Section 234C – Interest payable for deferment of advance tax

Section 234C

In case an assessee, other than an assessee who declares profits and gains in accordance with the provisions of section 44AD(1) or section 44ADA(1), who is liable to pay advance tax under section 208 has failed to pay such tax or the advance tax paid by such assessee on its current income on or before the dates specified in column (1) is less than the specified percentage of tax due on returned income, then simple interest@1% per month for the period specified in column (4) on the amount of shortfall, as per column (3) in below table is leviable under section 234C.

Specified Date Specified % Shortfall in Advance Tax Period
15th June 15% 15% of tax due on returned income (-) advance tax paid up to 15th June 3 Months
15th September 45% 45% of tax due on returned income (-) advance tax paid up to 15th September 3 Months
15th December 75% 75% of tax due on returned income (-) advance tax paid up to 15th December 3 Months
15th March 100% 100% of tax due on returned income (-) advance tax paid up to 15th March 1 Month

Note – However, if the advance tax paid by the assessee on the current income, on or before 15th June or 15th September, is not less than 12% or 36% of the tax due on the returned income, respectively, then, the assessee shall not be liable to pay any interest on the amount of the shortfall on those dates.

Computation of interest under section 234C in case of an assessee who declares profits and gains in accordance with the provisions of section 44AD(1) or section 44ADA(1):

In case an assessee who declares profits and gains in accordance with the section 44AD(1) or section 44ADA(1), as the case may be, who is liable to pay advance tax under section 208 has failed to pay such tax or the advance tax paid by the assessee on its current income on or before 15th March is less than the tax due on the returned income, then, the assessee shall be liable to pay simple interest at the rate of 1% on the amount of the shortfall from the tax due on the returned income.

Section 234C

Non-applicability of interest under section 234C in certain cases

Interest under section 234C shall not be leviable in respect of any shortfall in payment of tax due on returned income, where such shortfall is on account of under-estimation of or failure to estimate –

(i) the amount of capital gains;

(ii) income of nature referred to in section 2(24)(ix) i.e., winnings from lotteries, crossword puzzles etc.;

(iii) income under the head “Profits and gains of business or profession” in cases where the income accrues or arises under the said head for the first time.

(iv) the amount of dividend income u/s 2(22)(a)/(b)/(c)/(d)

However, the assessee should have paid the whole of the amount of tax payable in respect of such income referred to in (i), (ii), (iii) or (iv), as the case may be, had such income been a part of the total income, as part of the remaining instalments of advance tax which are due or where no such instalments are due, by 31st March of the financial year.

Meaning of tax due on returned income

Tax due on returned income means the tax calculated on total income declared in the return furnished by the assessee less 

– tax deducted or collected at source

– any relief of tax allowed under section 89

– any tax credit allowed to be set off in accordance with the provisions of section 115JD.

Example

Mr. X is running a garments shop. Tax Liability of Mr. is Rs 45,500. He has paid advance tax as given below: 

Rs. 8,000 on 15th June, 

Rs. 11,000 on 15th September,

Rs. 12,000 on 15th December, 

Rs. 14,500 on 15th March. 

Mr. X has not opted for presumptive taxation scheme of section 44AD. Will he be liable to pay interest under section 234C, if yes, then how much?

In this case the advance tax liability of Mr. X at different installments will be as follows: 

1) In first installment: Not less than 15% of tax payable should be paid by 15thJune.
The tax liability is Rs. 45,500 and 15% of 45,500 amounts to Rs. 6,825. Hence, he
should pay Rs. 6,825 by 15thJune. He has paid Rs. 8,000, hence, there is no short
payment in case of first installment. 

2) In second installment: Not less than 45% of tax payable should be paid by
15thSeptember. Tax liability is Rs. 45,500 and 45% of 45,500 amounts to Rs.
20,475. Hence, he should pay Rs. 20,475 by 15th September. He has paid Rs.
8,000 on 15th June and Rs. 11,000 on 15th September (i.e. total of Rs. 19,000 is
paid till 15thSeptember). There is short payment of Rs. 1,475 (i.e. Rs. 20,475 – Rs
19,000).
Though there is short payment of Rs. 1,475 but Mr. Khushal will not be liable to
pay interest under section 234C because he has paid minimum of 36% of advance
tax payable by 15th September. He has paid Rs. 19,000 till 15th September and
36% of 45,500 amounts to Rs. 16,380. Hence, no interest shall be levied in case of
deferment of second installment. 

3) In third installment: Not less than 75% of tax payable should be paid by 15th
December. Tax liability is Rs. 45,500 and 75% of 45,500 amounts to Rs. 34,125.
Hence, he should pay Rs. 34,125 by 15th December. He has paid Rs. 8,000 on 15th
June, Rs. 11,000 on 15th September and Rs. 12,000 on 15th December (i.e. total of
Rs. 31,000 is paid till 15thDecember). There is a short payment of Rs. 3,125 (i.e.
Rs. 34,125 – Rs 31,000). Hence, he will be liable to pay interest under section
234C on account of short fall of Rs. 3,125 (Note).

4) In last installment: 100% of tax payable should be paid by 15th March. The total tax liability of Rs. 45,500 is paid by Mr. Khushal by 15th March (i.e. 8,000 on 15th June, Rs. 11,000 on15th September, Rs. 12,000 on 15th December and Rs 14,500 on 15th March). Hence, there is no short payment in case of last installment. Thus, Mr. Khushal will not be liable to pay interest under section 234C in case of last instalment. 

(Note) There is a short fall of Rs. 3,125 in case of third installment (computation already discussed). Due to short fall in case of third installment, interest under section 234C will be levied. Interest will be levied at 1% per month or part of the month on the short paid amount of Rs. 3,100 (i.e. Rs. 3,125 rounded off to Rs. 3,100 as per Rule 119A). Interest will be levied for a period of 3 months. In other words, interest will be levied on Rs. 3,100 at 1% per month for 3 months. Interest under section 234C will come to Rs. 93.

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