2021 (4) TMI 395 - AT - Income Tax

Deduction of interest on late deposit of TDS under Section 37(1) - DR submitted that interest on late deposit of TDS is neither an expenditure wholly and exclusively incurred for the purposes of business and further it is a payment, which is in form of tax it is not an allowable expenditure - even otherwise there is no evidence that it is merely compensatory in nature, thus hit by proviso to section 37 (1) and interest on late payment of TDS has rightly been disallowed - HELD THAT - The above issue has already been considered in CIT Vs. Chennai Properties Investment Ltd. 1998 (4) TMI 89 - MADRAS HIGH COURT wherein it has been held that interest under Section 201(1A) of the Act paid by the assessee does not assume the character of business expenditure and also cannot be regarded as compensatory payment. The above decision of the Hon ble Madras High Court has also been dealt with exclusively by the various benches of the ITAT , specifically in Velankani Information Systems Ltd. 2018 (10) TMI 68 - ITAT BANGALORE wherein considering various decisions of the Tribunal had followed the decision of the Hon ble Madras High Court in CIT Vs. Chennai Properties Investment Ltd. 1998 (4) TMI 89 - MADRAS HIGH COURT No merit in the appeal of the assessee and hold that interest payment on late payment of tax at source is not eligible business expenditure for deduction and it is not compensatory in nature. None of the decision cited by the assessee in statement of facts supports the view of the assessee that above expenditure is allowable u/s 37 (1) of the act. Even assuming meanwhile denying, that above interest expenditure is compensatory in nature, it should be allowed as allowable expenditure. The conditions of the allowability of expenditure is laid down u/s 37 (1) of the income tax act which speaks that any expenditure which is not a capital expenditure or personal expenses of the assessee which is laid out or expended wholly and exclusively for the purpose of the business shall be allowed in computing the income chargeable Under the head profits and gains of business or profession. Payment of interest on late payment of TDS cannot be considered as an expenditure led out or expended wholly and exclusively for the purpose of the business because late payment of TDS cannot be considered as part of the business of the assessee. Thus we hold that payment of interest on late deposit of tax deduction at source by the assessee leviable u/s 201 (1A) of the act is neither an expenditure only and exclusively incurred for the purpose of the business and therefore same is not allowable as deduction u/s 37 (1) - Decided against assessee.

Summary

Issues:
1. Deduction of interest on late deposit of TDS under Section 37(1) of the Income Tax Act, 1961.

Analysis:
The appeal was filed against the order of the ld. Commissioner of Income Tax (Appeals) regarding the deduction of interest on late deposit of TDS under Section 37(1) of the Income Tax Act, 1961. The Assessing Officer disallowed the deduction, which was confirmed by the CIT (A). The assessee, a Pvt. Ltd. company engaged in trading groceries, claimed the interest as an allowable expenditure u/s 37(1) based on the tax audit report. However, the AO held that any expenditure incurred for an offense or prohibited by law cannot be deemed incurred for business purposes. The interest on delayed TDS payment was considered not allowable, leading to disallowance in the assessment order under Section 143(3) of the Act.

The CIT (A) affirmed the disallowance, stating that interest on late TDS deposit is not compensatory and is not deductible. The assessee appealed before the ITAT, but despite notices, did not appear, leading to a decision based on available records. The Department representative supported the lower authorities, arguing that the interest is not wholly and exclusively for business purposes and is in the form of tax, hence not allowable as an expenditure. The contention was that the interest on late TDS payment was rightly disallowed under the proviso to section 37(1) of the Act.

The ITAT considered the decision of the Hon’ble Madras High Court and various ITAT benches, concluding that interest paid under Section 201(1A) is not compensatory and does not assume the character of business expenditure. Citing the Madras High Court's ruling, the ITAT upheld the disallowance of interest on delayed TDS remittance. Despite the assessee citing decisions indicating that the interest is not penal in nature, the ITAT confirmed the disallowance, stating that such payment is not business expenditure and therefore not allowable under Section 37(1) of the Act. The conditions for the allowability of expenditure under Section 37(1) were not met as the late TDS payment was not considered wholly and exclusively for business purposes.

In conclusion, the ITAT held that the payment of interest on late TDS deposit was not an allowable deduction under Section 37(1) of the Act as it was not incurred solely for the purpose of business. Thus, the appeal of the assessee was dismissed.