[Section 218]: Assessee Deemed to be in Default

Section 218 of the Income Tax Act, 1961 deals with situations where a taxpayer is considered to be in default for non-payment or short payment of advance tax. Here’s a detailed analysis:

1. When is an Assessee Deemed in Default?

An assessee is treated as being in default if:

• • They fail to pay any instalmentof advance tax as per Section 211, or
  • The payment made is less than the required amountas per:
    • Their own estimate (Section 209(1)), or
    • The Assessing Officer’s order (Section 210(3))

Exception: No default if shortfall is due to:

• • Underestimation of capital gains/casual income(covered under Proviso to Section 234C), or
  • Genuine calculation errorslater rectified

2. Consequences of Being in Default

(A) Interest Charges

• • Section 234B: 1% simple interest per month if <90% of total tax paid by March 31
  • Section 234C: 1% interest per month on shortfall in instalments

(B) Penalty Proceedings

• • The AO may initiate penalty proceedings under Section 221
  • Penalty can be up to amount of tax in default

(C) Prosecution

• • In severe cases of willful evasion, prosecution may be initiated under Section 276C

3. Key Judicial Interpretations

✔ Default is Automatic

• • Mere non-payment makes assessee “deemed in default” – no separate order needed [CIT v. Kohinoor Flour Mills]

✔ Reasonable Cause Defense

• • Assessee can avoid penalty by proving reasonable causefor default [Section 273B]

✔ AO Must Give Opportunity

• • Before imposing penalty, AO must give proper hearing [CIT v. Ram Commercial Enterprises]

4. Practical Examples

Case 1: Partial Payment

• • Required advance tax: ₹1,00,000 (₹25,000 per instalment)
  • Paid only ₹15,000 in June
  • Result: Default for ₹10,000 + interest under 234B/234C

Case 2: Complete Non-Payment

• • No advance tax paid despite liability
  • Result: Full default amount + interest + possible penalty

5. How to Avoid Being in Default?

1. Estimate Income Carefully
   • Consider all known income sources
   • Account for predictable capital gains
2. Use Revised Estimates
   • File revised estimates if income changes (Section 210(5))
3. Pay Minimum 90% by March 31
   • Avoids Section 234B interest
4. Maintain Documentation
   • Keep records supporting estimates

6. Comparison with Related Sections