Whether interest on delayed payment of TDS is deductible expenses?

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Whether interest on delayed payment of TDS is deductible 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:

ITAT MUMBAI:-

M/S NEELKAMAL REALTORS SUBURBAN PVT. LTD.

VERSUS

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:

  1. 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
  2. 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.
  1. 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.

Similar was the issue in another case before ITAT Mumbai in the case of M/S RESOLVE SALVAGE & FIRE INDIA PRIVATE LIMITED VERSUS DCIT 14 (3) (1) , MUMBAI. It was held as under:

  1. We observe that Ld.CIT(A) has relied upon the decision of Ferro Alloys Corporation [1991 – BOMBAY HIGH COURT] in which the Hon’ble High Court has not discussed anything on merit considering the fact that the case Bharat Commerce Industries Ltd. [1998 SUPREME COURT] was pending before Hon’ble Supreme Court and we observe that even in the case of Bharat Commerce Industries Ltd, the issue involved is relating to interest paid on late payment of advance-tax.Therefore, the issue involved in the present case is not relating to late remittance of advance-tax but late remittance of TDS.The issue involved is whether the interest paid by the assessee to the government can be termed as compensatory or penal in nature.
  2. In our considered view, the assessee has deducted the tax on behalf of the third party and failed to remit the same within the due date and the interest charged on such amount is only compensatory in nature.
  1. Here we notice that the co-ordinate bench of this Tribunal has already held the same view in the case of STUP Consultants Pvt Ltd [2019 ITAT MUMBAI] interest expense on the delayed payment of service tax is allowable deduction.The above principles can be applied to the interest expenses levied on account of delayed payment of TDS as it relates to the expenses claimed by the assessee which are subject to the TDS provisions.Thus we hold that the interest paid on delayed payment of TDS u/s 201(1A) is an allowable deduction.
  1. We direct accordingly. Assessee succeeds in its appeal.

With above observation, interest on delayed payment of TDS was also allowed as deduction.

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