Report No.

11 of 2020 (Direct Taxes)

Chapter V: Interest under sections 234A, 234B, 234C,

and 244A of the Act
5.1 Introduction
Sections 234A, 234B and 234C of the Income Tax Act (hereinafter referred to
as ‘Act’), 1961 provide for levy of interest for errors on part of the assessee at
the rates prescribed by the Government from time to time. Further, section
244A of the Act provides for payment of interest if there is a delay in the
payment of refund due to the assessee.
Assessment Information System (AST), a software module of the Income Tax
Department (ITD), inter alia, undertakes the functions of calculation of tax and
calculation of interest under various sections of the Act. It is designed to
automatically take details of prepaid taxes i.e. advance tax and self-assessment
tax from Individual Running Ledger Account (IRLA)64 of the assessee in order
to determine the amount payable by him or refund of any amount due to him.
The AST module, however, allows the Assessing Officer (AO) to modify the
value of interest under sections 234A, 234B, 234C and 244A of the Act under
the head ‘Modified’.
ITD, in 2017, by way of re-writing the business processes of the AST and other
modules of the ITD, adopted Income Tax Business Application (ITBA) module
for electronic conduct of proceedings/assessments that would eliminate
human intervention in respect of modification of interests under sections
234A, 234B, 234C and 244A of the Act.
5.2 Why we chose this topic
The reasons for selecting this topic were as under:
(a) During the earlier compliance audit, we noticed that though system (AST)
had calculated correct amount of interest under various sections of the
Act, the same was manually modified by Assessing Officers (AOs) to
increase or decrease the chargeable interest.
(b) We also noticed that AOs had blocked the refund by way of modification
in system (AST) which involved overcharge of interest.
(c) We received a communication from Central Vigilance Commission (CVC)
sharing similar information as stated above that the AOs were blocking
refunds to the assessees by applying manual intervention in the system.
We, therefore, decided to cover the above aspects in a more comprehensive
way through this Audit.

64 IRLA system has been developed to keep a record of all the demands raised and collections made
by an Assessing Officer (AO) in a consolidated manner, and in a single location.

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5.3 Audit objective

The objective of the Audit was to ascertain whether a system for calculating
correct amount of interest arising due to-default in furnishing return of
income, default/deferment in payment of advance tax and delay in payment
of refund due to the assessee was in place.
Sub-objectives to achieve the above objective are:
1. Whether system calculated interest manually modified by the AOs was
in accordance with the provisions of the Act? (SO-1)
2. Whether system calculated interest was modified manually by the AOs
to block the refund payable to the assessee? (SO-2)
3. Whether after implementation of ITBA, calculation of interest was being
done through system correctly and there was no manual intervention?
(SO-3)
5.4 Legal frame work
Brief of provision of sections 234A, 234B, 234C and 244A of the Act prescribed
in the Act is given below:
Section Brief of provision
Section Section 234A of the Act provides for levy of interest on account of default in
234A furnishing return of income at specified rates and for specified time period.
Section Section 234B of the Act provides for levy of interest on account of default in
234B payment of advance tax at specified rates and for specified time period.
Section Section 234C of the Act provides for levy of interest on account of default in
234C payment of instalments of advance tax at specified rates and for specified time
period.
Section Section 244A of the Act provides for payment of interest on refunds arising due
244A to excess payment of advance tax, Tax Deducted at Source (TDS) or Tax
Collected at Source (TCS) at specified rates and for specified time period.

Details of legal provisions relating to the interest under sections 234A, 234B,
234C and 244A of the Act are given in Appendix-5.1.
5.5 Audit coverage
The audit covered the sample of cases where interest under sections 234A,
234B, 234C, and 244A of the Act were modified during processing in AST and
orders passed in FY 2016-17 and FY 2017-18. For FY 2018-19, audit covered
the cases65 that were processed/completed in ITBA for examination in the
context of calculation of interest under sections 234A, 234B, 234C and 244A of
the Act.

65 The cases selected for sample for FY 2016-17 and FY 2017-18 was further extended for FY 2018-19,
that was processed/completed in ITBA in FY 2018-19

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5.6 Sample size

ITD furnished assessee-wise data on interest under sections 234A, 234B, 234C
and 244A of the Act modified by AOs during processing in AST in FY 2016-17
and FY 2017-18 which comprised 8,35,727 records. Out of 8,35,727 records,
6,544 assessment cases were selected as sample for audit after risk analysis.
Further, 496 assessment cases were added to the sample that were
processed/completed in ITBA in FY 2018-19. Thus, total 7,040 cases66 were
selected as sample for audit. State wise details of sample selected for audit is
given in Appendix-5.2.
Besides 7,040 sample cases selected for audit, we also included 134 high value
cases where we found observation on interest under sections 234A, 234B and
234C of the Act during our regular compliance audit conducted for the period
2018-19.
5.7 Non production of records
Out of the 7,040 cases requisitioned, 6,713 cases (6,217 cases67 + 496 cases68)
were produced to Audit. Records not furnished comprised 4.64 per cent of the
requisitioned records. The non-production of the records was a constraint in
complete coverage of the selected sample. Reasons furnished by ITD for
non-production of records were, records lying with CIT (Exemption),
prosecution council, vigilance, appeal and records not readily available.
5.8 Audit findings
Of the 6,217 cases (AST cases processed/completed in FY 2016-17 and
FY 2017-18), checked by audit we found instances of systemic issues viz.
deficiency noticed in AST system in calculating the correct amount of interest
and absence of proper checks in the AST system to shield manual intervention.
We also found instances concerning compliance issues where AOs did not
modify the system calculated incorrect interest or if modified, modified it
incorrectly. On the other hand, AO modified the system calculated correct
interest which lead to short/excess levy of interest. Instances were also
noticed where AO blocked the refund due to the assessees’ by modifying the
interest component causing undue hardship and harassment to the assessee.
We noticed 7,38569 observations under sections 234A, 234B, 234C and 244A
of the Act in respect of 4,767 assessment cases70 involving tax effect of

66 7,040 cases comprise 4,810 unique assessees

67 For FY 2016-17 and FY 2017-18 processed/completed through AST; 6,217 cases comprise 4,551
unique assessees
68 For FY 2018-19 processed/completed through ITBA; 496 cases comprise 354 unique assessees
69 Overall tax effect with respect to 7,385 cases is ` 20,51,183.77 lakh; however, 7,385 includes 958
cases pertaining to same assessee for same AY but assessed separately, thus the effective tax effect
is ` 19,09,054.91 lakh
70 7,385 instances pertaining to 4,767 assessments cases comprising 3,486 unique assessee

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` 19,09,054.91 lakh71 and blockade of refund/avoidable payment of interest

amounting to ` 4,39,571.21 lakh/` 5,274.59 lakh. We also noticed systemic
issues where wrong amount of interest was calculated through AST system in
1,400 cases, 1,744 cases, 1,900 cases and 1,585 cases with respect to interest
under sections 234A, 234B, 234C and 244A of the Act respectively.
In addition, we noticed instances of incorrect calculation of interest through
Income Tax Business Application (ITBA), which was adopted after re-writing
the business process of AST in 2017. We also found errors in calculation of
interest under sections 234A, 234B and 234C of the Act during our regular
compliance audit conducted for the period 2018-19. Of the 496 cases that
were processed/completed through ITBA in FY 2018-19, in 32 cases, we
found that the interest was wrongly calculated involving a tax effect of
` 2,297.95 lakh72.
During our regular compliance audit conducted for the period 2018-19, we
found 134 cases involving tax effect of ` 1,10,269.82 lakh73 related to errors in
calculation of interest under sections 234A, 234B and 234C of the Act.
Findings in respect of 6,217 audited cases (AST cases processed/completed in
FY 2016-17 and FY 2017-18), have been discussed from para 5.8.1 to para 5.8.4
of this report. Further, findings in respect of ITBA cases have been discussed
in para 5.8.5 and findings of cases noticed during our regular compliance audit
have been discussed in para 5.8.6 of this report.
We referred this report to the Ministry of Finance in April 2020 for its
comments. Response of the Ministry was awaited (June 2020).
5.8.1 Incorrect calculation of interest through System (AST)
All Income Tax Returns (ITRs) are first summarily processed under section
143(1) at Centralized Processing Centre (CPC), Bengaluru before scrutiny
assessments, thus all data pertaining to summary assessments are directly
captured in AST. The work of processing, rectification, completion of
assessment order in respect of scrutiny cases is done by AOs in AST module,
part of ITD module, for all returns transferred from CPC. AST, inter alia,
undertakes assessment functions of calculation of tax and calculation of
interest under various sections of the Act. In the case of scrutiny assessment,

