2024 (8) TMI 1232 - AT - Income Tax

Addition under the provisions of Explanation 1 to sec. 37(1) - As argued expenses in dispute have not been prohibited under the provisions of law - interest and the fee were levied on account of non-compliance of the different provisions under the different Act, which is compensatory in nature and, therefore, the same should be allowed as a deduction. HELD THAT - As regards the first category of expenses representing the interest and late fee on account of delay in filing GST return, we find that it was levied for non-compliance of the provisions of GST Act. Assessee is required to comply the provisions of GST Act by filing the return within the stipulated time. Since the returns have not been filed within the stipulated time, the interest and fee were charged under the GST Act. As such the interest in dispute was not charged by the revenue for committing any offence which was prohibited under the provisions of GST Act. Thus, interest and late fees paid by the assessee in the given facts and circumstances is compensatory in nature which is allowable as deduction under the provisions of section 37(1) As decided in the case of ITO vs. Virtue Financial Services (P) Ltd 2012 (9) TMI 762 - ITAT DELHI regarding the payment made on account of delay in submitting statutory requirement/returns held that the same are compensatory in nature and allowable as business expenditure u/s 37 Interest on delayed payment of Professional tax, PT, and licence fee for which the assessee was under the statutory obligation to deposit/pay within the stipulated time but there was a delay and therefore the interest was charged under the relevant Act which is nothing but compensatory in nature and therefore the same cannot be hit by the explanation 1 to section 37(1) of the Act. Accordingly, we hold that such interest on account of delayed payments is eligible for deduction as business expenses under section 37(1) - grounds of appeal of the assessee are allowed.

Summary

Issues:
1. Addition of expenses under Explanation 1 to sec. 37(1) of the Act.

Analysis:

The appeal was filed by the assessee against the order passed by the Addl.JCIT (A)-12, Mumbai, challenging the addition of Rs. 14,13,154 under Explanation 1 to sec. 37(1) of the Act for the assessment year 2023-24. The AO disallowed certain expenses incurred by the assessee, which were found to be prohibited under the law. The expenses included interest on delay in filing GST return, delay in payment of Professional Tax, late fees, and interest on License Fee. The AO added these amounts to the total income of the assessee, a decision upheld by the ld. CIT(A).

The main contention raised by the assessee was that the expenses were not prohibited under the law but were levied due to non-compliance with different statutory provisions, making them compensatory in nature. The assessee argued that these expenses should be allowed as deductions. On the other hand, the Revenue supported the decisions of the lower authorities.

The ITAT observed that the expenses disallowed by the CIT(A) were incurred in violation of the law, leading to their disallowance under Explanation 1 to sec. 37(1) of the Act. However, regarding the interest and late fees on delayed GST returns, the ITAT held that they were compensatory in nature, not penal, and therefore allowable as deductions under sec. 37(1) of the Act. The ITAT referred to a Delhi Tribunal case where it was held that payments made for delay in submitting statutory returns were compensatory and allowable as business expenditure under sec. 37 of the Act.

Further, the ITAT also considered the interest on delayed payment of Professional Tax and License Fee, stating that these charges were compensatory in nature due to delayed compliance with statutory obligations. Therefore, such interest on delayed payments was deemed eligible for deduction as business expenses under sec. 37(1) of the Act. Consequently, the ITAT allowed the grounds of appeal raised by the assessee, resulting in the appeal being allowed in favor of the assessee.

In conclusion, the ITAT ruled in favor of the assessee, allowing the appeal and holding that the expenses in question, which were compensatory in nature, should be deductible as business expenses under sec. 37(1) of the Act.