Can Interest Be Charged On Disputed Tax Amounts?

In India, interest can indeed be charged on disputed tax amounts, even while a case is under appeal or litigation. Disputed tax amounts refer to taxes that the taxpayer has not paid but are contested in a tax dispute or pending appeal. The Income Tax Act does not offer a blanket waiver of interest on such disputed amounts during the pendency of litigation, and interest may continue to accrue until the final resolution of the matter.

Can Interest Be Charged on Disputed Tax Amounts?

1. Interest Under Section 234A – Late Payment of Tax

Section 234A of the Income Tax Act applies when a taxpayer does not pay the taxes due on or before the due date specified in the Income Tax Act.

Even if the tax amount is disputed, if the taxpayer has not paid the tax by the due date, interest under Section 234A will still be charged. This interest continues to accumulate during the appeal process or litigation.

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

Example: If a taxpayer owes ₹1,00,000 in tax and disputes this amount in an appeal, but does not pay the tax by the due date, interest will accrue at 1% per month on ₹1,00,000 until the tax is paid or the dispute is resolved.

2. Interest Under Section 234B – Failure to Pay Advance Tax

Section 234B applies when a taxpayer has not paid sufficient advance tax during the year, and interest is levied on the outstanding amount.

In cases where there is a disputed tax amount, interest under Section 234B may still be applicable because the dispute does not affect the requirement to pay advance tax. If the taxpayer has not paid the advance tax, interest is charged on the unpaid amount, regardless of the dispute.

Interest Rate: This interest is also charged at 1% per month from the due date of the advance tax installment until the amount is paid.

3. Interest Under Section 234C – Deferred Payment of Advance Tax

Section 234C imposes interest if a taxpayer does not pay their advance tax in the prescribed manner, particularly in the required installments.

Interest will be charged if the taxpayer has not paid their advance tax installments correctly, even if the amount is under dispute.

Interest Rate: The interest charged is 1% per month on the amount of shortfall in the advance tax installment.

4. No Waiver of Interest During Litigation

The Income Tax Act does not provide an automatic stay on interest charges for disputed tax amounts during litigation. Therefore, even if the taxpayer is challenging the tax assessment, interest will continue to accrue during the appeal process.

The courts or tribunals do not typically have the authority to stay or waive interest unless a specific legal provision applies, and interest charges are separate from the main issue being contested.

5. Possibility of Relief on Interest

In certain circumstances, a taxpayer may request relief from interest payments or penalties during litigation, but such requests are rarely granted unless there are exceptional circumstances, such as:

• Financial hardship.
• The dispute involves complex legal issues.
• The taxpayer can show that the delay was due to genuine reasons beyond their control.

The taxpayer can also argue that interest should not be levied if the dispute is likely to succeed in their favor, but the standard practice is to continue charging interest until a final decision is made.

6. Final Outcome Impact on Interest

If the disputed tax is ultimately ruled in the taxpayer's favor (e.g., the court or tribunal reduces or removes the disputed tax liability), the interest paid on the disputed amount will not be refunded automatically. However, taxpayers can potentially claim refunds of any excess tax paid (including interest) after the final judgment is made.

Example: Suppose a taxpayer disputes an assessment order that demands ₹1,00,000 in tax for the financial year 2020-21. The taxpayer decides to appeal the order:

• The due date for paying the tax is 31st July 2021, but the taxpayer has not paid the disputed tax.
• Interest under Section 234A starts accumulating at 1% per month from 31st July 2021, even while the matter is under appeal.
• If the taxpayer has failed to pay advance tax earlier, interest under Section 234B and Section 234C will also apply.
• If the taxpayer wins the appeal and the disputed tax is reduced or eliminated, they might be able to claim a refund for any overpaid tax, but the interest charges on the disputed tax may still apply unless specifically waived or reduced.

Conclusion:

In India, interest can be charged on disputed tax amounts during the litigation process. The Income Tax Act continues to charge interest under Sections 234A, 234B, and 234C for the late payment of tax, even if the amount is under appeal. While it is possible to request relief or waiver in exceptional cases, interest typically continues to accrue until the dispute is resolved. Taxpayers are encouraged to pay their taxes on time or seek proper legal relief to minimize the financial impact of interest during tax litigation.