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Advance Tax Explained

12:02 AM Jul 18, 2016 | A N Shanbhag

All taxpayers are required to pay advance tax in spite of the fact that most of their income is subject to TDS.

If the tax payable for the year is ` 10,000 or more advance tax is payable without having to submit any estimate or statement of income to the ITO in four installments. The recent Budget 2016 has amended Sec.  211 to provide that the number of installments and due dates for payment of advance tax in the case of individuals, HUFs, firms, etc., shall be the same as is applicable to companies.

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This amendment forces taxpayers to pay advance tax four times in a year in place of the erstwhile three times, with the first installment of 15% required to be paid on or before 15th June instead of 15th September. The rest of the installments are adjusted taking in view of the first installment.

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TDS is treated as advance tax paid. Senior citizens who report business or professional income must adhere to the new advance tax payment schedule Budget 2016 has also clarified that a return which is otherwise valid would not be treated as defective merely because self-assessment tax and interest payable in accordance with the provisions of Sec. 140A, has not been paid on or before the date of furnishing of the return.

Interest Chargeable or Payable

If advance tax is not paid as per the schedule mentioned above, penal interest is levied before filing of the return of income. Section 234B and Section 234C may become applicable. The following are the various scenarios under which a taxpayer is liable to pay interest.

Simple interest @1% per month or part thereof as reduced by the interest paid, if any, is chargeable on the shortfall on advance tax paid and TDS in following cases —

n Not Filing or Late Filing of the Returns: U/s 234A

Interest is payable from the due date to the date of i) filing the return or ii) completion of assessment where no return is furnished. There is no provision for reduction or waiver of interest and the question of granting opportunity of being heard does not arise — CIT v. R. Ramalingair [2000] 108 Taxman 1 (Ker.). Interest is leviable on the tax on the total income declared in the return and not on the income as assessed and determined by the assessing authority –– Tej Kumari v. CIT 22 TCR 250 (Pat.) 2001.

n Best Judgment

Sec. 144 provides that the ITO shall make the assessment to the best of his judgment in the following 3 cases:

n The assessee has failed to make the voluntary return.

n There has been a failure to comply with all the terms of a notice to produce accounts or other documents.

n The AO considers the return to be incorrect or incomplete and serves a notice, but the assessee does not respond.

In such cases, interest is chargeable from the due date to the date of best judgment assessment.

 Advance Tax Paid is less than 90%: Sec. 234B

Interest is payable on the shortfall from the 1st April next to the date of assessment. In this case, the interest will be charged on the income as assessed by the ITO. The assessee was entitled to interest u/s 214 for excess advance tax paid during the financial year, even if the tax was paid beyond the dates specified u/s 211 of the Act — CIT v. Praveen Kapoor [2005] 144 Taxman 682 (All.)

 Shortfalls of First Two Installments: Sec. 234C

Interest is payable for 3 months each (when the next installment falls due) on the amount of shortfall of 30% or 60%, even if the delay is just by one single day. If the advance tax paid 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 @ 1% on the amount of the shortfall.

 Excess Refund Paid to Assessee: Sec. 234D

Where any refund has been granted to the assessee u/s 143(1) and subsequently on regular assessment, no refund or lesser amount of refund is found due to the assessee, then, the assessee shall be liable to pay simple interest u/s 234D @ ½% on the excess amount refunded for every month or part of the month, starting from the date of refund to the date of such regular assessment.

Refund Due to Assessee: Sec. 244A

ITO has no power to withhold any refund due to an assessee, irrespective of its size, even if it is felt that grant of the refund could be detrimental to the interest of the Department in recovering some other dues from the assessee.

Where refund is due on account of excess payment of tax, simple interest should be paid to the assessee @ 0.5% for every month or part of a month from the date of payment of the tax to the date on which the refund is granted. No interest will be paid if the refund is less than 10% of the tax.

The recent Budget 2016 has raised this interest rate at 9% p.a., against 6% p.a., if there is delay beyond 90 days in giving effect to Appellate order. The responsible officers will be accountable for this loss to Government.

Advance Tax on Unanticipated Income and Capital Gains

No interest is charged in respect of any income, which was neither anticipated nor contemplated, received after the due dates for advance tax.

However, it is necessary to pay advance tax on such income at the next due date. For instance, if the assessee earns capital gains on 25th October, he should pay 60% tax on or before 15 December and 40% additional tax on or before March 15.

Advance tax paid on or before 31st March was treated as advance tax paid on 15 March. Many assessees used to make the payments only towards the last day of the year. Corrective action under the law has taken by treating such payments as received late. We submit that estimating income earned during the year before the year end, is an impossibility.  This is more true for unanticipated income received after 15 March.

The most optimal way would be to fix two dates – one at the end of six months and the next shortly after the end of the fiscal – for the purposes of paying tax till that point in time. For example, say on 15th October, taxpayers will have to pay tax on all their income earned till 30th September.

Then on say 15th April, the remaining tax on the balance income earned from 1st October till 31st of March may be paid. Interest and penalties should only be levied for short-falls in payment of such advance tax.

 This would be a much smoother and cleaner way for tax collection, both for the taxpayer as well as the exchequer.

The following Table gives clarity —-
Old Rate New Rate
15th June : – 15%
15th September : 30% 45%
15th December : 60% 75%
15th March : 100% 100%

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