Interest under Section 220(2) - Income Tax Act

Section 220(2) of the Income Tax Act consists of provisions for late payment of demand of tax, interest and penalty. This article seeks to explore its various provisions and applicability in brief.

Section 156

Before going further with this article, we need to understand Section 156 of the

Income Tax Act, which states that, on instances where any tax, penalty, fine or any other sum is payable in accordance with the Act, the Assessing Officer shall serve upon the assessee a notice of demand in Form No.7 specifying the amount to be paid. If the amount specified in any notice of demand as mentioned above is not paid within 30 days of the service of notice, the assessee shall be liable to pay a simple interest at the rate of 1% for every month or part of the month, and the period of interest will range from the due date until the payment is met. The Assessing officer can reduce the period of payment, making it lesser than 30 days, provided that the reason for the concession is valid.

Increase or Decrease on Interest payable under Section 220(2)

According to the first proviso to Section 220(2), if the taxes payable under this section has been reduced, interest shall be reduced accordingly, and excess interest paid, if any, shall be refunded. The second proviso under Section 220(2) states that, as a result of an order under in the first proviso, the interest payable under this section has been reduced, subsequently, based on order under this section or Section 263, interest payable under Section 220 is increased. The assessee would be hereby liable to pay interest under Section 220(2) on the amount payable of such order, immediately after the lapse of the due date. Payment of interest must continue until the date of final payment.

Issue of Notices

The Assessing Officer is responsible for issuing prior notices under Section 220(2), demanding the taxpayer to meet the payments required. Besides that, in cases where the Assessing Officer alters his/her assessment, a fresh notice of demand must be issued. The second demand notice will replace the initial one.

Reduction/Waiver of Section 220(2)

Notwithstanding anything contained in Section 220(2), the concerned officer may reduce the interest payable on the satisfaction of the following conditions:

Payment of such amount may cause genuine hardship to the assessee.
Default in the payment of the interest payable was due to circumstances beyond the control of the assessee.
The assessee has extended his/her co-operation in any inquiry relating to the assessment of any proceeding for the recovery of any amount due.

Time-Limit for Adjudicating the Application for Waiver of Interest

The decision on waiver of interest must be made within a period of 12 months from the end of the month in which the application is received. Before deciding on rejection, the assessee, like in many cases, must be given an opportunity of being heard. Petition of waiver of interest under Section 220(2A) can be filed even after the payment of interest by the assessee.

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Frequently Asked Questions

Common questions about Interest Under Section 220(2).

Section 220(2) of the Income Tax Act deals with the provisions for levying interest on late payment of demand of tax, penalty, or any other sum payable under the Act. It specifies the interest rate and the period for which the interest is applicable.

Interest under Section 220(2) becomes payable if the assessee fails to pay the amount specified in the notice of demand within 30 days of the service of the notice. The interest is charged at the rate of 1% for every month or part of the month from the due date until the payment is made.

Yes, the Assessing Officer has the power to reduce the period of payment to less than 30 days if there is a valid reason for the concession.

If the tax payable is reduced after the interest has been levied under Section 220(2), the interest payable shall be reduced accordingly, and any excess interest paid shall be refunded to the assessee.

Yes, the second proviso to Section 220(2) states that if the interest payable has been reduced due to an order, and subsequently, based on another order, the interest payable is increased, the assessee shall be liable to pay the increased interest from the due date until the final payment is made.

Yes, the Assessing Officer is responsible for issuing prior notices under Section 220(2), demanding the taxpayer to make the required payment. Additionally, if the Assessing Officer alters the assessment, a fresh notice of demand must be issued.

Yes, the concerned officer has the power to reduce or waive the interest payable under certain circumstances, such as genuine hardship to the assessee, default due to circumstances beyond the assessee's control, or if the assessee has extended cooperation in the inquiry or assessment proceedings.

Yes, the decision on the waiver of interest must be made within a period of 12 months from the end of the month in which the application is received. The assessee must also be given an opportunity of being heard before the rejection of the application.

Yes, the assessee can file a petition for waiver of interest under Section 220(2A) even after paying the interest.

The rate of interest charged under Section 220(2) is a simple interest of 1% for every month or part of the month from the due date until the payment is made.