71 Short levy of interest amounting to ` 1,46,462.46 lakh and excess levy of interest amounting to
` 14,46,070.93 lakh under sections 234A, 234B and 234C; short payment of interest amounting to
` 1,11,141.46 lakh and excess payment of interest amounting to ` 205380.06 lakh under section
244A
72 Short levy of interest amounting to ` 284.29 lakh and excess levy of interest amounting to
` 1,635.24 lakh under sections 234A, 234B and 234C; short payment of interest amounting to
` 370.91 lakh and excess payment of interest amounting to ` 7.52 lakh under section 244A
73 Short levy of interest amounting to ` 65,796.38 lakh and excess levy of interest amounting to
` 44,473.44 lakh under sections 234A, 234B and 234C

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rectification, appeal effect orders in the field offices, figures are data-fed to
the system by AOs based on the orders. With the new figures entered into
different heads of income under additions, computation sheet for final
demand is generated.
We examined calculation of interest, under sections 234A, 234B, 234C and
244A of the Act, done through AST system. In 1,400 cases, 1,744 cases, 1,900
cases and 1,585 cases with respect to interest under sections 234A, 234B, 234C
and 244A of the Act respectively74, it was found that wrong amount of interest
was calculated through system. Details of incorrect amount of interest
calculated through system is shown in the Table 5.1 below:
Table 5.1:Incorrect amount of interest calculated through system (` in lakh)
Short calculation Excess calculation
Number of cases Amount Number of cases Amount
Interest under 419 12,561.10 981 58,306.18
section 234A
Interest under 593 1,72,452.05 1,151 5,85,792.92
section 234B
Interest under 696 24,640.48 1,204 1,43,547.74
section 234C
Interest under 1,103 2,09,880.50 482 1,50,138.59
section 244A

Trend of error committed through system (in per cent)75 in calculating interest
is shown in chart below:

Chart 5.1
Errors committed through system (AST) in per cent
35 31.42
28.40
30 25.86
25 22.73

20
15
10
5
0
234A 234B 234C 244A

Thus, percentage of error committed through system in calculating interest

was significantly high with respect to sections 234C and 234B of the Act which
was more than 31 per cent and 28 per cent, respectively, of the total cases.

74 We noticed errors in levy of interest in 2,921 cases under one section, 831 cases under two sections,
524 cases under three sections and 108 cases under all four sections (234A/234B/234C/244A).
75 1,400 cases out of 6,160 cases for section 234A; 1,744 cases out of 6,140 cases for section 234B;
1,900 cases out of 6,048 cases for section 234C and 1,585 cases out of 6,129 cases for section 244A

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We noticed that 774 cases were processed under section 143(1) of the Act
(summary assessment) and 5855 were assessed under other sections of the
Act76 (non-summary assessments). The percentage of errors committed
through system in cases processed under section 143(1) of the Act, were
27.71 per cent77, 6.59 per cent78, 3.58 per cent79 and 12.81 per cent80 in respect
of interest levied under section 234A, 234B, 234C and 244A, respectively. As
the processing of ITRs was automated and was centrally done through CPC
Bengaluru, the probability of occurrence of errors in levy of interest through
AST systems should be ‘nil’ in such cases.
We further segregated the interest calculated incorrectly through the system,
PAN category wise and compared it with total audited cases81 (which was also
segregated PAN category wise). Details of percentage of error in interest
calculated through system with respect to total audited cases, PAN category
wise, is shown in Table 5.2 below:
Table 5.2: Incorrect interest calculated through the system, PAN category wise
No. of Percentage No. of Percentage No. of Percentage No. of Percentage
cases of incorrect cases of incorrect cases of incorrect cases of incorrect
where interest where interest where interest where interest
incorrect under incorrect under incorrect under incorrect under
interest section interest section interest section 234C interest section
Type of under 234A under 234B under calculated under 244A
Assessee section calculated section calculated section through the section calculated
234A was through the 234B was through the 234C was system to 244A was through the
calculated system to calculated system to calculated the total no. calculated system to
through the total no. through the total no. through of audited through the total no.
the system of audited the system of audited the system cases the system of audited
cases cases cases
1 2 3 4 5 6 7 8 9
AOP 17 0.28 21 0.34 40 0.66 33 0.54
BOI 6 0.10 4 0.07 8 0.13 11 0.18
Company 320 5.19 619 10.08 741 12.25 767 12.51
Firm 118 1.92 179 2.92 240 3.97 121 1.97
Govt. Authority 2 0.03
HUF 27 0.44 19 0.31 13 0.21 12 0.20
Artificial
3 0.05 4 0.07 4 0.07 3 0.05
Juridical Person
Local Authority 2 0.03 6 0.10 3 0.05 7 0.11
Individual 894 14.51 883 14.38 800 13.23 597 9.74
Trust 13 0.21 9 0.15 51 0.84 32 0.52
TOTAL 1,400 22.73 1,744 28.40 1,900 31.42 1,585 25.86

76 Sections 144, 154, 155, 250, 254, 262, 263, 264, 143(3), 147, 153C, 153A and 260 A of the Income
Tax Act, 1961.
77 388 cases out of 1,400 cases
78 115 cases out of 1,744 cases
79 68 cases out of 1,900 cases
80 203 cases out of 1,585 cases
81 Of the 6,217 audited cases, audit could get the required information/document from the ITD for
ascertaining the amount of interest in 6,160 cases, 6,140 cases, 6,048 cases and 6,129 cases under
sections 234A, 234B, 234C and 244A respectively. Therefore, audit could ascertain the amount of
interest under sections 234A, 234B, 234C and 244A in 6,160 cases, 6,140 cases, 6,048 cases and
6,129 cases respectively

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From the above, it can be seen that for calculating interest, the error in respect
of individual assessee was on the higher side. The scale of error is significant
as the individual assessees constitute more than 90 per cent of total taxpayers.
We further segregated the number of cases in respect of individual assessee
where interest was short/excess levied through the system, which is shown in
the Table 5.3 below:
Table 5.3: Incorrect interest calculated through the system, pertaining to individual
assessees
Section Total no. of Cases Short levy Excess levy % of no. of excess levy to
(individual assessee) of interest of interest no. of individual cases
where incorrect (no. of (no. of where wrong interest
interest was calculated cases) cases) was calculated through
through the system the system
1 2 3 4 5
234A 894 275 619 69.24
234B 883 315 567 64.29
234C 800 210 590 73.75
Total 2,577 800 1,776 68.92

