The Interest Tax Act

The Interest Tax Act, 1974

The Interest Tax Act, 1974

The Interest Tax Act was brought into force for imposing special taxes on certain specified cases such as loans or other credit payments. In this article, we look at the Interest Tax Act, 1974 in detail.

Rate of Tax Imposed

According to the provisions of this Act, any taxable interest accruing or arising after the 31st of March 1983 will incur an interest rate of 3.5%. Every credit institution will be taxed with an interest of 2% of the taxable amount for its taxable interest.

The total amount of interest accruing or arising to the credit institution will be considered as the chargeable interest of any previous year. It may be noted that the chargeable interest is not inclusive of interest on loans and advances made to other credit institutions or any co-operative society pursuing a banking business.

Computation of Chargeable Interest

The provisions of this Act stipulates that with respect to the computation of chargeable interest of a particular previous year, a deduction pertaining to the amount of interest which is established to have become a bad debt during the previous year will be performed on the total amount of interest. The total amount of interest excludes interest on loans and advances made to credit institutions.

It is of vital importance that such interest has been taken into account for the computation of chargeable interest of the assessee of an earlier previous year and the amount has been written off as irrecoverable in the accounts of the assessee for the previous year during which it is established to have become a bad debt.

Note: – The Income Tax Department has clarified that no other deduction shall be allowed from the total amount of interest accruing or arising to the assessee.

Return of Chargeable Interest

A principal officer of a credit institution or any person treated as its agent (in case of a non-resident credit institution), is required to furnish a return of the chargeable interest of the credit institution of the previous year in the prescribed form and verified in the prescribed manner. This formality should be completed before the 31st of December of the particular assessment year. If the concerned person hasn’t done so, he/she might be granted an additional period of 30 days through a notice.

If the assessee fails to file the returns even in the additional window allotted to him/her, or identifies any omission or wrong statement therein, he/she may furnish a return or revised return before the completion of one year from the end of the relevant assessment year or before the completion of the assessment, whichever is earlier.

Assessment Procedures

The assessment for a particular financial year is conducted based on the details furnished by the assessee. If the concerned Assessing Officer (AO) is of the opinion that the assessee has furnished incorrect details or if the assessee hasn’t furnished any, the AO will issue a show cause notice, thereby providing him/her with an opportunity of being heard. Before initiating the process of assessment, the Assessing Officer should ensure that a notice is sent to the assessee, demanding him/her to produce the relevant documents or evidence within a specified time.

No assessment shall be performed under section 8 at any time after the expiry of two years from the end of the assessment year in which the interest was initially assessable.

Self-Assessment

Given a scenario where a return has been furnished under section 7 and the interest-tax payable for the particular return exceeds any interest-tax already paid under any provision of this Act, the assessee shall make the necessary interest tax payments within thirty days of furnishing the return. If there is a failure on the part of the assessee in making the necessary payments, he/she will be penalized in the appropriate manner. However, the assessee should be provided with an opportunity of being heard before being allowed to face the consequences.

Interest Escaping Assessment

If the Income-tax Officer has reasons to believe that the assessee has omitted some important detail while filing the returns, or fails to file a return under section 7 for any assessment year, or fails to disclose the accurate facts which is required for the assessment, or any chargeable income has not being assessed or has been under-assessed, or has been made the subject of excessive relief under this Act; the Assessing officer is entitled to issue a notice under section 7 to the assessee within four years from the end of the particular assessment year; and the implications will apply accordingly.

Appeal

The assessee is entitled to file an appeal to the commissioner for any particular grievances encountered with respect to the assessment proceedings or penalty/fine levied upon him/her. The appeal must be filed within a period of thirty days from the date of notice (pertaining to the assessment, penalty or fine) issued to the assessee. The commissioner may extend the period of permission on the existence of a satisfactory reason for the delay.

If the concerned assessee isn’t satisfied with the order issued by the Commissioner, the appeal can be further addressed to the Appellate Tribunal within 60 days of the date of order of the Commissioner.

Consequences of Default

The assessee will be dealt with appropriate penalties and an imprisonment of at-least 3 months, which may extend until 7 years for furnishing incorrect statements in the return or evasion of tax. The income-tax laws have been made stringent so as to ensure fairness in all aspects of taxation.

Post by Sreeram Viswanath

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