2021 (2) TMI 63 - AT - Income Tax

Addition towards proportionate interest on interest free advances extended U/s. 36(1)(iii) - Assessee argued that assessee had extended interest free loan out of its non-interest-bearing fund - HELD THAT - Claim of the Ld. AR that the assessee had extended interest free loan out of its non-interest-bearing fund is only partially correct - AO has not considered the interest free fund available with the assessee during the period of interest free loan extended to its sister concern. Needless to mention that addition cannot be made in the hands of the assessee U/s. 36(1)(iii) extending interest free loan from its non-interest-bearing fund - we hereby remit the matter back to the file of the ld. AO to compute the proportionate interest with respect to the interest-bearing fund extended to the assessee s sister concern and thereafter pass appropriate order in accordance with law and merit based on our observations mentioned herein above. Disallowance of interest paid on late payment of TDS - penalty levied invoking the provisions of section 37(1) of the Act - HELD THAT - Any expenditure incurred by the assessee for any purpose which is an offence or which is prohibited by law shall not be allowed to be claimed as deduction. In the case of the assessee, the late payment of TDS and the penalty levied towards the late payment of TDS cannot be treated as an offence or an act prohibited by law. These are only damages thrust on the assessee for non-payment of dues to the Revenue within the stipulated period provided under the Act. Revenue Authorities has erred in invoking the provisions of section 37(1) in the case of the assessee - we hereby direct the Ld. AO to delete the addition made in the hands of the assessee towards interest and penalty paid for late payment of TDS. Appeal of the assessee is partly allowed for statistical purposes.

Summary

Issues:
1. Disallowance of proportionate interest on interest-free advances under section 36(1)(iii) of the Act.
2. Disallowance of interest paid on late payment of TDS and penalty under section 37(1) of the Act.

Issue 1: Disallowance of proportionate interest on interest-free advances under section 36(1)(iii) of the Act:

The assessee, a Private Limited Company, extended interest-free advances to sister concerns totaling ?7,81,85,990. The Assessing Officer (AO) disallowed proportionate interest of ?15,61,749 under section 36(1)(iii) of the Act. The Commissioner of Income Tax (Appeals) upheld this decision. The assessee argued that as it had own funds exceeding the advanced amount, the disallowance was unwarranted. The Tribunal noted the erosion of the company's capital and reserves, indicating a lack of interest-bearing funds. However, it found the AO did not consider the interest-free fund available during the loan extension. Consequently, the Tribunal remitted the matter back to the AO to compute interest based on the interest-bearing fund.

Issue 2: Disallowance of interest paid on late payment of TDS and penalty under section 37(1) of the Act:

The Revenue Authorities disallowed interest and penalty totaling ?2,73,183 for late TDS payment under section 37(1) of the Act. The Tribunal analyzed the provisions of section 37(1) and concluded that expenses incurred for an offense or prohibited by law cannot be claimed as a deduction. Late TDS payment and associated penalties were viewed as damages for non-compliance rather than offenses. Therefore, the Tribunal directed the AO to delete the addition of ?2,73,183 in the hands of the assessee. The appeal was partly allowed for statistical purposes.

In summary, the Tribunal remitted the issue of interest on interest-free advances back to the AO for proper computation based on available interest-bearing funds. Additionally, it directed the deletion of the disallowed interest and penalty for late TDS payment, as they were not considered offenses under section 37(1) of the Act. The appeal was partly allowed in favor of the assessee.