Thus, 68.92 per cent of cases with respect to individual assessees were levied
interest at excess amount through the system. Amount of excess levy of
interest was charged against the individual assessee upto ` 803.35 lakh under
section 234A of the Act, ` 2,728.31 lakh under section 234B of the Act and
` 559.59 lakh under section 234C of the Act, causing unnecessary harassment
and hardship to the assessee.
We further examined the reason behind the incorrect calculation of interest
through AST system and explanation from the ITD was sought in this regard.
Though the ITD furnished the reply in 1,851 cases82, the reply was not specific
to root cause of the deficiency in system and was only general in nature. One
of the major reasons furnished by ITD was that the interest was wrongly
calculated due to system error.
However, during the course of the audit, on comparison of the ITR, assessment
order and the figures available in AST system, we found that:
Of the 1,400 cases with respect to incorrect interest calculated
through the system, under section 234A of the Act, system did not
capture the tax amount/advance tax/TDS/TCS in 125 cases. Further,
in 461 cases, system failed to compute the correct period of delay in
filing of return. In 115 cases, though the system captured the tax
component and period of delay of filing of return correctly, amount

82 Reply furnished in respect of 362 cases against 234A, 378 cases against 234B, 399 cases against 234C
and 712 cases against 244A

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of interest under section 234A of the Act was calculated through the
system incorrectly.
Further analysis of 476 cases pertaining to capturing of incorrect
period of delay through the system, revealed that period of delay
reckoned through the system less than actual was ranging from one
month to more than 36 months in 339 cases and period of delay
reckoned through the system more than actual was ranging from one
month to more than 36 months in 137 cases. Details are as follows:
Table 5.4: Period of delay reckoned less/more than actual through system resulting in
incorrect calculation of interest under section 234A of the Act
Range of delay No. of cases (period No. of cases (period Total no.
of delay reckoned of delay reckoned of cases
less than actual) more than actual)
1 2 3 4
≤12 months 263 79 342
>12 months and ≤24 months 50 18 68
>24 months and ≤36 months 3 7 10
More than 36 months 23 33 56
Total 339 137 476

As such, in 134 cases out of 476 cases (constituting 28.15 per cent),
system calculated incorrect amount of interest by capturing the
period with a difference of more than 12 months and thus levied
short/excess amount of interest for significant amount.
With respect to section 234B of the Act, out of the 1,744 cases, system
failed to capture the tax amount/TDS/TCS/SAT in 364 cases. In 130
cases, the system failed to capture the period of default correctly.
Further, in 304 cases, though the system captured the tax component
and period of default correctly, amount of interest under section 234B
of the Act was calculated through system incorrectly.
Of the 1,900 cases with respect to incorrect interest under section
234C of the Act, calculated through the system, the system did not
capture the tax amount in 409 cases. Further, in 212 cases, system
failed to capture the correct period of deferment of tax. We also
found in 253 cases, where the system captured the tax component
and period of interest payable, however, amount of interest under
section 234C of the Act was calculated through system, incorrectly.
Of the 1,585 cases with respect to incorrect interest under section
244A of the Act calculated through the system, the system failed to
capture the tax amount/advance tax/TDS/TCS in 203 cases. We also
found in 66 cases, where the system captured the tax component and
period for which the interest was payable to assessee correctly,

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however, amount of interest under section 244A was calculated

through system, incorrectly. We also found 60 cases pertaining to
period for which granting of refund due to assessee was delayed.
Thus, from the above, it can be seen that system failed to capture tax
amount/TDS/TCS vis-à-vis period of delay/default which resulted in incorrect
calculation of interest under sections 234A, 234B, 234C and 244A. As the AST
system was designed to automatically take details of advance tax/TDS/TCS
from other modules of IT Application, non-capture of such details indicates
deficiency in the system. Further, where such details were captured correctly,
incorrect interest was calculated through the system. This had an impact on
final demand/refund due to the assessee.
In our earlier Performance Audit Report on ‘IT Applications in Income Tax
Department83, we had highlighted the shortcoming in AST module and had
recommended that ‘Ministry may strengthen IT systems and iron out the
incongruence between critical IT modules so that intended results are
delivered’. The ministry had submitted to the Public Accounts Committee
(PAC) that “the Department has started the process of re-writing the business
processes of the AST and other modules of the Income Tax Department and
bringing them under one common architecture through a project called the
Income Tax Business Application”84. However, the fact remains that the AST
was in operation till 2017-18 and the department did not ensure that the
existing deficiencies were addressed for the assessments during these years,
before they implemented ITBA. Further, even in ITBA, there have been
instances of incorrect calculation of interest as brought out in para 5.8.5 of this
report.
5.8.2 Failure of AOs in rectifying the incorrect interest calculated through
the system
AST module allows the AOs to modify the value of interest under sections
234A, 234B, 234C and 244A of the Act under the head ‘Modified’ wherein the
value of interest can be changed (increased/ decreased) and calculation is
done in accordance with the provisions of the Act. We found cases where the
AOs did not utilise the ‘modified’ feature of the AST to rectify the incorrect
calculation of interest through the system. Further, we also found other cases
where the AOs misused the modification feature to levy wrong amount of
interest. The number of such cases have been shown in Table 5.5 below:

83 Report No. 23 of 2012-13, for the year ended March 2012; report tabled on the floor of the
Parliament on 30 April 2013
84 The second report of the PAC 2014-15 (Sixteenth Lok Sabha) on IT Applications in IT Department,
submitted to Lok Sabha and Rajya Sabha on 25-11-2014.

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Table 5.5: Incorrect interest calculated through the system either not modified or modified
incorrectly by AOs
Interest Incorrect interest Modified Not modified by Modified at
under calculated through correctly by AOs AOs out of incorrect
section the system (no. of out of column 2 column 2 though amount by AOs
cases) (no. of cases) were incorrect out of column 2
(no. of cases) (no. of cases)
1 2 3 4 5
234A 1,400 665 258 477
234B 1,744 822 265 657
234C 1,900 1,001 360 539
244A 1,585 426 588 571
Total 6,629 2,914 1,471 2,244

It can be seen that the AOs modified the incorrect computation through the
system in 5,158 (2,914+2,244) cases. However, more than 43 per cent of these
modifications by the AOs were incorrect. Further, AOs did not correct
1,471 cases. Audit findings with respect to column 4 and column 5 of
Table 5.5 above are discussed in the succeeding paragraphs.
5.8.2.1 AOs did not use modification feature to correct the incorrect
interest through the system
Audit examined the cases where the incorrect interest was calculated through
the system (as discussed in para 5.8.1) to see whether AOs had taken
corrective measures against such cases and modified it correctly. However,
audit found in 1,471 cases where AOs did not take any action on incorrect
interest, calculated through the system, to rectify it. Further details of
1,471 cases are shown in Table 5.6 (cases related to short levy/payment of
interest) and Table 5.7 (cases related to excess levy/payment of interest) as
below:
Table 5.6: Short levy/payment of interest where AOs did not modify the incorrect interest
calculated through the system
Interest Number of cases where AOs Short levy/ Short levy/ payment
85
under did not modify the incorrect payment of interest of interest (amount
section interest calculated through the (no. of cases) ` in lakh)
system
1 2 3 4
234A 258 57 292.3786
234B 265 100 18,805.95
234C 360 124 2,365.45
244A 588 500 53,251.90
Total 1,471 781 74,715.67

85 Levy in respect of interest under sections 234A, 234B and 234C; payment in respect of interest under
section 244A
86 Actual Money Value involved is ` 282.70 lakh as the two assessees were assessed for same AYs
passed under different assessment orders

