Chennai ITAT quashes interest under section 234C following Assessee’s compliance with advance tax obligations

Introduction

The Hon’ble Chennai Income Tax Appellate Tribunal (“ITAT”) recently ruled that no additional interest under section 234C of the Income-tax Act, 1961 (‘the Act’) is warranted when the Assessee promptly discharges advance tax liability, as the obligation for advance tax on capital gains arises only after the transaction takes place. The said decision was given in the case of IDFC Financial Holdings Co. Ltd v. Deputy Commissioner of Income Tax (‘DCIT’), Chennai pronounced on 04 December, 2024. The Tribunal observed that the Assessee paid the full tax liability, including capital gains, either through remaining advance tax installments or by March 31 for gains arising after March 15 and hence, no additional interest under section 234C was justified.

Facts of the case

• IDFC Financial Holding Company Limited (‘Assessee’), is a public company incorporated in India and a wholly owned subsidiary of IDFC Limited.
• The Assessee filed its return of income on October 24, 2019, declaring INR 5,823.49 lakhs under normal provisions, INR 14,231.15 Lakhs as deemed income under section 115JB of the Act i.e., as per Minimum Alternate Tax (‘MAT’) provisions, and claimed a refund of INR 0.47 lakhs for the Assessment Year (AY) 2019-20.
• Taxes were paid as per MAT provisions since it was higher than the tax liability under normal provisions.
• The Centralized Processing Center (‘CPC’) processed the income tax return under section 143(1) of the Act and enhanced the interest under section 234C of the Act i.e., levy of interest for short payment of advance taxesto INR 148.04 Lakhs.
• The Assessee had computed the said interest under section 234C of the Act at INR 29.51 Lakhs.
• The enhanced demand arose due to interest under section 234C on advance tax related to capital gains from the sale of investments amounting to INR 140 lakhs which arose in the 4^th quarter (i.e. 28^th March 2024) of the AY 2019-20.

Judgements referred

• Supreme Court in the case of CIT Vs Rolta India Ltd. vide Civil appeal no. 135 of 2011
• Chennai ITAT in the case of M/s. Hamilton Industries Pvt. Ltd., in ITA No.218/Mum/2022
• Bombay High Court in the case of JCIT Vs Summit Industries Ltd
• Karnataka High Court in the case of Kwality Biscuits Ltd Vs CIT (243 ITR 519)
• Jaipur ITAT Jaipur in the case of M/s GIE Jewels (ITA No. 794/JP/2017),
• Mumbai ITAT in the case of Kumari Kumar Advani vs. ACIT [IT Appeal No. 7661 (MUM) of 2013]
• Express Newspapers Ltd v. Jt. CIT [2007] 15 SOT 41
• Mahendra U. Shah v. ACIT [IT Appeal No. 3048 (MUM) of 2003
• Hindustan International v. ITO (2010) 96 ITR 123 (Chnd)
• Commissioner of Income-tax v. Smt. Premlata Jalan [2003] 264 ITR 744 (Rajasthan)

Assessee’s Contention

• The Assessee contended that the book profit under MAT provisions, amounting to INR 14,231.15 Lakhs, included capital gains of approximately INR 140 Lakhs from the sale of investments. These capital gains were realized exclusively in the fourth quarter, i.e., on March 28, 2019.
• The Assessee claimed it accurately computed and paid advance tax on March 31, 2019, for these capital gains.
• However, the CPC accepted the income figures but mistakenly increased the interest under section 234C from INR 29.51 Lakhs to INR 148.04 Lakhs.
• The Assessee contended that the CPC erroneously included capital gains in the advance tax calculations for all quarters, despite the gains arising only in the 4th quarter.
• The Assessee emphasized that the interest under section 234C of the Act was correctly computed and paid at INR 29.51 Lakhs.
• The CIT(A) also upheld the CPC’s action, prompting the Assessee to file the instant appeal before the ITAT.

Assessing Officer’s (‘AO’) Contention

• The CPC accepted the income figures as per the income tax return but increased the interest under section 234C due to the shortfall in advance tax payments.
• The CPC included capital gains in the total income for all quarters, thereby computing the advance tax liability for each quarter based on the full annual income, rather than recognizing that capital gains arose only in the 4th quarter.
• Consequently, the interest under section 234C was enhanced to INR 148.04 Lakhs, reflecting the shortfall in advance tax payments for the first three quarters.
• The CPC maintained that the Assessee should have paid advance tax on capital gains in the earlier quarters, thereby justifying the enhanced interest demand.

Issues raised before the ITAT

Whether the Assessee is liable to pay the enhanced interest under section 234C of the Act, as computed by the CPC, by including capital gains in the advance tax for all quarters, despite the gains arising only in the 4th quarter?

Decision on the issue raised

Whether the Assessee is liable to pay the enhanced interest under section 234C of the Act, as computed by the CPC, by including capital gains in the advance tax for all quarters, despite the gains arising only in the 4th quarter?

• The ITAT examined the facts of the case and observed that the Assessee had duly paid the advance tax on 31 March 2019 with respect to the capital gains. It was found that the Assessee had complied with the legal obligation of timely advance tax payment, addressing all necessary requirements under sections 234A, 234B, and 234C of the Act. The ITAT observed that there were no discrepancies regarding the correct computation or payment of the advance tax due for the relevant assessment year.

• The ITAT acknowledged that while the CIT (A) cited certain circulars and case laws supporting the Revenue’s position, these were distinguishable from the current case, as they did not address the specific circumstances of capital gains arising late in the financial year.

• The ITAT underscored the importance of considering the nature of capital gains, particularly in cases where they are unanticipated and arise at the tail end of the financial year. The ITAT reiterated that the levy of interest under section 234C was not intended to penalize taxpayers who receive capital gains unexpectedly late in the financial year.

• On the basis of above observations, the ITAT concluded that the imposition of interest under section 234C was unjustified and ruled in favour of the Assessee, deleting the interest charge.

Conclusion

In this case, the ITAT’s ruling effectively overturned the enhanced interest charge under section 234C of the Act, acknowledging that the Assessee had complied with all the requisite conditions for advance tax payment, particularly considering the capital gains. The ITAT found that the capital gains were received unexpectedly and late in the financial year, a factor which played a significant role in its decision. This ruling aligns with previous decisions where interest under section 234C was not levied in situations where capital gains were unanticipated and arose later in the year, highlighting a consistent approach in recognizing the unique nature of such cases. The ITAT’s judgment reinforces the principle that interest charges under section 234C of the Act should not apply when the taxpayer could not have reasonably anticipated the capital gains in time to meet advance tax requirements.