Section 234D in Income Tax Act, 1961 was introduced in the act to cover those situations where the refund was issued to the assessee according to intimation U/s 143(1) & later on it was discovered post Scrutiny Assessment that the assessee wasn’t eligible for refund or amount of refund was more than amount refunded after processing of the Income Tax Return u/s 143(1).
For Example, Mr. X filed Return of Income for the Assessment Year 2017-18 & total Tax Liabilities was Rs 8 Lacs. Prepaid Taxes in form of TDS & Advance Tax amounting to Rs 9 Lacs. The ROI was filed us 139(1) & intimation was generated on 30/12/2017 & refund of Rs 1 Lacs was processed & credited along with interest us 244A to the assessee. Later on, the case of the assessee has opened us 143(3) & notice us 143(2) was issued. While finalizing the assessment order on 25/06/2019, the demand notices u/s 156 were issued & the assessee was liable to pay Net Demand of Rs 1.6 Lacs.
In this entire scenario, the assessee received Rs 1 Lacs on 30/12/2017 & the same funds were used by him to generate other incomes. It means there is some sort of opportunity costs associated with those funds. Therefore section 234D was introduced to cover the opportunity costs i.e. Interest in favor of the Revenue.
Provisions of Section 234D followed by Section 143(1D) of the Income Tax Act, 1961
Interest on excess refund.
234D. (1) Subject to the other provisions of this Act, where any refund is granted to the assessee under sub-section (1) of section 143, and—
(a) no refund is due on regular assessment; or
(b) the amount refunded under sub-section (1) of section 143 exceeds the amount refundable on regular assessment,
the assessee shall be liable to pay simple interest at the rate of one-half per cent on the whole or the excess amount so refunded, for every month or part of a month comprised in the period from the date of grant of refund to the date of such regular assessment.
(2) Where, as a result of an order under section 154 or section 155 or section 250 or section 254 or section 260 or section 262 or section 263 or section 264 or an order of the Settlement Commission under sub-section (4) of section 245D, the amount of refund granted under sub-section (1) of section 143 is held to be correctly allowed, either in whole or in part, as the case may be, then, the interest chargeable, if any, under sub-section (1) shall be reduced accordingly.
Explanation 1.—Where, in relation to an assessment year, an assessment is made for the first time under section 147 or section 153A, the assessment so made shall be regarded as a regular assessment for the purposes of this section.
Explanation 2.—For the removal of doubts, it is hereby declared that the provisions of this section shall also apply to an assessment year commencing before the 1st day of June, 2003 if the proceedings in respect of such assessment year is completed after the said date.
(1D) Notwithstanding anything contained in sub-section (1), the processing of a return shall not be necessary, where a notice has been issued to the assessee under sub-section (2).
Frequently Asked Question on Section 234D along with Section 143(1D)
1) Is it necessary to process the Return of Income us 143(1) in all the cases where Return of Income is filed by the assessee under Income Tax Act, 1961?
Ans – Only the return of income which was filed by the assessee us 139 or in response to in notice us 142(1) shall process us 143(1). However, in Income Tax Act, 1961 return of Income has also been filed us 148 & 153A. Therefore, ROI filed us 148 or 153A shall not process us 143(1).
2) The due date for furnishing the ROI U/s 139(1) for Assessment Year 2017-18 was 31/07/2017. Mr. X having Total Tax Liabilities of Rs 8 Lacs & prepaid Taxes of Rs 8.6 Lacs failed to filed the ROI us 139(1). Decide from the below case that whether ROI will be processed us 143(1) & also highlights the other relevant points:
Case A – Assessee receives notice us 142(1) on 10/08/2017 to file the ROI up to 25/08/2017 & Assessee filed the ROI on 22/08/2017.
Case B – Assessee receives notice us 142(1) on 10/04/2018 to file the Return of Income up to 25/04/2018 & assessee filed the Return of Income 15/04/2018.
Case C – Assessee receives notice us 142(1) on 10/04/2018 to file the ROI up to 25/04/2018 & Assessee didn’t file the ROI. The case was selected for best judgment assessment us 144 & total tax liabilities was Rs 8.2 Lacs.
Case D – Assessee didn’t file the ROI up to 25/04/2018 & the case wasn’t select for Best Judgment Assessment.
Case E – Assessee filed the ROI on 15/04/2018 in response to notice U/s 142(1). AO invoke Section 241A introduced by Finance Act, 2017.
Ans: The Return of Income which was filed in case A was considered as ROI U/s 139(4) irrespective of the fact it was filed after the notice us 142(1). Since ultimately return was filed within the time limits prescribed us 139(4). This ROI will be processed us 143(1). ROI filed in Case B will be considered as ROI us 142(1) & it will also Process us 143(1) & refund will issue to the assessee.
In Case C, since the assessee hasn’t filed ROI. Hence, the question of Procession of Return is not relevant. The Assessee will eligible to set off his prepaid taxes against the enhanced tax liabilities.
In Case of D, Assessee wasn’t eligible for a Refund since he didn’t file the Return of Income. Options available with the assessee to claim the credit of prepaid taxes are:
a) File a condonation letter to the appropriate authority & request them to allow the assessee to file the ROI us 119(2)(b).
b) If in the future the case of the assessee was selected for Income Escaping Assessment or Search & Seizure then he can claim the credit of Prepaid taxes.
In the case of E, even the assessee filed the ROI still Return will not be processed until the Assessment Order us 143(2) read with Section 153(1) is passed by the AO.
3) Means is it correct to conclude that any Return of Income which has filed us 139 will mandatory processed us 143(1)?
Ans – the answer to the above FAQs can be given in two folds:
Position before Finance Act, 2016: As per Section 143(1D) Notwithstanding anything contained in sub-section (1), the processing of a return shall not be necessary, where a notice has been issued to the assessee under sub-section (2).
i) If Return of Income is selected for Scrutiny Assessment by issuing notice us 143(2) then it is not necessary that Processing of Income us 143(1) is mandatory. It means the processing of the ROI can be upheld till the time of passing the Assessment Order.
ii) It is not like that in every case of scrutiny assessment intimation us 143(1) can’t be issued before the issue of Scrutiny notice us 143(2).
iii) Invoking of Section 143(1D) is not mandatory in each & every case where the case was going to select for Scrutiny Assessment. In nutshell, it may be possible that the revenue could issue refund us 143(1) & later on the case was selected for scrutiny assessment.
iv) This section acted as a precautionary measure for the Income Tax Department to upheld the refund so that interest on the revenue can be saved in case of defaulters/tax evaders.
v) However, this may also lead to hardship in genuine cases. Let’s consider an example, Mr. X a salaried employee having total Tax Liabilities of Rs 6 Lacs. Total Prepaid Taxes was Rs 7.5 Lacs out of which Rs 1.5 Lacs was TDS us 194A which was reflected in Form 26AS. Assessee case was selected for scrutiny Assessment & thus by invoking 143(1D) return wasn’t processed. The order was passed after 1 year & it was found that the assessee was rightly eligible for a refund. This may be the classic example of genuine hardship where the refund of the assessee was upheld just because the case was selected for scrutiny assessment.
Position after Finance Act, 2016: Finance Act, 2016 substituted section 143(1D) with Section 241A which allows the assessing officer to upheld the Refund only in the genuine cases after getting the prior approval of the Commissioner of Income Tax or Principal Commissioner of Income Tax. Therefore, w.e.f. Assessment Year 01/04/2017 refund can be upheld only when there is a genuine defaulter & that too with prior approval of PCIT/CIT. Hence, there will be a reduction in unnecessary withheld Refunds.
It means from Assessment year beginning from 01/04/2017 & onwards where any refund is granted to the assessee under intimation us 143(1) we can fairly presume that section 241A wasn’t invoked by the revenue in those cases.
4) Assessee X Limited filed its ROI for AY 2013-14 declaring total Income at Rs 20 Lacs with a Tax liability of Rs 6.8 Lacs. Prepaid Taxes was Rs 7.4 Lacs. The refund was granted to the assessee after the issue of Intimation us 143(1). On 30/06/2019 the case of the Assessee was selected for Income escaping assessment & the net demand was raised by the assessing officer of Rs 1.3 lacs after allowing the Tax Credit of Rs 7.4 Lacs. In the demand notice us 156 assessees was also asked to pay the interest us 234D on Rs 7.4 Lacs which is Rs 30,000/-The assessee argued that he was not liable to pay the Interest us 234D since Interest us 234D can be paid only when the demand was raised because of the reason of scrutiny assessment & not due to Income Escaping Assessment. Comment.
Ans- The contention of the assessee that interest us 234D was not applicable since the demand notice us 156 was issued to him under the assessment order us 147 reads with Section 153(2) is not as per Law.
Explanation to Section 234D clarifies that where the assessment made us 147 or 153A it will be regarded as a regular Assessment. In the given case, the case of the assessee was directly land to the Income Escaping Assessment for the first time hence the assessee was liable to pay the interest us 234D.
5) X hasn’t filed the ROI for the Assessment Year 2015-16 although total tax liabilities were Rs 14 Lacs & total prepaid taxes were Rs 16 Lacs. On 05/09/2018 the Assessing officer issue a notice to us 148 to assess the escaped Income of the Assessment Year 2015-16 & determine the net tax liabilities of Rs 15 Lacs. Comment on the applicability of Section 234D?
Ans:
i) Section 234D is applicable only when a refund was issued to the assessee already under section 143(1).
ii) To process the Return of Income pre-requisite is there must be a return of Income. If there is no return filed by the assessee processing of ROI couldn’t possible.
iii) If no processing took place refund couldn’t issue. If there was no refund issued to the assessee earlier then the question of applicability of Section 234D is redundant.
6. Return of Income for the Assessment Year 2012-13 was filed on 25/09/2012 us 139(1). Prepaid Taxes was Rs 20 Lacs. Total Tax Liabilities was Rs 13 Lacs. Refund us 143(1) was issued on 01/01/2013 along with interest us 244A. Scrutiny Assessment was conducted & the Assessment order was passed on 12/01/2015 & income was further reduced by Rs 1.3 Lacs & a refund was granted. On 05/06/2017 notice u/s, 148 was issued to the assessee & the Assessment order was passed against the assessee & the net demand raised u/s 156 was Rs 5.5 Lacs. Interest us 234D was also charged Rs 75,000/-. The assessee contended that Interest us 234D is not possible in case of Re-assessment. If the case was directly open U/s 147 for the first time then only interest us 234D can be levied. Comment
Ans- The comment of the Assessee is not as per Law. The explanation to Section 234D clarifies that if the case of the assessee opened us 147 or 153A for the first time then those assessments will be treated as a regular assessment for Section 234D.
It nowhere mentions that only during the first assessment case was subject to Section 234D. To sum up, consider the following examples:
i) No ROI is filed – Intimation U/s 143(1) couldn’t issue – Section 144 invoke – Interest U/s 234D not applicable since refund wasn’t issued earlier.
ii) No ROI is filed – Intimation U/s 143(1) couldn’t issue – Section 147 invoke – Interest U/s 234D not applicable since refund wasn’t issued earlier.
iii) No ROI is filed – Intimation U/s 143(1) couldn’t issue – Section 153A invoke – Interest U/s 234D not applicable since refund wasn’t issued earlier.
iv) ROI Filed – Intimation U/s 143(1) issued – before crediting the amount to the account of the Assessee – Notice us 143(2) was issued – Interest U/s 234D not applicable since refund wasn’t credited actually to the account of the assessee.
v) ROI Filed – Section 241A was invoked – Interest U/s 234D not applicable since refund wasn’t credited actually to the account of the assessee.
vi) ROI Filed – Intimation Issued along with Refund & Interest U/s 244A – Scrutiny Assessment completed & income reduced & refund issued- Case was selected for Section 147 & net demand raised – Interest U/s 234D will invoke since the case was select for Section 147 for the first time.
vii) ROI Filed – Intimation Issued along with Refund & Interest U/s 244A – Section 147 completed & amount was recovered along with Interest us 234D (since it was the first time case was land to section 147)- Case was again selected for Section 147 & further demand raised – Interest U/s 234D is not applicable since the assessee had already been recovered from the assessee.
7) What is the logic behind not covering Re-Assessment U/s 147 or Section 153A in Section 234D where the earlier assessment was made either U/s 147 or Section 153A?
Ans –
a) From the above discussion, it is cleared that until & unless ROI is processed u/s 143(1) & refund was issued the question of Section 234D couldn’t arise.
b) Assessment U/s 143(3) is a revenue-neutral Section. It means the Assessment order can go both in favor of revenue & against the revenue. On the other hand, Section 147 or 153A or 144 is solely made for the benefits of the Revenue. Let’s understand through some examples:
- ROI Filed – 143(1) done – Refund Credited – 143(3) done in favor of the Assessee – Case re-opened U/s 147 – Net Result was against the Assessee – this situation is required to cover U/s 234D – It is covered.
- ROI Filed – Losses of Rs 6 Lacs & TDS was Rs 2 Lacs – 143(1) done & refund was issued – 143(3) done & losses are reduced by 1.5 Lacs (no impact on the amount of refund) – Case open U/s 147 losses convert into Income of Rs 5 Lacs – this case has to cover U/s 234D to protect the Interest of Revenue.
- ROI Filed – Losses of Rs 6 Lacs & TDS was Rs 2 Lacs – 143(1) done & refund was issued – 147 done & losses are reduced by 1.5 Lacs (no impact on the amount of refund) – Case open U/s 147 losses convert into Income of Rs 5 Lacs – this case is not covered U/s 234D.
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Disclaimer:- This article is for information and shall not be treated as a solicitation in any manner or of any other purposes whatsoever. For the benefit of the reader, a short glimpse of provisions is presented in my language as per my capabilities. It shall not be used for any legal advice/opinion and shall not be used to rendering any professional opinion. Readers are advised to kindly go through original government publications and published case laws and judicial pronouncements. Errors may creep in and hence it will be highly appreciable to highlight such errors or providing suggestions for effective improvements.
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