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Thus, failure of AOs to take the corrective action against incorrect interest
calculated through the system had resulted in short levy of interest leading to
undue benefit and potential gain to assessee as well as loss of revenue.
Further, short payment of interest under section 244A of the Act had resulted
in avoidable hardship and harassment to the assessee. One instance of short
levy of interest is given below:
(a) Charge: Pr. CIT-Central-3, Kolkata, West Bangal; AY 2010-11
The AO assessed the income of the assessee company under section 144/147
of the Act in December 2017 at income of ` 126.93 lakh. Audit noticed that
instead of calculating correct amount of interest under section 234B of the Act
at ` 26.87 lakh, interest was calculated through the system under the said
section at ` 19.52 lakh. Audit further noticed that AO did not modify the
incorrect interest to rectify it, which resulted in short levy of interest of
` 7.35 lakh. ITD replied (October 2019) that error in computation of interest
under section 234B was due to some technical error in the system and the same
was corrected as per provisions of the Act.
We also found cases where, inaction on part of the AOs against incorrect
interest calculated through the system, resulted in excess levy of interest
having potential impact on withholding of refund/ excess payment out of
exchequer in the form of interest on refund, apart from undue hardships/
harassment of assessees. Excess payment of interest under section 244A of
the Act had resulted in loss of revenue. Section wise details of such cases have
been shown in the Table 5.7 given below:
Table 5.7: Excess levy/payment of interest where AOs did not modify the incorrect
interest calculated through the system
Interest Number of cases where AO did not Excess levy/ Excess levy/
under modify the incorrect interest payment of payment of interest
section calculated through the system interest (no. of (amount ` in lakh)
cases)
1 2 3 4
234A 258 201 5,773.96
234B 265 165 70,992.96
234C 360 236 21,593.37
244A 588 88 8,654.45
Total 1,471 690 1,07,014.74

The issues related to AST system were highlighted in our earlier report87
wherein the need for strengthening the IT system of the department was
emphasised. Thus, AOs should have re-verified the interest and tax calculated
through the system, as the shortcomings in system were known to the
department. However, no action had been taken by the AOs to rectify the

87 Report No. 23 of 2012-13, for the year ended March 2012

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incorrect interest calculated through the system leading to incorrect

levy/payment of interest.
5.8.2.2 Errors in calculation of interest by AOs while rectifying incorrect
interest calculated through the system using modification feature
Audit found in 2,244 cases where AOs used the modification feature to rectify
the incorrect interest calculated through the system but modified it at
incorrect amount of interest. Further details of 2,244 cases are shown in
Table 5.8 (cases related to short levy/payment of interest) and Table 5.9 (cases
related to excess levy/payment of interest) below:
Table 5.8: Short levy/payment of interest where interest calculated through the system
as well as by AOs was incorrect
Interest Number of cases where Short levy/ payment Amount of short levy/
under AO modified the interest of interest (no. of payment of interest
section amount incorrectly cases) (amount ` in lakh)
1 2 3 4
234A 477 281 3,325.93
234B 657 335 1,05,528.64
234C 539 275 2,969.33
244A 571 329 57,591.13
Total 2,244 1,220 1,69,415.03

Thus, failure of AOs in modifying the incorrect interest (as calculated through
the system) at correct amount resulted in the short levy of interest leading to
undue benefit and potential gain to assessee as well as loss to revenue.
Further, short payment of interest under section had resulted in avoidable
hardship and harassment to the assessee. Two instances where incorrect
modification by AOs of incorrect interest calculated through the system led to
short levy of interest are given below:
(a) Charge: Pr. CIT-Central-2, Kolkata, West Bengal; AY 2013-14
The case of the assessee company was processed under section 143(1) of the
Act in August 2014 at income of ` 549.07 lakh and tax of ` 178.15 lakh thereon.
The AO, further, assessed the income of the assessee under section
143(3)/153A of the Act in March 2016 at income of ` 1,768.55 lakh which was
further rectified under section 154 of the Act in April 2016 at income of
` 1,675.92 lakh and tax of ` 543.75 lakh thereon. Audit noticed that the
assessee, in response to notice under section 153A of the Act, filed its return
of income after delay of six months. However, interest under section 234A of
the Act was calculated through the system at ` 76.78 lakh instead of correct
amount of ` 21.93 lakh88. The AO, further modified the interest amount at nil
resulting in non levy of interest at ` 21.93 lakh. Reasons for carrying out the

88 Six per cent on enhanced tax of ` 365.60 (` 543.75-` 178.15)

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incorrect modifications in AST system by the AOs could not be ascertained by

audit, as there was no provision in the AST module to capture the reasons
behind changes made by AOs.
(b) Charge: Pr. CIT-IV, Pune, Maharashtra; AY 2010-11
The assessment of the assessee company was rectified under section 154 of
the Act in June 2016 at an income of ` 27,139.76 lakh. Audit noticed that the
correct amount of interest of ` 336.59 lakh under section 234C of the Act was
offered by assessee at the time of filing of return of income. However, interest
of ` 347.21 lakh under the said section was calculated through the system
against the correct amount of ` 336.59 lakh. The AO, further modified it to
` 186.42 lakh. The error had resulted in short levy of interest under section
234C of the Act of ` 150.17 lakh (` 336.59 lakh – ` 186.42 lakh) due to
modification done by AO. Further, audit could not ascertain the reasons for
carrying out the incorrect modifications in AST system by the AOs as there was
no provision in the AST module to capture the reasons behind changes made
by AOs.
Further, section wise details of 1,024 cases, where AO’s modification in
incorrect interest calculated through the system led to excess levy/payment of
interest is shown in Table 5.9 below:
Table 5.9: Excess levy/payment of interest where interest calculated through the system
as well as by AOs was incorrect
Interest Number of cases where AO Excess levy/ Excess levy/ payment
under modified the interest payment of interest of interest (amount
section amount incorrectly (no. of cases) ` in lakh)
1 2 3 4
234A 477 196 9,357.25
234B 657 322 2,36,664.94
234C 539 264 1,27,682.28
244A 571 242 1,58,317.21
Total 2,244 1,024 5,32,021.68

Thus, AOs intervention, where the incorrect interest was computed through
the system, led, to excess levy of interest having potential impact on
withholding of refund/excess payment out of exchequer in the form of interest
on refund, apart from undue hardships/ harassment of assessees in case of
excess levy of interest. Further, excess payment of interest under section 244A
of the Act had resulted in loss to revenue. One instance where interest
calculated through the system as well as by the AO was incorrect leading to
excess levy of interest is given below:
(a) Charge: Pr. CIT-Central-I, Kolkata, West Bengal; AY 2010-11
The AO assessed the income of the assessee company under section
143(3)/153A of the Act in December 2016 at nil income. As such, interest

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under section 234B of the Act was not leviable since the assessed income was
at nil amount. However, interest under section 234B of the Act was calculated
through the system, amounting to ` 165.93 lakh resulting in overcharge of tax
of ` 165.93 lakh. Further, the AO, instead of modifying the interest amount at
zero, modified it at ` 768.15 lakh, as a result of which, over charge of interest
amount was increased from ` 165.93 lakh to ` 768.15 lakh. Further, audit
could not ascertain the reasons for carrying out the incorrect modifications in
AST system by the AOs as there was no provision in the AST module to capture
the reasons behind changes made by AOs.
5.8.3 Manual intervention and modification by AOs in correct interest
calculated through the system
Where the correct amount of interest was calculated through the system,
there was no scope for manual intervention and modification in the interest
calculated through the system. However, we found instances where AOs
manually modified the interest amount even though correct amount of
interest was calculated through the system. Details of such cases have been
shown in Table 5.10 below:
Table 5.10: Instances of modification by AOs in correct interest calculated through the
system
Interest Correct interest calculated through Correct interest calculated through
under the system (no. of cases) the system modified incorrectly by
section AOs (no. of cases)
1 2 3
234A 4,760 1,003
234B 4,396 1,180
234C 4,148 654
244A 4,544 833
Total 17,848 3,670

