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Meaning of Assessed Tax for the purpose of section 234B

CA Harsh Kothari , Last updated: 28 September 2023  
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Introduction:

We regularly face situations where we are required to compute interest under section 234B of the Income tax Act, 1961 (Act). 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 without the aid of excel utilities. This article aims to simplify calculation of section 234B and understand the important concept of “Assessed Tax”.

Plain text of section 234B of the Act is as follows:

Text Box: (1) Subject to the other 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 it is evident from the plain reading of 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”.

Explanation 1 to section 234B of the Act, explains the meaning of assessed tax as follows:

Text Box: Assessed tax means the tax on the total income determined under sub-section (1) of section 143 and where a regular assessment is made, the tax on the total income determined under such regular assessment as reduced by the amount of,— (i) 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; (ii) any relief of tax allowed under section 90 on account of tax paid in a country outside India; (iii) any relief of tax allowed under section 90A on account of tax paid in a specified territory outside India referred to in that section; (iv) any deduction, from the Indian income-tax payable, allowed under section 91, on account of tax paid in a country outside India; and (v) any tax credit allowed to be set off in accordance with the provisions of section 115JAA [or section 115JD].]  

When interest is charged to a taxpayer under Section 234B?

The two conditions under which interest is charged to a taxpayer under Section 234B:

  • Delayed Advance Tax Payment: Interest is charged if the taxpayer delays the payment of advance tax, and their tax liability after reducing TDS for the financial year is Rs 10,000 or more.
  • Insufficient Advance Tax Payment: Interest can also be levied if the taxpayer paid advance tax but the amount paid is less than 90% of the assessed tax liability.

Let us understand computation of section 234B of the Act by this simple illustration:

Suppose the tax liability of an Individual Assessee was Rs 540,000 while tax deducted at source was Rs 340,000.

Advance tax paid was Rs 120,000.

Calculation of Interest:

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

Therefore amount of advance tax paid was less than amount payable by Rs 60,000  (180,000-120,000).

The total interest due will be: Rs 60,000 * 1%* 10 months (April-January) = Rs 6,000.

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Published by

CA Harsh Kothari
(Consultant)
Category Income Tax   Report

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