Income tax law by design has provisions with enabling powers to authorized officers for waiver of interest to provide respite to the taxpayers in genuine hardship cases upon meeting certain conditions. However such waivers are rare and made on case-to-case basis meaning therefore that the assessee has to seek them by way of an application to the designated person citing genuine hardship. The authorities are expected to see that the conditions for grant of waivers are complied within the case circumstance and only if satisfied can they grant such waiver.
Chapter VII-D lead section 220 (2) provides for charge of running order simple interest at 1% per month on unpaid demands. Chapter VII-F next in the sequence contains provisions for charge of interest in certain situations. For instance Section 234A seeks to levy interest at 1 % per month for default in filing of return of income. Section 234B provides 1 % per month charge for default in payment of advance tax. Section 234C further provides for a charge at 1 % per month for deferment of advance tax. Income taxes are payable as we earn incomes. The Karnataka High Court in Canbank Financial Services Ltd. v. CCIT (2020) 423ITR113 held that advance tax is payable on accrual of income even before these are actually realized in bank. Any default in this regard has implications of charge of interest. Later after when a return is furnished and processed or assessed, as the case may be there may be a case of additional sums payable. These further add to the interest burden upon the assessee for short estimating his incomes. Finally for any failure to discharge the outstanding demand a further interest is chargeable u/s 220(2).
Waiver scheme and guidelines
Sub-section (2A) of section 220 reads as under:-
(2A) Notwithstanding anything contained in sub-section (2), the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner may reduce or waive the amount of interest paid or payable by an assessee under the said sub-section if he is satisfied that—
(i) payment of such amount has caused or would cause genuine hardship to the assessee ;
(ii) default in the payment of the amount on which interest has been paid or was payable under the said sub-section was due to circumstances beyond the control of the assessee ; and
(iii) the assessee has co-operated in any inquiry relating to the assessment or any proceeding for the recovery of any amount due from him:…..
On the other hand, the Direct Tax Laws (Amendment) Act, 1987, inserted sections 234A, 234B and 234C in the Income-tax Act from the assessment year 1989-90 to provide for penal interest for the defaults in late furnishing of the return of income, defaults in payment of advance-tax and for deferment of advance-tax respectively and omitted separate penalty provisions for these defaults. The interest payable under these sections was mandatory and there was no provision for reduction or waiver of the penal interest which position was subsequently also affirmed by the Supreme Court in CIT v. Anjum M. H. Ghaswala [2001] 252 ITR 1. To mitigate unintended hardships in certain limited circumstances the Central Board of Direct Taxes from time to time have issued notifications u/s 119 (2) (a) starting 23 may 1996 for reduction or waiver of penal interest under section 234A, or section 234B or section 234C of the Act in the classes of cases or classes of income as are specified therein. However, that does not include a genuine hardship circumstance like the one referred to in section 220 (2A) scenario.
Genuine hardship meaning
The Madras High Court in TCV Engineering Limited v Assistant CIT (2020) 426ITR516 was grappled with assessee’s case of application for waiver of interest u/s 220 on the ground of genuine hardship. In particular, the assessee-company in respect of the tax due for the assessment years 1996-97 and 1997-98, had applied for the waiver under section 220(2A) of the Income-tax Act, 1961. For the assessment year 1996-97, the demand was Rs. 10,34,719 and for the assessment year 1997-98, the demand was Rs. 3,79,120 towards the interest payable under sections 234A, 234B and 234C.In other words there was also a charge of interest on interest.
Further, the assessee-company had been incurring loss for the past 4 years, therefore, they were undergoing a financial crisis and the assessee could not get any funds due to lack of business even to meet the day-to-day expenses. In these circumstances therefore the assessee claimed that it was facing genuine hardship in making the payment of interest as demanded.
Following the dictionary meaning of the words ‘genuine’ and a catena of the decisions of the Supreme Court on the terminology ‘genuine hardship’ the High Court held as under:
“Under sub-section (2A) of section 220 of the Income-tax Act, 1961 , the Principal Chief Commissioner or the Commissioner or the Principal Commissioner or the Commissioner is vested with the power to reduce or waive the amount of interest paid or payable by the assessee under sub-section (2). For seeking such a waiver, the assessee must satisfy three conditions. The first condition is that the assessee must have genuine hardship, the second condition is that the non-payment was due to circumstances beyond the control of the assessee and the third condition is that the Revenue must have the satisfaction that the assessee has cooperated in an inquiry relating to the assessment or any proceeding for the recovery of any amount due from him. In B. M. MALANI v. CIT [2008] 306 ITR 196 (SC) the word genuine has been exhaustively explained by the Supreme Court, especially in the context of section 220(2A). The hardship faced by the assessee need not be mere hardship but it should be a genuine hardship. In this context, in BENARA VALVES LTD. v. CCE [2009] 20 VST 297 (SC), the Supreme Court made it clear that in the Indian context, undue hardship is normally related to economic hardship and undue means something which is not merited by the conduct of the claimant or is very much disproportionate to it. Pg 516
“Applying the aforesaid principle mentioned in the said case, namely, Poompuhar Shipping Corporation Ltd.’s case, and also the principle in general that, the genuine hardship in Indian condition is nothing but the financial hardship as held by the apex court as cited above, the present reason cited by the Revenue in the impugned order, in the considered view of this court, cannot be considered to be a worthy reason for rejecting the plea made by the assessee for waiver.
Since the assessee already complied with the third condition and in respect of the first and second conditions, which are coupled with each other, regarding the genuine hardship, to some extent the assessee was able to demonstrate the reasoning, it should have been considered in proper perspective by the Revenue. Pg 534
Covid-19 and Economic hardship
In the present times, the economic activity has been on halt for last more than seven months since March 2020. Businesses have been under tough liquidity positions with cogent and definite evidence. In these circumstances therefore there is a valid ground for the grant of a waiver of interest to the taxpayer on the basis of economic hardship. Taxpayers may therefore suo motu apply in this regard and seek a waiver of interest.
To be just and fair the CBDT may forthwith come out with a notification u/s 119(2) (a) to also provide a waiver of interest u/s 234A, B and C to assessee’s engaged in the worst affected sectors with rippling effect such as hotels and hospitality, travel and tourism, realty, retail, financial and automobiles.