5.8.3.1 Further, section wise details of cases, where AOs unwarranted

modification in the correct interest calculated through the system led to short
levy/payment of interest is shown in Table 5.11 below:
Table 5.11: Short levy/payment of interest with respect to cases where correct interest
calculated by the system was modified incorrectly by AOs
Interest Modified incorrectly Short levy/ payment of Short levy/ payment
under section by AO (no. of cases) interest (no. of cases) ` in lakh)
of interest (`
1 2 3 4
234A 1,003 175 643.06
234B 1,180 105 36,160.06
234C 654 188 28,804.45
244A 833 134 1,303.15
Total 3,670 602 66,910.72

Thus, unwarranted modification by AOs in the correct interest calculated by

the system resulted in short levy of interest leading to undue benefit and

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potential gain to assessee as well as loss to revenue. Further, short payment

of interest under section 244A of the Act had resulted in avoidable hardship
and harassment to the assessee. One instance of short levy of tax is given
below:
(a) Charge: Pr. CIT-II, Kanpur, Uttar Pradesh; AY 2015-16
The assessment of the assessee company was rectified under section 154 of
the Act in March 2018 at an income of ` 60,577.02 lakh. It was noticed from
the screen shot of the order that tax liability after giving credit to all pre-paid
taxes was ` 20,590.44 lakh. As such, interest under section 234B of the Act
amounting to ` 6,794.03 lakh was payable by the assessee which was
calculated through the system at the correct amount. Though the correct
amount of interest was calculated through the system, the AO manually
modified the interest amount at nil, which resulted in short levy of interest of
` 6,794.03 lakh. ITD replied (September 2019) that the error had been rectified.
However, ITD did not furnish any reason why the AO manually modified the
correct interest calculated through the system.
Further, section wise details of cases where AOs unwarranted modification of
the correct interest calculated through the system led to excess levy/ payment
of interest are shown in Table 5.12 below:
Table 5.12: Excess levy/payment of interest with respect to cases where correct interest
calculated through the system was modified incorrectly by AO
Interest Modified incorrectly Excess levy/ payment Excess levy/ payment of
under by AO (no. of cases) of interest (no. of interest (amount ` in
section cases) lakh)
1 2 3 4
234A 1,003 828 1,25,694.69
234B 1,180 1,075 8,56,674.23
234C 654 466 77,158.39
244A 833 699 41,578.62
Total 3,670 3,068 11,01,105.93

Thus, AOs unwarranted intervention, where the correct interest was

calculated through the system, led, to excess levy of interest having potential
impact on withholding of refund/excess payment out of exchequer, apart from
undue hardships/ harassment of assessees in case of excess levy of interest.
Excess payment of interest under section 244A of the Act had resulted in loss
to revenue. One instance where AO modified the correct interest calculated
through the system that led to excess levy of interest is given below:
(a) Charge: Pr. CIT-II, Lucknow, Uttar Pradesh; AY 2015-16
The AO assessed the income of an Individual in December 2016 after scrutiny
at an income of ` 22,091.78 lakh. It was observed from the screen shot of the

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order that interest under section 234A of the Act amounting to ` 525.49 lakh
was payable by the assessee which was calculated through the system at
correct amount. Though the correct amount of interest was calculated
through the system, the AO manually modified this interest amount at
` 1,276.19 lakh resulting in excess levy of interest of ` 750.70 lakh. ITD rectified
the error under section 154 of the Act (January 2017). However, ITD did not
furnish any reason why the AO manually modified the correct interest
calculated through the system.
5.8.3.2 It is seen further, from the Table 5.11 and Table 5.12 above that the
number of cases where excess interest (2,369 cases) was levied by the AOs
against correct interest calculated through the system was on much higher
side as compared to number of cases where the interest was short levied
(468 cases). We further analysed the number of cases vis-à-vis amount of
excess levy of interest (under sections 234A, 234B and 234C-column 3 and
column 4 of Table 5.12 above) and short payment of interest (under section
244A-column 3 and column 4 of Table 5.11 above) with respect to assessees’
status. The details are shown in Table 5.13 below:
Table 5.13: Distribution of number of cases vis-à-vis amount of excess levy/ short payment of interest-status
wise
Status/ Excess Excess levy of Excess Excess levy of Excess Excess levy Short Short
Particulars levy of interest levy of interest levy of of interest payment payment of
interest under section interest under section interest under of interest
under 234A under 234B under section interest under
section (Amount- section (Amount- section 234C under section
234A ` in lakh) 234B ` in lakh) 234C (Amount - section 244A
(No. of (No. of (No. of ` in lakh) 244A (Amount-
cases) cases) cases) (No. of ` in lakh)
cases)
1 2 3 4 5 6 7 8 9
AOP 25 4,695.44 13 1,767.20 6 1,177.35 1 0.04
Company 299 105,964.13 529 845,105.22 175 7,1043.83 10 1,272.67
Firm 85 3,308.38 73 4,732.94 41 1,209.61 6 0.29
Govt. 1 0.11 2 10.00 1 7.07 3 3.96
Authority
HUF 8 0.57 7 7.40 4 0.02 2 0.14
AJP 2 162.1
Local 1 24.65 2 1,539.17 5 1,643.44
Authority
Individual 390 6,101.14 445 2,598.66 229 283.49 107 25.95
Trust 17 5,438.17 4 913.64 5 1,793.58 5 0.10
Total 828 125,694.69 1075 8,56,674.23 466 77,158.39 134 1,303.15

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It is seen that the maximum number of modifications were done in respect of

individual cases followed by company assessees. Excess levy of interest has
the direct impact on refund, if the refund is due to assessee. Else, it creates
undue demand on the assessees. As such, by way of levy of excess interest,
the assessees were put to unnecessary harassment and undue hardship, as
either refund was blocked due to excess levy of interest or undue demands
were raised on the assessees. We have found such instances where the refund
due to the assessee was blocked by the AOs by tweaking interest component
and the same has been discussed in the para 5.8.4 given below:
5.8.4 Irregularities in issue of refund
As per provisions of section 237 of the Act, if any person satisfies the AO that
the amount of tax paid by him or on his behalf or treated as paid by him or on
his behalf for any assessment year exceeds the amount with which he is
properly chargeable under this Act for that year, he shall be entitled to a refund
of the excess.
As such, in cases where the aggregate of advance tax, regular tax, tax deducted
at source etc. so collected exceeds the tax determined on completion of the
assessment, then the assessee is entitled for refunds. Timely disposal of
refund claims is a key measure of the operational efficiency of tax
administration. Prompt refunds instil confidence among taxpayers and
increase tax compliance.
Citizen’s Charter 2014 of Income Tax Department commits issue of refund
including interest under section 143(1) and proceedings other than section
143(1) of the Act within six months and one month respectively from the date
of processing/completion of order.
5.8.4.1 Blockade of refund by way of unwarranted modification by AOs in
the interest component causing hardship and harassment to
taxpayers
Audit noticed 1,130 instances89 where modification by AOs in interest amount
resulted in blockade of refund amounting to ` 4,39,571.21 lakh which was due
to be payable to the concerned assessee. This was done by AO through manual
modification in the interest under sections 234A, 234B and 234C of the Act at
excess amount thereby creating unreasonable demand and as a result of this,
the refund due to the assessee was denied, apart from violation of sections
234A, 234B and 234C of the Act.

