Income Tax

Non Payment of Taxes after Demand – Interest u/s 220(2) IT Act

Non Payment of Taxes after Demand - Interest u/s 220(2) IT Act

Section 156 of the IT Act provides that in cases wherein any penalty, fine or any other sum is required to be paid as per this Act, the AO must serve a demand notice upon the assessee in Form No.7 specifying the amount to be paid. And if the same isn’t paid within a span of 30 days of the service of notice, the assessee would be liable towards the payment of a simple interest @ 1% for every month or part of the month, the period of interest is calculated from the due date until the payment is met.

The AO has the power to make a reduction in the period of payment, making it lesser than 30 days if there is a valid reason for such  concession otherwise, the assessee shall be liable to pay interest u/s 220(2) of the IT Act, which is discussed in detail in the present article.

Interest u/s 220(2) of the IT Act: Meaning

As per the first proviso to Section 220(2), if there has been a reduction in the taxes payable under this section, the interest shall be reduced accordingly, and any excess interest paid shall be refunded. 

The second proviso u/s 220(2) states that consequential to an order under the first proviso, the interest payable as per the section has been reduced; subsequently, based on the order as per this section or Section 263, interest payable u/s 220 is increased, the assessee would be liable for payment of interest u/s 220(2) on the amount payable of such order, immediately after the lapse of the due date. Payment of interest must continue until the date of final payment.

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Interest u/s 220(2) of the IT Act: Purpose

The interest u/s 220(2) of the Act is levied to encourage the assessee towards timely payment of taxes as any failure n respect of the same shall be both expensive and time-consuming for them. 

Need for Payment of Taxes by Companies Operating in India

The companies operating in India need to ensure the payment of taxes on the income generated through their operations due to the following reasons-

  • Compliance with the taxation system of India 
  • Provide funds for the essential government programs 
  • Ensure a profitable business along with the creation of employment in the country.

The Indian taxation system allows them to pay taxes on their profits rather than sales.

For this purpose, the company files its ITR (Income Tax Return) with the IRD, an acronym for Indian Revenue Department, which calculates the tax liability of the company, followed by sending a demand notice to the company, which must  be paid by the company which must be paid within 30 days from the receipt of the said notice.

In the event of failure towards the payment of tax within the prescribed time limit by the company, the department shall have the authority to take numerous actions, such as the seizure of the company’s assets, along with passing an order of attachment of the same. 

Calculation of Interest

  • If the assessee fails to pay their taxes after the receipt of a demand notice, the government can charge interest on the unpaid amount the rate of which may vary depending upon the country.
  • For the calculation of interest the government shall first determine the time that has passed since the receipt of the demand notice to the assessee.
  • The time is converted into a percentage by dividing it by 100   which is then multiplied by the unpaid balance to get the interest rate.
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Consequences of Non-payment of Taxes by Individual/ Companies  

In case any individual/company fails to pay taxes despite it being an obligation for them, it can attract numerous penalties such as the imposition of fines, imprisonment and even deportation in the worst cases. 

The imposition of a fine is the first step towards such penalty, which is determined on the basis of the severity of the offence and the financial condition of the assessee.  

If the assessee doesn’t pay the taxes despite being financially equipped for the same even in instalments, it shall result in him being imprisoned. The assessee shall be required to serve the prescribed sentence in order to get released.

The assessee can be deported upon its failure to reply to the notice served by the government. Although deportations are rare, non-compliance with the tax obligations by the assessee can compel the government to take this huge step. 

Reduction/Waiver of Section 220(2)

Despite the provisions of Section 220(2), the concerned officer can reduce the interest payable if the following conditions are 

  • Payment of such an amount may lead to genuine hardship to the taxpayer.  
  • The Non-Payment of the interest was due to circumstances beyond the control of the assessee.
  • The assessee has extended his/her cooperation in any inquiry in relation to the assessment of any proceeding for the purpose of recovery of any amount so due.

Time-Limit for Adjudicating the Application with regard to Waiver of Interest

The time limit for making a decision regarding the waiver of interest must be made within 12 months from the ending of the month from the receipt of the application for such a waiver. Before concluding about its rejection, the assessee must be given an opportunity of being heard. A petition of waiver of interest u/s 220(2A) can be made even after the payment of interest by the assessee.

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Despite the payment of taxes being challenging, it is essential to do it in accordance with the law. Any non-compliance with the provisions of section 220(2) of the Act shall make the assessee liable for penalties. Therefore it is advisable to ensure timely tax[1] payment to keep such penalties at bay. 

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