Payment of interest on late deposit of TDS is not allowable as deduction: Delhi ITAT


Payment of interest on late deposit of TDS is not allowable as deduction: Delhi ITAT


Whether interest paid for delay in payment of TDS is an allowable expenditure or not is a question often asked. More particularly, one may note that the expenditure of penal nature is not an allowable deduction U/s 37(1). The question of disallowance of interest on TDS arises in various cases as it is considered as penal in nature.


The another argument in support of disallowance was that the income tax is considered as an expenditure of personal nature as against GST.


The further question that might arise is whether the interest on TDS would be required to be mentioned in the Tax Audit Report by the auditor as an expense “penal in nature”.



Here is an interesting case before ITAT Delhi as under:

Universal Energies Ltd (ITA No. 2761/Del/2018)



Let us have a short overview of the case:





Sec. 201(1A) of the Income Tax Act mandates Assessee to pay simple interest @ 1.5% per month or part of the month in case of delay in remittance of TDS amount deducted, to the treasury of the Central Government.


While filing the income tax return, the Interest on TDS has not been added back in the computation of Income by the assessee.


AO during the course of the assessment proceeding disallowed the expenses and added back to the income of the assessee.


Assessee filed an appeal against the same.



ITAT Delhi held as below:


  1. The payment of interest takes colour from the nature of the levy with reference to which such interest is paid and the tax required to be but not paid in time, which rendered the assessee liable for payment of interest was in the nature of a direct tax and similar to the income-tax payable.


  1. It is undisputed law that income tax inputs interest, penalty also and the same is not allowable as per provisions of Section 40(a)(ii).


With the above observation, the ITAT upheld the disallowance. In short, it concluded that the interest on TDS is not an allowable expenditure.



Delhi ITAT in the above case has held that interest on TDS is not an allowable deduction. However, one may note that there are various other ITAT & High Courts which have held that the interest on TDS is compensatory in nature and so the same has been held to be an allowable expenditure.