What Are The Penalties For Delaying Tax Payments During Litigation?

In India, delaying tax payments during the course of tax litigation can result in additional financial burdens for taxpayers. Even if a dispute is pending, the Income Tax Act imposes penalties and interest for late payments, ensuring that tax obligations are met in a timely manner. These penalties are separate from the final decision of the court or tribunal and are aimed at maintaining compliance and discouraging delayed payments.

Penalties for Delaying Tax Payments During Litigation:

1. Interest on Outstanding Tax (Section 234A, 234B, and 234C)

Interest under Section 234A:

If a taxpayer has not paid the full amount of tax due as per the assessment or return filed, they will be liable to pay interest under Section 234A for the period of delay. This applies if the tax is not paid by the due date specified in the notice of demand or by the due date of filing the return.

Interest Rate: The interest is charged at a rate of 1% per month or part of a month for the period of delay.

Interest under Section 234B:

This section imposes interest if the taxpayer has not paid advance tax or self-assessment tax before the due date.

Interest Rate: The interest rate is 1% per month on the outstanding amount, calculated from the due date until the actual payment date.

Interest under Section 234C:

If the taxpayer fails to pay advance tax in installments as per the prescribed schedule, interest is charged under this section.

Interest Rate: The rate is 1% per month on the unpaid amount for the delayed period.

2. Penalty for Late Payment of Tax (Section 221)

Penalty for Failure to Pay Tax:

Under Section 221 of the Income Tax Act, if a taxpayer defaults in payment of tax, a penalty may be levied by the Assessing Officer (AO). However, the penalty is not automatic and depends on the circumstances of the case.

The penalty may range from 10% to 100% of the tax amount that remains unpaid. The penalty will depend on whether the taxpayer has shown wilful default or negligence in paying taxes. If the taxpayer makes an attempt to settle the tax arrears or submits a satisfactory explanation, the penalty might be reduced or waived.

No Penalty During Appeal:

A taxpayer who is in the process of filing an appeal against an assessment order might be able to request a reduction or suspension of penalties if the appeal is based on a valid legal argument. However, the penalty for late payment of tax still applies.

3. Compounding of Offenses

For certain cases, where a taxpayer is continuously delaying payment despite the assessment, the tax authorities may decide to compound the offense. Compounding refers to an agreement between the taxpayer and the authorities where the taxpayer may be allowed to pay a lump sum amount in exchange for not being prosecuted. However, this option is not always available and is typically used in cases of minor defaults.

4. Impact on Taxpayer's Reputation and Credit Rating

Continuous delays in paying taxes during litigation can damage the taxpayer’s reputation and could lead to difficulties in obtaining loans or conducting business transactions. Lenders, investors, and partners may consider the taxpayer’s non-compliance as a risk factor.

5. No Stay on Penalties During Litigation

No Stay on Penalty:

Even though a taxpayer may be appealing the tax assessment in a court or tribunal, penalties and interest on unpaid taxes continue to accrue during the litigation process. The stay of penalty is not granted automatically unless the court or tribunal specifically orders it.

Interest on Penalty:

In cases where penalties are levied for delayed payment, the taxpayer might also be required to pay interest on the penalty amount itself, further increasing the financial burden.

6. Relief or Waiver of Penalties

Request for Waiver:

In certain cases, taxpayers may request the Income Tax Appellate Tribunal (ITAT) or High Court to waive penalties or interest on the grounds of genuine hardship, such as medical conditions, inability to pay due to financial constraints, or if the appeal is likely to succeed.

However, such relief is generally granted only if the taxpayer has made efforts to settle the tax dispute and cooperated with the authorities.

Example:

Suppose a business has filed an income tax return for the financial year 2020-21 but has not paid the due tax on time. If the tax authority issues a notice demanding the tax and the business fails to make the payment, the following penalties would apply:

• Interest under Section 234A: If the tax is paid late, the business would be liable to pay interest at the rate of 1% per month on the unpaid tax.
• Penalty under Section 221: The tax authority may also impose a penalty of up to 100% of the unpaid tax, depending on whether the default was willful or due to negligence.
• Impact on Appeal: If the business is contesting the assessment in a tax tribunal, the penalties and interest would continue to apply unless the tribunal orders otherwise.

Conclusion:

Delaying tax payments during litigation can lead to the imposition of penalties and interest, even while a case is under appeal. The Income Tax Act mandates that interest and penalties accrue for unpaid taxes, which increases the financial burden on taxpayers. However, taxpayers may be able to request relief or waiver of penalties in certain circumstances, such as genuine hardship. It is essential for taxpayers to pay the due taxes on time or seek proper legal relief to avoid accumulating penalties and interest during the litigation process.