Automatic interest liability forms part of tax arrears under a settlement scheme when determined before the cut-off date.

Interest under section 220(2) of the Income-tax Act, 1961 was treated as part of "tax arrears" for settlement under the Kar Vivad Samadhan Scheme, 1998, because the Scheme covered tax, penalty and interest determined on or before the cut-off date and remaining unpaid. The liability arose automatically on default in payment of the demand notice amount, so it did not depend on a separate adjudicatory order. The amount payable under the Scheme had to be computed strictly under its statutory formula, and the declarant's omission to specifically include the interest in the declaration did not prevent its inclusion. The CBDT clarification was noted as supporting this position.

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Issues: Whether interest under section 220(2) of the Income-tax Act, 1961 could validly be included in the amount payable under the Kar Vivad Samadhan Scheme, 1998 as part of the tax arrears and be charged at 50 per cent. under section 88(a)(iv) of the Scheme.

Analysis: The expression "tax arrear" under section 87(m)(i) of the Scheme covers tax, penalty or interest determined on or before 31 March 1998 and remaining unpaid, and the Scheme operates on the basis of a complete settlement package. Interest under section 220(2) is a statutory liability that arises automatically on default in payment of the demand notice amount and does not depend on a separate adjudicatory order. The amount payable under the Scheme has therefore to be computed in accordance with the Scheme itself, irrespective of whether the declarant specifically included the interest in the declaration. The clarification issued by the Central Board of Direct Taxes also supported the view that interest under section 220(2) could form part of the matter settled under the Scheme.

Conclusion: Interest under section 220(2) of the Income-tax Act, 1961 was rightly treated as part of the tax arrears under the Kar Vivad Samadhan Scheme, 1998, and the demand of 50 per cent. thereof was valid.

Ratio Decidendi: Interest that arises automatically under the Income-tax Act on default in payment of a demand becomes part of "tax arrears" if it was determined on or before the cut-off date fixed by the settlement scheme, and the amount payable under such a scheme must be computed strictly in accordance with the scheme's statutory formula.

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