2020 (6) TMI 758 - AT - Income Tax

Disallowance on account of interest on late payment of TDS u/s 201(1A) - contention of the assessee is that the provision of section 40(a)(ii) prohibits the deduction of payment of taxes levied on profit or gain of the business and TDS is not paid on profit or gains of the business, therefore interest paid under section 201(1A) is allowable as business expenses as the same does not constitute the part of the taxes which is levied on profit or gains of business - AO disallowed the claim of the assessee by holding that the interest paid on TDS is not as allowable expenses - HELD THAT - Interest on delayed deposit of TDS is not allowable deduction in view of the judgment of Hon ble Madras High Court in case of CIT vs. Chennai Properties Investment Ltd 1998 (4) TMI 89 - MADRAS HIGH COURT As we have decided the identical issue in favour of the assessee in the case of M/s Narayani Ispat Pvt. Ltd. (supra). However, we are changing our decision in the present case for the simple reason that the judgment of Hon ble Madras High Court in case of CIT vs. Chennai Properties Investment Ltd 2017 (10) TMI 67 - ITAT KOLKATA was not brought to our notice while hearing the case of M/s Narayani Ispat Pvt. Ltd. There is no ambiguity that the issue is covered against assessee by the Hon ble Madras High Court in case of Chennai Properties Investment Ltd. (supra). Accordingly we do not find any infirmity in the order of the learned CIT-A. Hence we decline to interfere. Thus the ground of appeal of the assessee is dismissed.

Summary

Issues: Disallowance of interest on late payment of TDS under section 201(1A)

In this case, the appeal was filed against the order of the Commissioner of Income Tax (Appeals) regarding the disallowance of interest on late payment of TDS under section 201(1A). The assessee, a partnership firm in the construction business, claimed the interest paid as a business expense, arguing that TDS is not levied on profits or gains of the business. However, the Assessing Officer disallowed the claim based on a decision of the Madras High Court. The CIT (A) upheld the disallowance, citing the same decision and rejecting the assessee's argument. The assessee then appealed to the ITAT, presenting a decision by the Kolkata Tribunal favoring the assessee. After considering the arguments, the ITAT referred to the Madras High Court decision, emphasizing that interest on delayed TDS payment is not a deductible expense, as it is a penalty for failure to pay tax on time. Despite a previous decision in favor of the assessee, the ITAT upheld the disallowance, noting the binding precedent of the Madras High Court decision.

The primary issue in this case was the disallowance of interest on late payment of TDS under section 201(1A). The assessee contended that since TDS is not levied on profits or gains of the business, the interest paid should be allowed as a business expense. However, the Assessing Officer disallowed the claim, relying on a decision of the Madras High Court that held such interest does not qualify as a business expenditure. The CIT (A) also upheld the disallowance, emphasizing the Madras High Court decision. The ITAT, after considering arguments from both sides and a favorable decision by the Kolkata Tribunal, ultimately upheld the disallowance based on the Madras High Court decision, which deemed the interest as a penalty for delayed tax payment rather than a deductible business expense.

The key contention revolved around the character of interest on late TDS payment and its eligibility as a business expense. The assessee argued that since TDS is not imposed on business profits, the interest paid should be considered a legitimate business expense. Conversely, the authorities, following the Madras High Court decision, viewed such interest as a penalty for failure to remit tax on time, thus disallowing it as a deductible expense. The ITAT, while acknowledging a prior decision in favor of the assessee, ultimately upheld the disallowance, aligning with the Madras High Court ruling and emphasizing the penalty nature of the interest payment.

The ITAT's decision highlighted the significance of the Madras High Court judgment, which established that interest on delayed TDS payment is akin to a penalty for non-compliance rather than a business expense. Despite a previous decision favoring the assessee, the ITAT deemed the Madras High Court decision as a binding precedent, leading to the dismissal of the appeal. This case underscores the importance of judicial precedents in tax matters and the critical distinction between penalties and allowable business expenses in determining tax liabilities.