation came to Rs. 4,59,043/-, 90% of which the assessee was bound to pay as advance tax. The assessee had advance tax and TDS credit of Rs.5,12,984/-, in excess of, even, the tax liability created. Hence, as per the provisions of section 234B there was no cause for imposition of a liability under sub-section (1) or under sub-section (3).

The Hon’ble High Court opined that if the regular assessment was upheld finally and there was a reassessment and re-computation of total income, the assessee would have been liable to pay advance tax to that extent also, on which, an interest would be levied under Section 234B(3). In the present case, however, the entire tax assessed on regular assessment; for which there was advance tax payment in compliance with Sections 208 and 210, was set aside and the advance tax paid was refunded to the assessee. The Department also had the benefit of advance tax from 31-03-1992 to 04-03-1996, when the refund was made. Hence, there would be no liability on the assessee under Section 234B(3), since there could not be a liability created from 01-04-1992.

Despite the fact that the Department stood to loose, in so far as the re-assessment made of the total income, the interest from the date on which the refund is made to the date of payment of tax dues. However, the Hon’ble High Court found that the Legislature had not contemplated the peculiar situation of a refund having been made of the advance tax and a reassessment determining escaped income after the refund. Accordingly in view of that the Legislature having not contemplated such a situation and not thought it fit to levy interest, the Hon’ble High Court opined that it would not be proper for the Court to re-write the provision by levying an interest, which liability was not available in the statute.

Finally, the Hon’ble High Court opined that under the mandate of Section 234B of the Act, the levy of interest is compensatory in nature.  Since the assessee had obtained a refund of the entire tax paid with interest. Subsequently, a re-assessment was made and the liability to pay advance tax arose again on 31-03-1992; which had been paid but later refunded. The Hon’ble High Court directed the Department to compute the interest paid to the assessee, in ordering refund, for the amount of Rs.4,59,043/-, and raise a demand, which would be paid by the assesee.

Decision/ Conclusion/Held:

• The first and third questions were answered in favour of the assessee and against the Revenue, holding that that there could be no levy of interest under Section 234B(3), since the advance tax on the income determined on re-assessment was paid by the assessee in the close of the previous year to the assessment year.

• The Hon’ble High Court held that the charging of interest under section 234B(1) in regular assessment is not a necessary condition for charging interest under section 234B(3). Thus, the second question was answered in favour of the Revenue.

• The fourth question raised was answered in favour of the Revenue and against the assessee.