Interest for defaults in furnishing return of income [Section 234A] under Scheme of Mandatory Interest :

1. Where the return of income for any assessment year under sub-section 139(4) or in response to a notice under section 142(1), is furnished after the due date or is not f urnished, the assessee shall be liable to pay simple interest at the rate of 1% for every month or part of a month comprised in the period commencing on the day immediately following the due date and,

(a) where the return is furnished after the due date, ending on that date of furnishing the return; and

(b) where no return has been furnished, ending on the date of completion of assessment under section 144.

2. The amount on which interest will be payable will be the amount of the tax on the total income as determined under section 143(1) or on regular assessment, as reduced by the amount of –

(i) advance tax, if any, paid ;

(ii) any tax deducted or collected at source;

(iii) any relief of tax allowed under section 90 or 90A;

(iv) any deduction of tax allowed under section 91;

(v) any tax credit allowed to be set-off in accordance with the provisions of section 115JAA or section 115JD.

3. ‘Due date‘ means the date specified in section 139(1) as applicable in the case of the assessee.

4. The tax on total income as determined under section 143(1) shall not include additional income-tax payable under section 143.

5. Where in relation to an assessment year an assessment is made for the first time under section 147, the assessment so made shall be regarded as regular assessment for the purposes of this section.

6. The interest payable under this section shall be reduced by the interest paid under section 140A.

7. Where the return of income for any assessment year required by a notice under section 148 issued after the determination of income under section 143(1) or after completion of assessment under section 143(3) or section 144 or section 147 is furnished after the expiry of the time allowed under such notice, or is not furnished, the assessee shall be liable to pay simple interest at the rate of 1% for every month or part of a month comprised in the period commencing on the date immediately following the expiry of the time allowed as aforesaid and,

(i) where the return is furnished after the expiry of the time aforesaid ending on the date of furnishing the return;

(ii) where no return has been furnished ending on the date of completion of the reassessment or re-computation under section 147.

8. The amount on which the above interest is payable is the amount by which the tax on the total income determined on the basis of such reassessment or re-computation exceeds the tax on the total income determined under section 143(1) or on the basis of the earlier assessment aforesaid.

9. Where as a result of an appellate order or an order of the revision or an order from the Settlement Commission, the interest payable is reduced or increased the Assessing Officer shall proceed as follows:

(i) Where the interest is increased, the Assessing Officer shall serve on the assessee a notice of demand in the prescribed form specifying the sum payable and such demand notice shall be a notice under section 156.

(ii) Where interest is reduced, the excess paid shall be refunded.

10. Interest under section 234A not chargeable on self assessment tax paid before the due date of filing of return of income [Circular No. 2/2015, dated 10-2-2015]

Interest under section 234A is charged in case of default in furnishing return of income by an assessee. The interest is charged at the specified rate on the amount of tax payable on the total income, as reduced by the amount of advance tax, TDS/TCS, any relief of tax allowed under section 90 and 90A, any deduction allowed under section 91 and any tax credit allowed in accordance with section 115JAA and section 115JD. Since self-assessment tax is not mentioned as a component of tax to be reduced from the amount on which interest under section 234A is chargeable, interest is being charged on the amount of self -assessment tax paid by the assessee even before the due date of filing of return.

However, it has been held by Hon’ble Supreme Court , in the case of CIT vs Prannoy Roy (2009) 309 ITR 231, that interest under section 234A on default of furnishing return of income shall be payable only on the amount of tax that has not been deposited before the due date of filing of the Income-tax return for the relevant assessment year.

Accordingly, the CBDT reviewed the present practice of charging interest and decided that no interest under section 234A shall be charged on self assessment tax paid by the assessee on or before the due date of filing of return.