Prior payment adjustment under section 140A remains first towards interest, not tax, under the settlement scheme.

Where the Kar Vivad Samadhan Scheme, 1998 prescribed its own method for determining the amount payable and was silent on re-adjustment of earlier payments, the adjustment rule in section 140A of the Income-tax Act continued to operate. Amounts paid under section 140A are first appropriated towards interest and only thereafter towards tax, and the Scheme did not permit that prior payment to be shifted to tax liability. The High Court therefore held that the section 140A payment could not be treated as payment towards tax under the Scheme, and the issue was decided against the assessee.

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Issues: Whether the amount already paid under section 140A of the Income-tax Act, 1961, was liable to be treated as payment towards tax under the Kar Vivad Samadhan Scheme, 1998, instead of being adjusted first towards interest.

Analysis: The Explanation to section 140A(1) provides that where the amount paid falls short of the aggregate tax and interest, the payment is to be adjusted first towards interest and only thereafter towards tax. The Scheme of 1998 contains a non obstante clause and prescribes its own method of determining the amount payable, but it does not contain any provision requiring re-adjustment of payments already made under section 140A. The clarifications relied upon by the assessee dealt with part payments made after tax arrears were computed and did not direct that a payment made under section 140A should be shifted to tax liability. The Scheme had therefore to be applied as framed, without importing a contrary adjustment mechanism from section 140A.

Conclusion: The payment made under section 140A could not be treated as payment towards tax liability under the Scheme. The issue was decided against the assessee.

Ratio Decidendi: Where a special settlement scheme prescribes its own computation of tax arrears and is silent on re-adjustment of prior payments, the adjustment rule in section 140A continues to apply and such prior payment is first appropriated towards interest, not tax.

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