Monday, September 20, 2010

Interest on Late payment of Advance TAX 234B and 234C- income from capital gains


on Monday, September 20, 2010

One of my clients is a sole proprietor. His income from business for the year ending March 31, 2010 is Rs. 15,80,000. He is entitled for a deduction of Rs. 1,00,000 under section 80C. During the financial year 2009-10, he has paid advance tax as follows–


Rs.
Business income
15,80,000
Less: Deduction under section 80C
1,00,000
Net income
14,80,000
Tax on net income for the assessment year 2010-11
3,58,440
Less: Tax credit available in respect of TDS
76,500
Balance
2,81,940
30% of balance
84,582
Advance tax installment paid on September 12, 2009
85,000
60% of balance
1,69,164
Advance tax installment paid on December 6, 2009
84,500
Advance tax installment paid on March 8, 2010
1,14,000

As can be seen from the above data, my client has paid advance tax before due dates and the amount paid is not less than the amount which is otherwise payable by way of advance tax as per law. On March 17, 2010, he has transferred 10,000 equity shares of a company and short-term capital gains chargeable to tax under section 111A comes to Rs. 80,00,000. Since no instalment becomes due after March 17, 2010, he has not paid any advance tax during 2009-10 in respect of short-term capital gains. Sections 234B and 234C should not be invoked in such a case. I want to know your expert opinion on this point.
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Section 234C gives mode of calculation of interest for deferment of advance tax. Proviso to section 234C(1) gives a relief in the case of payment of advance tax on income from capital gains and winnings from lotteries. Proviso to section 234C(1) is given below–

“Provided that nothing contained in this sub-section shall apply to any shortfall in the payment of the tax due on the returned income where such shortfall is on account of under-estimate or failure to estimate—
(a) the amount of capital gains; or
(b) income of the nature referred to in sub-clause (ix) of clause (24) of section 2,

and 
the assessee has paid the whole of the amount of tax payable in respect of income referred to in clause (a) or clause (b), 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 the 31st day of March of the financial year”.

To get the benefit of this proviso, your client should have deposited tax on short-term capital gain on or before March 31, 2010. Tax on Rs. 80,00,000 comes to Rs. 12,36,000 under section 111A. If Rs. 12,36,000 is deposited before April 1, 2010, section 234C will not be applicable. As your client has not deposited tax on short-term capital gain before the end of the financial year, penal interest under section 234C will be applicable and it will be calculated as follows–


Rs.
Rs.
Business income

15,80,000
Short-term capital gain (generated during March 2010)

80,00,000
Gross total income

95,80,000
Less: Deduction under section 80C

1,00,000
Net income

94,80,000
Tax on net income

15,94,440
Less: Tax credit

76,500
Balance

15,17,940
30% of balance
4,55,382

Less: Advance tax paid up to September 15, 2009
85,000

Short fall (first instalment) (rounded off)
3,70,300

Interest for short payment of first instalment (1% for 3 months on Rs. 3,70,300)

11,109
60% of balance tax payable
9,10,764

Less: Advance tax paid up to December 15, 2009
1,69,500

Short fall (second instalment) (rounded off)
7,41,200

Interest for short payment of second instalment (1% for 3 months on Rs. 7,41,200)

22,236
100% of balance
15,17,940

Less: Advance tax paid up to March 15, 2010
2,83,500

Short fall (third instalment) (rounded off)
12,34,400

Interest for short payment of third instalment (1% on Rs. 12,34,400)

12,344
Interest under section 234C

45,689
Short fall for the purpose of interest under section 234B will be calculated as under–

Rs.
Tax on net income (after TDS credit)
15,17,940
90% of tax calculated above
13,66,146
Advance tax paid during the financial year 2009-10 (Rs. 85,000 + Rs. 84,500 + Rs. 1,14,000)
2,83,500
Short fall in payment of advance tax (Rs. 15,17,940 – Rs. 2,83,500)
12,34,440


Advance tax paid during the financial year 2009-10 is less than 90% of assessed tax. Consequently, on the short fall of Rs. 12,34,400 interest will be payable at the rate of 1 per cent per month from April 1, 2010 to the date of payment of self-assessment tax. If self-assessment tax is not paid, interest would be payable up to the date of assessment.
By:Dr. Vinod K. Singhania

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