89 The overall blockade of refund in respect of 1,130 cases is ` 4,39,571.21 lakh; however, 1,130 cases
includes 35 cases pertaining to same assessee for same AY but assessed separately

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We segregated the 1,130 instances into PAN category wise vis-à-vis amount of
blocked refund, details shown in Table 5.14 below:
Table 5.14: Details of cases of blocked refund-PAN category wise
Type of Assessee Amount of blocked refund (`` in lakh) No. of Cases
1 2 3
AOP 2,761.45 19
Company 4,15,787.61 610
Firm 7,585.35 85
Govt. Authority 17.06 1
HUF 47.54 2
Artificial Juridical Person 161.44 3
Local Authority 1,411.76 3
Individual 7,079.18 395
Trust 4,719.82 12
Total 4,39,571.21 1,130

From the above, it can be seen that majority of the cases where the refund
was blocked pertained to companies, individuals and firms. However, the
maximum amount of blocked refund pertained to companies only. Of the
1,130 blocked refund cases, we found that 197 cases were processed under
section 143(1)90 of the Act and 660 cases were processed under section
143(3)91 of the Act, wherein by way of modification in the interest component,
refund of ` 96,662.32 lakh and ` 2,10,788.58 lakh, respectively, was blocked.
Processing of ITRs under section 143(1) of the Act, through CPC Bengaluru, is
supposed to be automated. Details of cases processed under section 143(1)
of the Act, with reference to range of amount are shown in Table 5.15 below:
Table 5.15: Blocked refund cases processed under section 143(1) of the Act
Range of Amount (in ` ) Number of blocked refund cases Amount of blocked refund
` in lakh)
(`
1 2 3
≤10000 73 2.17
>10000 and ≤100000 68 23.04
>100000 and ≤500000 14 28.93
>500000 42 96,608.18
Total 197 96,662.32

Out of the 197 cases, there were 40 cases of company assessees and 149 cases
of individual assessees whose refunds amounting to ` 93,785.82 lakh and
` 2,450.21 lakh, respectively, were blocked.
Six instances where AOs had blocked the refund of the assessee are discussed
below:

90 Cases under section 143(1) are processed through CPC-Bengaluru

91 Cases under section 143(3) are scrutiny assessments completed by the assessing officer

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(a) Charge: Pr. CIT (Int. Tax)-III; DDIT(Int. Tax)- Noida AY: 2015-16
The assessment of the assessee company was processed under section 143(1)
of the Act in March 2017 wherein the AST system calculated interest under
section 234B of the Act at nil, as the same was not leviable. Audit noticed that
at the time of assessment under section 143(1) of the Act, the assessee
had TDS credit of ` 19,369.84 lakh against the tax due amounting to
` 1,995.10 lakh. However, instead of issuing the refund amount of
` 17,374.74 lakh (` 19,369.84 lakh – ` 1,995.10 lakh) to the assessee, the AO
modified the interest under section 234B of the Act at ` 17,374.74 lakh which
resulted in blockade of refund. ITD, in its reply, stated (November 2019) that
the matter is sub-judice and proceedings for different years are pending before
Hon’ble High Court. Any rectification, if required, will be made as per decision
of Hon’ble High Court. However, ITD did not furnish the reason behind
modification in the interest amount, which was not warranted.
(b) Charge: Pr. CIT (Int. Tax)-III, DDIT(Int. Tax)-I-Dehradun; AY: 2010-11
In the case of an assessee company, an appellate order under section 254 of
the Act was implemented in November 2017 wherein interest under section
234B of the Act was calculated through AST system at nil. Audit noticed that
the company had total tax credit of ` 62,532.21 lakh consisting of TDS credit
of ` 16,830.73 lakh, advance tax credit of ` 43,437.49 lakh and other tax
credits ` 2,263.99 lakh against the tax due amounting to ` 50,577.28 lakh.
However, instead of issuing the refund of ` 11,954.93 lakh (` 62,532.21 lakh –
` 50,577.28 lakh) to the assessee, the AO modified the interest under section
234B of the Act of the same amount, which resulted in blockade of refund.
(c) Charge: Pr. CIT IX, Mumbai; AY: 2015-16
The AO completed the scrutiny assessment of the assessee company in
December 2017 under normal provisions at nil income and under special
provision (Section 115JB of the Act) at book profit of ` 9,517.65 lakh. Audit
noticed that the company had TDS credit of ` 7,666.47 lakh against the
demand of ` 1,994.95 lakh. However, instead of issuing refund of
` 5,671.52 lakh (` 7,666.47 lakh – ` 1,994.95 lakh), the AO modified the
interest under section 234B of the Act of the same amount which indicates
that AO intentionally modified the interest amount just to block the refund
that was due to the assessee. The rectification under section 154 of the Act
was done in December 2018 to issue the refund of ` 5,671.52 lakh including
avoidable payment of interest of ` 170.15 lakh.

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(d) Charge: Pr. CIT (Central)-3, Delhi; AY: 2015-16

The AO completed the scrutiny assessment in October 2017 under normal
provisions at nil income and under special provision (Section 115JB of the Act)
at book profit of ` 12,755.93 lakh. Audit noticed that the company had filed
its return of income on September 2015 i.e. within the prescribed time limit as
stipulated in section 139(4) of the Act. As such, the assessee was not liable to
pay interest under Section 234A of the Act. Audit examination revealed that
though no interest under section 234A of the Act was computed through the
system, AO modified it through manual intervention and levied the interest
under this section amounting to ` 1,563.74 lakh without giving any justification
in its assessment order. It was further noticed from Income Tax Return (ITR)
of the assessee that the assessee had claimed the same amount of
` 1,563.74 lakh as a refund.
Audit further noticed that the ITD rectified the error when the assessee filed
its grievance on Centralized Public Grievance Redress and Monitoring System
(CPGRAMS) in February 2018. ITD issued the refund of ` 1,837.39 lakh in April
2018, which included interest under section 244A of the Act of ` 273.65 lakh
including avoidable payment of interest of ` 39.09 lakh.
The ITD in its reply (October 2019) stated that the modification of the interest
under section 234A of the Act was an error of data feeding due to human error.
Subsequently, rectification order under Section 154 was passed in April 2018
and thereafter the refund as claimed by the assessee was granted and issued.
The reply was unacceptable as the refund was withheld with the directions of
the PCIT (Central-3) at the time of assessment. Thus, the action of the ITD is
affirmative of harassment and financial hardship to the compliant tax payer.
(e) Charge: Pr. CIT (Central)-3, Delhi; AY: 2014-15
In this case, a rectification order under section 154 of the Act was passed on
May 2017 at an income of ` 221.92 lakh under normal provisions and
` 1084.79 lakh under special provisions of the Act with a tax liability of
` 227.37 lakh thereon. As per the snapshot of order under Section 154 of the
Act, the TCS/TDS of ` 1243.96 lakh was available to the company, therefore,
the company was not liable to pay the interest under section 234C of the Act.
No interest under section 234 C was computed through the AST, as shown in
snapshot, as it was not due from the assessee. The AO, however, levied
interest under section 234C of the Act amounting to ` 966.58 lakh through
manual modification without giving any justification. Audit further noticed
that the ITD rectified the error only after the assessee filed repeated requests
for refund and finally took up the grievance on CPGRAMS in April 2018. The
process of refund of ` 966.58 lakh including avoidable payment of interest of

