We regularly face situations where we are required to compute interest under section 234B of the IT Act, 1961 Whereas, the present scenario is that this interest calculation is automatically done in the income tax return (ITR) utility available on the web portal of the Indian Revenue Authorities (IRA), however, it is very important for us to understand section 234B of the Act and its computation .This article purpose to clarify the calculation of section 234B and understand the important concept of “Assessed Tax”.
section 234B of the Act is as follows:
Subject to this provisions of this section, where, in any financial year, an assessee who is liable to pay advance tax under section 208 has failed to pay such tax or, where the advance tax paid by such assessee under the provisions of section 210 is less than ninety per cent of the assessed tax, the assessee shall be liable to pay simple interest at the rate of [one] per cent for every month or part of a month comprised in the period from the 1st day of April next following such financial year [to the date of determination of total income under sub-section (1) of section 143 [and where a regular assessment is made, to the date of such regular assessment, on an amount]] equal to the assessed tax or, as the case may be, on the amount by which the advance tax paid as aforesaid falls short of the assessed tax.
As per reading according to section 234B of the Act that in order to be able to compute interest under section 234B accurately, it becomes essential to understand the meaning of “Assessed Tax”.
Explains to the meaning of assessed tax to section 234B as follows:
Assessed tax means the tax on the total income determined under sub-section (1) of section 143 and in the case of regular assessment the tax on the total income determined under such regular assessment as reduced by the amount of,—
(a) Any tax deducted or collected at source in accordance with the provisions of Chapter XVII on any income which is subject to such deduction or collection and which is taken into account in computing such total income;
(b) any relief of tax allowed under section 90 on account of tax paid in a country outside India;
(c) any relief of tax allowed under section 90A on account of tax paid in a specified territory outside India referred to in that section;
(d) any deduction, from the income-tax payable, allowed under section 91, on account of tax paid in a country outside India; and
(e) any tax credit allowed to be set off in accordance with the provisions of section 115JAA [or section 115JD].]
Let us understand computation of section 234A of the Act by this simple illustration:
e.g. The Income tax payable of an Individual was Rs 540,000 while tds was Rs 340,000.
Advance tax already paid was Rs 120,000.
Calculation of Interest under section 234B as follows :-
Tax Liability was Rs 540,000 while TDS was Rs 340,000.
Assessed Tax: Rs 200,000 (540,000- 340,000)
Now for computing interest under section 234B, 90 % of 200,000 shall be computed (and not Rs 540,000)
Rs 200,000* 90% = Rs 180,000
So amount of advance tax paid was less than amount payable by Rs 60,000 (180,000-120,000).
The total interest under section due will be: Rs 60,000 * 1%* 10 months (April-January) = Rs 6,000.