E.—Interest chargeable in certain cases

Interest for defaults in furnishing return of income.

423(1) Where the return of income for any tax year is furnished after the due

date or is not furnished, the assessee shall be liable to pay simple interest as per the following formula:— I = 1% x A x T where,— I = the interest payable; A = the amount of tax on which interest is payable, as specified in sub-section (2); T = number of months comprised in the period commencing on the date immediately following the starting date and ending on the end date, both specified in sub-section (2).

423(2)

For sub-section (1), in respect of the circumstances specified in column B of the Table below, the starting date shall be the date specified in column C, the ending date shall be the date as specified in column D and the amount of tax on which interest is payable is specified in column E.

---table---

423(3)

Where as a result of an order under section 287 or 288 or 359 or 363 or 365(10) or 368 or 377 or 378, the amount of tax on which interest was payable under sub-sections (1) and (2) has been increased or reduced, the interest shall be increased or reduced accordingly, and in a case —

• (a) where the interest is increased, the Assessing Officer shall serve on the assessee a notice of demand in the form as prescribed specifying the sum payable, and such notice of demand shall be deemed to be a notice under section 289 and the provisions of this Act shall apply accordingly;
• (b) where the interest is reduced, the excess interest paid, if any, shall be refunded.

423(4)

For the purposes of this section,—

• (a) tax on total income as determined under section 270(1) shall not include the additional income-tax, if any, payable under section 267;
• (b) tax on the total income determined under regular assessment shall not include the additional income-tax payable under section 267;
• (c) interest payable under sub-section (1) shall be reduced by the interest, if any, paid under section 266 towards the interest chargeable;
• (d) “tax paid” means–– (i) advance tax, if any, paid; (ii) any tax deducted or collected at source; (iii) any relief of tax allowed under section 157; (iv) any relief of tax allowed under section 159(1) on account of tax paid in a country outside India; (v) any relief of tax allowed under section 159(2) on account of tax paid in a specified territory outside India referred to in that section; (vi) any deduction, from the Indian income-tax payable, allowed under section 160, on account of tax paid in a country outside India; and (vii) any tax credit allowed to be set off as per section 206(13).

423(5)

Where for any tax year, an assessment is made for the first time under section 279, the assessment so made shall be regarded as a regular assessment for the purposes of this section.

Explanation

Section Summary:

Section 423 of the new income tax law in India deals with the interest charged for delays or failures in filing income tax returns. It specifies the calculation of interest payable by taxpayers who file their returns after the due date or fail to file them altogether. The section also outlines how adjustments to interest are made if the tax liability changes due to subsequent orders or assessments.

Key Changes:

1. Interest Calculation Formula: The section introduces a clear formula for calculating interest:
   I = 1% x A x T, where:

   • I = Interest payable,
   • A = Tax amount on which interest is calculated,
   • T = Number of months of delay.
     This replaces any ambiguous or outdated methods previously used.

2. Adjustments for Revised Tax Liability: If the tax liability changes due to orders under specific sections (e.g., 287, 288, etc.), the interest payable is recalculated. If the interest increases, a notice of demand is issued. If it decreases, any excess interest paid is refunded.

3. Exclusions from Tax Base: The section clarifies that additional income-tax under Section 267 is not included in the tax base for calculating interest.

4. Definition of "Tax Paid": The section provides a comprehensive definition of what constitutes "tax paid," including advance tax, TDS, TCS, and foreign tax credits.

Practical Implications:

• For Taxpayers: Taxpayers who miss the due date for filing returns will face a 1% monthly interest charge on the unpaid tax amount. This applies from the day after the due date until the date the return is filed or the tax is paid, whichever is earlier.
• For Businesses: Businesses must ensure timely filing of returns to avoid interest charges. They should also keep track of any changes in tax liability due to reassessments or orders, as these can impact the interest payable.
• For Compliance Processes: Tax authorities will issue notices for increased interest and process refunds for excess interest paid. Taxpayers must ensure accurate reporting of all tax payments (advance tax, TDS, etc.) to avoid miscalculations.

Critical Concepts:

1. Starting and Ending Dates: The starting date for interest calculation is the day after the due date for filing the return. The ending date is either the date the return is filed or the date the tax is paid, whichever is earlier.
2. Tax on Which Interest is Payable: This is the tax liability after deducting any advance tax, TDS, TCS, or foreign tax credits.
3. Interaction with Other Sections: The section interacts with Sections 287, 288, 359, etc., which allow for adjustments to tax liability. It also references Sections 266, 267, and 270 for exclusions and reductions in interest calculations.

Compliance Steps:

1. File Returns on Time: Ensure income tax returns are filed by the due date to avoid interest charges.
2. Track Tax Payments: Maintain records of advance tax, TDS, TCS, and foreign tax credits to accurately calculate the tax base for interest.
3. Respond to Notices: If a notice of demand is issued for increased interest, pay the amount promptly. If interest is reduced, claim the refund.
4. Reconcile Tax Liability: After any reassessment or order, recalculate the interest payable and ensure compliance with the revised amounts.

Examples:

• Scenario 1: A taxpayer files their return 3 months after the due date. The tax liability (after deducting advance tax and TDS) is ₹1,00,000. The interest payable is:
  I = 1% x ₹1,00,000 x 3 = ₹3,000.

• Scenario 2: After filing, the taxpayer receives an order under Section 287, increasing their tax liability by ₹20,000. The interest is recalculated as:
  I = 1% x ₹1,20,000 x 3 = ₹3,600. The taxpayer receives a notice for the additional ₹600.

• Scenario 3: If the taxpayer had already paid ₹3,000 in interest but the revised interest is ₹2,500 due to a reduction in tax liability, the excess ₹500 is refunded.