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` 125.66 lakh was initiated by the ITD in May 2018. Thus, the AO resorted to
manual intervention in the system to block the refund which was due to
assessee.
(f) Charge: Pr. CIT (Central)-2, Delhi; AY: 2014-15
AO completed the scrutiny assessment in March 2016 at a loss of
` 12,485.58 lakh. As the assessment was made at a loss, therefore, the
company was not liable to pay the interest under section 234B of the Act. It
was further noticed from the ITR filed by the assessee that the assessee had
claimed the tax credit of TDS amounting to ` 2,711.96 lakh as a refund. But,
AO modified the interest component through manual intervention and levied
interest of ` 2,695.29 lakh under section 234B of the Act and ` 16.66 lakh as
dividend distribution tax under section 115O of the Act (which was already
paid by the assessee). Thereafter, ITD passed the rectification order under
section 154 of the Act in July 2016 and released the refund amounting to
` 2,711.96 lakh including avoidable payment of interest of ` 40.68 lakh. Thus,
the action of AO indicates that AO resorted to manual intervention in the
system to block the refund which was due to assessee.
It was evident from the above cases that, AO had withheld the refund amount
admissible to the assessee by making manual modification through levy of
interest to the extent of the amount of refund, when available tax credit was
more than the tax or cases where no tax was leviable. It was done without
entering the reason for modification in the relevant column of the AST
snapshot.
Further, of the 1,130 cases where refunds were blocked by AOs by way of
modifying the interest amount, audit could identify 175 cases where refunds
were released to the assessee after a delay ranging from one month to 156
months. Details of such 175 cases are given in Table 5.16 below:
Table 5.16: Details of cases related to blocked refund
Range of delay in issuing the Number of Amount of Additional (avoidable)
blocked refunds to the blocked blocked payment of interest
assessees refund cases ` in
refund (` under section 244A of
lakh) ` in lakh)
the Act (`
1 2 3 4
≤12 months 86 47,179.78 1,842.69
>12 months and ≤24 months 49 22,493.88 2,121.79
>24 months and ≤36 months 25 5,537.44 831.92
More than 36 months 15 1,983.70 478.19
Total 175 77,194.80 5,274.59

Thus, by way of irregular levy of excess interest by AOs, not only refund
amount was blocked causing undue harassment and hardship to the assessees,
but it also put an additional burden on the exchequer in the form of avoidable

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payment of huge amount of interest on refunds. This also led to non-

adherence to the commitment made in the Citizen’s Charter by the ITD, as,
instead of issuing refunds to the assessee within the timeframe, refunds were
blocked through manual modification by AOs in the interest component.
5.8.4.2 Refund not due to the assessee issued irregularly
In Punjab, Pr. CIT-3, Ludhiana charge, audit found in 146 cases that no refund
was due to the assessees as processed under section 143(1) of the Act.
However, refund amounting to ` 63.63 lakh was issued (from September 2016
to February 2018) to the assessees by way of rectification under section 154 of
the Act. Based on the internal enquiry conducted (from January 2018 to March
2018) by the department, a First Information Report (FIR) was lodged
(April 2018).
On being pointed out by the Audit why refund was issued to such assessees
against whom no refund was due, the ITD stated (in 135 cases) that these
refunds were not issued by the AOs as the case was processed centrally at
CPC-Bengaluru. The system was unauthorisedly accessed by the data entry
operator in connivance with an advocate and issued refunds by carrying
illegitimate rectifications. First Information Report (FIR) had been lodged
against them.
This points to the fact that the ITD does not have effective access control in
place to manage unauthorized access to system. This also indicates
inadequate internal control mechanism that do not address different security
risks.
5.8.5 Incorrect Interest calculated through Income Tax Business Application
(ITBA)
The essence of any robust Information Technology (IT) system is that all
calculation especially, in case of interest calculation system, should be based
on a proper formula fed into the system and there should be no need for
carrying out any modification. In view of the above, the ITD adopted Income
Tax Business Application (ITBA) module from the financial year 2017-18 to
eliminate the human intervention in respect of modification of interests under
sections 234A, 234B, 234C and 244A of the Act as the same prevailed in earlier
software namely AST. Thereafter, the assessment proceedings in ITD are being
carried out on ITBA only.
We found that of the 6,217 cases (checked by audit) which were processed
through AST in FY 2016-17 and FY 2017-18, 496 cases were processed/
completed through ITBA in FY 2018-19. We further examined the 496 cases
which were processed through ITBA to see whether correct calculation of the
interest was being done through this application. Of the 496 cases, we found

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32 cases involving tax effect of ` 2,297.95 lakh where calculation of interest

was done wrongly through ITBA. Thus, the system deficiency with respect to
calculation of interest still persisted in the new application, i.e. ITBA.
Three such cases are illustrated below:
(a) Charge: Pr. CIT-II, Mumbai; AY: 2016-17
The AO assessed the income of a Bank after scrutiny in December 2018
through ITBA at an income of ` 4,177.23 lakh92. Audit noticed that the
assessee had filed its return of income on the due date of filing of return, i.e.
on 30 November 2016. Further, the assessee had filed its revised return of
income on 27 March 2018 against the due date of 31 March 2018. As such,
the interest under section 234A of the Act in respect of default in furnishing
the income tax return was not leviable in the instant case. However, while
calculating the tax demand generated through ITBA, interest under section
234A of the Act amounting to ` 395.08 lakh was levied. The error had resulted
in excess levy of interest under section 234A of the Act by an equal amount.
(b) Charge: Pr. CIT DDIT(Int)-I, Dehradun; AY: 2016-17
The AO assessed the income of the assessee company after scrutiny in January
2019 through ITBA. Audit noticed that at the time of filing of return of income,
the assessee had TDS credit of ` 12,628.87 lakh against tax payable of
` 7,549.58 lakh. Further, the computation sheet generated through ITBA
depicts that the department had allowed TDS credit of ` 10,812.50 lakh against
the tax liability of ` 9,147.09 lakh, therefore, there was no scope for levying
the interest under section 234C of the Act. However, the ITBA module had
levied the interest under section 234C of the Act amounting to ` 246.19 lakh.
The incorrect levy of interest under section 234C of the Act by the system in
ITBA module reflects the error in application part which needs improvement.
(c) Charge: Pr. CIT (LTU) Bengaluru; AY: 2015-16
The AO assessed the income of the assessee company after scrutiny in
December 2018 through ITBA at an income of ` 58,754.86 lakh. Audit noticed
that assessee filed its return of income on 23 November 2015 as against due
date of filing of return of income on 30 November 2015. As such, the interest
under section 234A of the Act in respect of default in furnishing the income tax
return was not leviable in the instant case. Audit noticed that, while calculating
the tax demand generated through ITBA, interest under section 234A of the
Act amounting to ` 697.06 lakh was levied. The ITD in its reply
(November 2019) stated that in the assessment order, the interest is calculated
by the ITD in an automated environment and AO has no role in computation.

92 Under special provision (Section 115JB of the Act)

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Thus, this mistake is not on part of AO. ITD rectified this error under section
154 of the Act in January 2019.
In our earlier performance audit on ‘IT Application in Income Tax Department’
(Report no. 23 of 2012-13), Ministry after acknowledging the deficiency in AST
system, had stated that Income Tax Business Application (ITBA) was being
developed by ITD to replace the existing ITD Application and all issues related
to existing system would be taken into consideration in the new application,
i.e. ITBA. Further, in the Report of the Tax Administration Reform Commission
(TARC) submitted to the Government of India on 30 May 2014, it was
highlighted that core module of the ITD application, viz. AST has been patchy
and uneven, leading to creation of incorrect demands in the system. It was
further stated in the report that ‘The CBDT, however, plans to overcome the
major gaps through ITBA’.
However, observation with respect to 32 cases where calculation of interest
was done wrongly through ITBA, is indicative of the fact that system deficiency
with respect to calculation of interest persists in the new application, i.e. ITBA.
5.8.6 Other compliance issues
This para pertains to observation noticed during our regular audit conducted
for the period 2018-19. We found 134 cases involving tax effect of
` 1,10,269.82 lakh with respect to interest under sections 234A, 234B and
234C of the Act.
Six such cases are illustrated below:
(a) Charge: PCIT -1, Coimbatore, Chennai; AY: 2009-10
The AO completed the assessment of the assessee company under section 144
read with section 147 of the Act in December 2016 at an income of
` 761.50 lakh. Audit scrutiny revealed that interest under section 234A of the
Act at ` 20.71 lakh was computed through the system (AST) instead of
` 225.19 lakh for the period from October 2009 to December 2016. The error
had resulted in short levy of interest under section 234A of the Act amounting
to ` 204.48 lakh. ITD rectified the error by passing orders under Section 154 of
the Act (September 2017).
(b) Charge: PCIT (Central)-1, Delhi; AYs:1995-96, 1996-97 & 1997-98
The AO assessed the income of an Individual for AYs 1995-96, 1996-97 and
1997-98 at ` 1,527.39 lakh, ` 5,572.94 lakh and ` 15,441.84 lakh in March
1998, March 1999 and March 2000 respectively. Assessees’ appeals against
these assessment orders before CIT (Appeals), Lucknow were finally decided
by the Hon’ble Supreme Court vide its order dated 04 July 2016. The appeal
effects were given by the AO in August 2016, wherein the AO wrongly used

