VAT Penalties not allowable as Deduction: ITAT Bangalore
Recently, ITAT Banglore in the case of Kadharegowda Siddaraju vs ITO (ITA No. 1641/Bang/2024; AY 2018-19; Dt.of Order 23/10/2024 has held that VAT Penalties cannot be allowed as Income Tax Deduction u/s 37.
Let us have a Short Overview of the case:
In this case, the assessee, an individual running a business in Mysuru, filed return of income for AY 2018-19. The AO disallowed ₹2,74,202 classified as VAT penalty.
The AO reasoned that payments of a penal nature are not allowable as deductions under Sec 37.
The assessee argued that the payment was not a penalty but arrears of VAT. The assessee further contended that the VAT authorities had waived penalties for earlier years, which indicated that the payment was not penal in nature.
However, the CIT(A) upheld the AO’s decision.
The tribunal noted the key argument of the assessee was that the payment made was for VAT arrears and not a penalty. The bench reviewed the Karnataka VAT authorities’ orders, which confirmed that penalties for certain years had been waived. However, the ITAT found that neither the AO nor the CIT(A) had adequately considered these waiver orders or distinguished between arrears and penalties.
In light of the incomplete examination of facts, the ITAT restored the matter to the AO for fresh consideration.
The AO was directed to review the VAT payment details, verify the nature of the payment, and determine whether it was penal or regular in nature.
The tribunal held that payments of a penal nature are not eligible for deduction under Sec 37 of the Act. However, if the payment was indeed for VAT arrears and not a penalty, it should be allowed as a deduction.
In short, the Bangalore Tribunal clarified that penalties levied under the VAT cannot be claimed as a deduction under Sec 37 of the Act.
The Copy Of the Appellate is as under:
