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Whether interest on delayed payment of GST, VAT, TDS, Service tax is an allowable expenses?
One of the common question during assessment proceeding is regarding the allowability of deduction towards interest paid on GST, TDS, VAT etc. The question asked is whether this is an allowable expenses or not?
One school of income tax law believes that it is penal in nature and so not an allowable expenses. Another school believes that since it is exclusively for the purpose of business, it should be allowed as deduction. Even in some cases, it appears to be “compensatory in nature”.
Here was an interesting case before ITAT Mumbai as under:
M/S NEELKAMAL REALTORS SUBURBAN PVT. LTD.
THE ASST. COMMISSIONER OF INCOME TAX, CENTRAL CI RCLE-1 (4) , MUMBAI,
ITA No. 86/Mum/2021
Dated.- April 28, 2022
Short Overview of the case:
The issue was with regard to disallowance under section 37(1) in respect of delayed payment of service tax, provident fund, and VAT?
ITAT observed as under:
- We find that identical issue has been decided by the co-ordinate Bench in case of Emdee Digitronics Pvt. Ltd [2019 ( ITAT KOLKATA] held that interest expense on late deposit of VAT, service tax, TDS etc are allowable expenditure under section 37(1) of the Act
- In view of the above fact, respectfully following the decision of Kolkata Bench of ITAT, we hold that such expenses are not disallowable under section 37(1) of the Act.
- Further, VAT laws, provident laws and service tax laws clearly provide for payment of interest if there is a delay in payment of fees. Therefore, it is apparent that those respective laws allowed the belated payment along with interest. Therefore, those are not affected by explanation–1 to section 37(1) of the Act.
With above observation, the ITAT Mumbai has also held that such interest payment are deductible expenditure.