2019 (1) TMI 1259 - AT - Income Tax

Interest charged u/s 234B, u/s 234C and 234D - whether compensatory in nature for use of government dues, as business expenditure u/s 37? - disallowance u/s 40(a)(ii) - Held that - There could be no quarrel as to the nature thereof since it is settled legal position that the character of such interest payment is compensatory in nature in the sense that it is payable by the assessee to the revenue for delayed payment of its dues. In terms of the provisions of Section 40(a)(ii), the assessee is not entitled to claim any deduction for any sum paid on account of any rate or tax levied. The expressions tax as defined u/s 2(43) means income tax chargeable under the provisions of this act and includes Fringe Benefit Tax. The expression interest as defined in Section 2(28A) means interest payable in any manner in respect of moneys borrowed or debt incurred (including a deposit, claim or other similar right or obligation) and includes any service fee or other charge in respect of the money borrowed or debt incurred or in respect of any credit facility which has not been utilized. Tax and interest has been given specific meaning under the act and the provisions of Section 40(a)(ii) refers only to any rate or tax levied without including therein the expression interest. Therefore, the stand of AO in disallowing the same u/s 40(a)(ii), in our opinion, was not justified. The payment of income tax is personal liability for the assessee and consequential interest paid thereupon for delay is part and parcel of the aforesaid payment only and retain the same color & character. This being the case, the deduction thereof u/s 37(1) could not be allowed to the assessee since it was personal expenditure in nature and the same could not be said to have been expanded wholly and exclusively for the purpose of assessee s business since payment of taxes or interest could, by no stretch of imagination, be said to be the assessee s business. For the same reason, the deduction thereof could not be allowed to assessee u/s 36(1)(iii) also which envisages amount of interest paid in respect of capital borrowed for the purposes of business or profession, which is not the case here. We are of the opinion that the aforesaid interest paid by the assessee under protest, was nothing but the money kept in trust before the revenue and the expenditure in that respect could not be said to have even crystallized during impugned AY and therefore, there could be no occasion to consider the question that whether the same was an admissible expenditure during impugned AY. Viewing from any angle, the deduction of this expenditure either u/s 37(1) or 36(1)(iii) could not be allowed to the assessee. We order so. The grounds stand dismissed to that extent. Refund of interest amount as received by assessee in the subsequent AY and offered to tax, could not be brought to tax in that AY since the same was mere refund of the money kept under trust and paid under protest by the assessee. AO is directed to reconsider this plea as to exclusion of interest amount to the extent of ₹ 183.05 Lacs for determining the income for AY 2010-11 after due verification of the fact that said amount was already offered to tax in that AY. The assessee is directed to provide requisite documentary evidences, in this regard, to bolster his claim. The assessee shall get corresponding consequential relief in other AY. Interest paid on account of late payment of fringe benefit tax could also not be allowed to the assessee. However, the amount of tax deduction at source TDS represents the amount of income tax of the third parties party on whose behalf the payment was deducted by the assessee & paid to the Government Exchequer. TDS amount do not represent the tax of the assessee but it is the tax of the party which has been paid by the assessee. This being the case, any interest paid on account of late payment of TDS could not be linked to the Income Tax of the assessee and therefore, the deduction thereof was available to the assessee. Hence, the deduction of ₹ 9,128/- as claimed by the assessee would be an allowable expenditure.

Issues:
1. Appeal against CIT(A) order for AY 2009-10
2. Disallowance of interest charged u/s 234B, 234C, and 234D as business expenditure u/s 37

Issue 1: Appeal Against CIT(A) Order for AY 2009-10:
The appeal before the Appellate Tribunal concerned the Assessment Year (AY) 2009-10, which was recalled for fresh hearing due to being disposed of ex-parte initially. The assessee contested the order of the Commissioner of Income Tax (Appeals)-7, Mumbai, regarding certain disallowances. The primary subject of the appeal was the disallowance of interest amounting to ?184.25 Lacs, as sustained by the first appellate authority.

Issue 2: Disallowance of Interest Charged u/s 234B, 234C, and 234D as Business Expenditure u/s 37:
The disallowance of interest payments under sections 234B, 234C, and 234D was the core issue in this case. The Assessing Officer (AO) disallowed the interest paid by the assessee, claiming it as business expenditure under Section 37. The CIT(A) upheld this disallowance, stating that interest on tax was not deductible under Section 37 as it was part of the tax itself. The Tribunal analyzed various judicial pronouncements on the compensatory nature of such interest payments.

The Authorized Representative for Assessee argued that the interest was compensatory and not penal, highlighting that the interest was refunded in a subsequent year where it was offered for taxation. The Tribunal referred to legal precedents to determine the nature of interest payments and their deductibility under Section 40(a)(ii) and Section 37(1). It was concluded that the interest paid under protest was akin to money held in trust, and thus, not an allowable deduction under Section 37(1) or Section 36(1)(iii).

Moreover, the Tribunal directed the Assessing Officer to reconsider the exclusion of the interest amount for the subsequent year and allowed the deduction for late payment of TDS, as it represented the tax of a third party. The appeal was partly allowed based on these findings.

In conclusion, the Tribunal's judgment addressed the issues raised by the assessee regarding the disallowance of interest payments and provided detailed reasoning based on legal interpretations and factual circumstances to decide on the deductibility of such expenses.

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