2010 (1) TMI 37 - HC - Income Tax

High Court: Interest under Income Tax Act 234B is mandatory & compensatory. Assessee's belief not exempt. Tribunal decisions overturned.

The High Court held that interest under Section 234B of the Income Tax Act is mandatory and compensatory, emphasizing that the assessee's bona fide belief ... Interest u/s 234B – non payment of advance tax - The ITAT held that interest under Section 234B of the Act cannot be charged in the case of the assessee as the assessee held a bona fide belief that there was no income chargeable to tax because interest paid exceeded the receipt of interest and that the decision of Tuticorin Alkali Chemicals was not applicable in the relevant assessment year 1991-92 – held that - as no advance tax was paid at all by the assessee during the assessment year in question, argument that the Assessing Officer was required to determine various aspects before charging the interest under Section 234B would not be applicable in the instant case - it cannot be disputed that it ultimately turned out that tax was payable on the interest income earned by the assessee and thus, the assessee was liable to pay advance tax as well under Section 208 of the Act, inasmuch as the tax payable on the said income earned was more than ten thousand rupees. In normal course, therefore, he was to compute the said advance tax and pay the same in the manner stipulated in Section 209 and 210 of the Act – there is default in payment of advance tax – interest u/s 234B is payable – ITAT order reversed - decided in favor of revenue Issues Involved:1. Charging of interest under Section 234B of the Income Tax Act.2. Set-off of interest income against interest paid.3. Applicability of the decision in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd.4. Specific direction for charging interest under Section 234B.5. Bona fide belief and its impact on liability to pay interest.Detailed Analysis:1. Charging of Interest under Section 234B of the Income Tax Act:The core issue in these appeals is the charging of interest under Section 234B of the Income Tax Act. The Tribunal had held that interest under Section 234B could not be charged as the assessee held a bona fide belief that no advance tax was payable. However, the High Court observed that Section 234B stipulates that an assessee liable to pay advance tax, who fails to do so, shall be liable to pay simple interest at 1% per month from the first day of April following the financial year to the date of determination of total income or regular assessment. The Court emphasized that the statutory provision mandates the charging of interest and does not allow for discretion based on the assessee's belief.2. Set-off of Interest Income Against Interest Paid:The assessee had set off the interest of Rs.6,48,190/- received on deposits against the interest of Rs.12,03,993/- paid on deferred payment facilities. The Assessing Officer (AO) disallowed this set-off, holding that the interest income earned during the period of construction is chargeable to tax under 'Income from other sources' and cannot be set off against interest paid. This view was upheld by the Tribunal for the assessment year 1990-91, citing the Supreme Court decision in Tuticorin Alkali Chemicals & Fertilizers Ltd. For the assessment year 1991-92, the Tribunal allowed the set-off, which was contested by the Revenue.3. Applicability of the Decision in the Case of Tuticorin Alkali Chemicals & Fertilizers Ltd.:The Tribunal's decision for the assessment year 1990-91 was based on the Supreme Court's ruling in Tuticorin Alkali Chemicals & Fertilizers Ltd., which held that interest income earned during the construction period is taxable under 'Income from other sources.' The High Court noted that this decision was not challenged and thus remained binding for the assessment year 1990-91.4. Specific Direction for Charging Interest under Section 234B:The Tribunal had held that since the AO did not specifically mention Section 234B in the assessment order, interest could not be charged under this section. The High Court disagreed, stating that the assessment order and the computation sheet (both dated the same) should be read together. The AO's general direction to 'charge interest' and the subsequent computation of interest under Section 234B in the computation sheet were sufficient to infer the AO's intent to charge interest under Section 234B.5. Bona Fide Belief and Its Impact on Liability to Pay Interest:The Tribunal had accepted the assessee's plea of bona fide belief that no advance tax was payable, relying on the Patna High Court's decision in CIT v. Ranchi Club Limited, affirmed by the Supreme Court in Smt. Tejkumari v. CIT. The High Court, however, held that the interest under Section 234B is compensatory in nature and mandatory, as established by the Constitution Bench of the Supreme Court in Anjum M.H. Ghaswala. The Court clarified that the provision aims to compensate the Revenue for the delay in tax payment, and the assessee's bona fide belief does not absolve it from the liability to pay interest.Conclusion:The High Court concluded that the interest under Section 234B is mandatory and compensatory, and the assessee's bona fide belief does not exempt it from this liability. The orders of the Tribunal were set aside, and the question of law was answered in favor of the Revenue. There were no orders as to costs.