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lower rate of interest than the rate prescribed under section 234B of the Act
for default in payment of advance tax by the assessee. The error had resulted
in short levy of interest of ` 3,352 lakh. ITD accepted (October 2017) the audit
observation and rectified the error by passing orders under section 154 of the
Act (September 2017).
(c) Charge: CIT LTU, Bengaluru, Karnataka; AY: 2015-16
The AO completed the assessment of a Bank in December 2017 after scrutiny
at an income of ` 7,82,161.61 lakh. Audit examination revealed that, while
computing interest under section 234B of the Act, ITD short levied the interest
amount by ` 3,934.44 lakh. ITD rectified the error by passing order under
section 154 of the Act (March 2019).
(d) Charge: PCIT – 4, Delhi; AY: 2015-16
The AO assessed the income of the assessee company in December 2017 at
` 1,66,028 lakh and tax liability of ` 56,432.90 lakh thereon. Audit noticed
that the AST system as well as AO had not levied the interest under section
234C of the Act, despite the fact that the advance tax paid by the assessee was
less than the tax due on the returned income. The error in computing the
interest resulted in short levy of tax of ` 955.38 lakh. This also points to the
fact that ITD had failed to levy correct interest under section 234C of the Act
and even the system was deficient in computing the final demand of the
assessee. ITD rectified the error (February 2019) by passing order under section
154/250 of the Act.
(e) Charge: PCIT –I, Bhubaneswar, Odisha; AY: 2014-15
The AO assessed the income of the assessee company in December 2017 at an
income of ` 1,68,887.69 lakh. Audit noticed that though the assessee
company was in default in payment of instalment of advance tax, interest
under section 234C of the Act was not levied. Failure on the part of ITD to
adhere to provision of section 234C of the Act resulting in non-levy of interest
of ` 111.78 Lakh. ITD rectified the error by passing rectification order under
section 154 of the Act (November 2019).
(f) Charge: PCIT -II, Hyderabad; AY 2008-09
The case of assessee company was assessed under section 147 read with
143(3) of the Act in March 2016 an income of ` 4,094.11 lakh and a tax of
` 1,293.13 lakh thereon. Audit examination revealed that, instead of
calculating correct amount of interest at ` 956.85 lakh under section 234B of
the Act, interest was calculated through AST at ` 237.81 lakh. Further, AO did
not take any action to correct the incorrect interest calculated through the
system. Thus, the error in computation through the system and no remedial
action taken by AO in this regard had resulted in short levy of interest ` 719.04

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lakh. ITD rectified the error by passing order under section 154 of the Act
(February 2019).
5.9 Conclusion
a) The interest was wrongly computed by ITD, in 76.68 per cent93 of cases
of the sample of 6,217 selected out of a population of 8,35,727 records,
either due to systemic deficiencies or due to incorrect interventions by
the AOs.
b) Input of the other ITD module was not being captured properly in the
AST system leading to incorrect computation of interest in number of
cases which has an impact on final tax collection and refund.
c) AOs did not take any step to rectify the incorrect interest, under
sections 234A, 234B, 234C and 244A of the Act, calculated through the
system even though AST system allowed the AOs to modify the value
of interest in accordance with the provisions of the Act, thereby leading
to either short levy/payment or excess levy/payment of interest.
d) AOs modified the interest under sections 234A, 234B, 234C and 244A
of the Act against the incorrect interest calculated through the system
in some cases. However, not all these cases were modified at correct
amount, which resulted in either short levy/payment or excess
levy/payment of interest.
e) AOs manually modified the interest amount which was not warranted
in instances where correct amount of interest was calculated through
the system, leading to either short levy/payment or excess
levy/payment of interest causing hardship and harassment to
taxpayers.
It is not clear why manual modification is permitted, that too
apparently without a protocol for seeking senior level clearances if, in
exceptional cases, manual intervention is required. In fact, if manual
intervention at every level is needed, or continued, it either points to
an ill designed IT System, or a deliberate attempt to retain discretion,
for no apparent good reason.

f) Incorrect levy of interest (excess levy) by AOs using modification

feature of AST led to blockade of refunds due to the assessees. This
was not only violation of provisions of law but also resulted in non-
fulfilment of Citizen’s Charter. On the one hand the efficiency of the
department was affected and on the other there was undue
harassment to the assessees.

93 4,767 assessment cases out of 6,217 assessment cases which were audited

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g) All Income Tax Returns (ITRs) are first summarily processed under
section 143(1) at Centralized Processing Centre (CPC), Bengaluru.
Processing of ITRs by CPC is supposed to be completely automated.
However, refunds of the assessees’ were blocked by modifying the
interest amount even in cases processed in summary manner through
CPC.
h) The net collection of taxes is computed by allowing for the refunds94.
Blockade of refunds, therefore, have the result of inflating the net tax
collection. Further, unreasonable tax demand from the assessee, by
way of excess levy of interest, results in disputes and further snowballs
into large arrears. Thus, the blockade of refund and excess demand
would have consequent effect on the revenue collection of the
Government.
5.10 Recommendations
a) CBDT may institute appropriate checks and balances in Income Tax
Business Application (ITBA) to prevent recurrence of error in
computation of tax and interest.
b) The IT system for direct taxes needs to be designed in such a way that
it should ensure zero or minimal physical interface between the
assessee and the tax officers. The Government may consider the IT
System for direct taxes being placed at arms length from CBDT, with an
independent governmental body or organisation.
c) AST module allows manual modification of interest amount which
resulted in errors in computation of interest. ITD needs to inquire into
the reasons for errors in computation of interest through AST and
reasons for allowing manual modification to co-exist with IT system.
d) The system should be designed to provide audit trail for modifications,
if any, being carried out by AOs. All justifications for modification by
AO must be available on the system.
e) CBDT may examine whether the instances of “errors” noticed are errors
of omission or commission and if these are errors of commission, then
ITD should ensure necessary action as per law.
f) The IT Department may fix accountability on the part of the AOs to
ensure that the risk of recurrences of similar types of irregularities are
minimised.

94 Para 7.2.2. of CBDT Accounts Manual

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g) CBDT may ensure that the refund due to the assessee is released in
prescribed time limit, upholding its commitment through the citizen
charter, rather than to withhold/block it by manual intervention.
h) AO’s action regarding blockade of refund as well as under charging of
interest may be investigated upon.
i) While audit carried out test check of a sample of cases, CBDT should
examine all the cases where modifications were carried out in AST to
identify instances of omission and commission and take necessary
action as per law.

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