2021 (7) TMI 5 - AT - Income Tax

Disallowance being interest paid on delayed deposit of TDS - Allowable business expenditure or not? - whether it is compensatory in nature and is, therefore, allowable as deduction? - HELD THAT - Interest is payable as consequence of failure to pay tax and the expenditure incurred for the purpose of payment of interest does not relate to the business of the assessee. Therefore, it is apparent that the payment of interest has nothing to do with the business of the assessee and, accordingly, payment of interest cannot be allowed as deduction under the provisions of the Act. While coming to this conclusion, we are guided by the ratio laid in the case of CIT vs. Chennai Properties and Investments Ltd. 1998 (4) TMI 89 - MADRAS HIGH COURT wherein as clarified that Income Tax is not allowable as business expenditure and the amount deducted as tax is not an item of expenditure. Hon ble Madras High Court also referred to the judgment of Bharat Commerce Industries Ltd. v 1998 (3) TMI 2 - SUPREME COURT wherein has rejected the arguments advanced by the assessee that retention of money payable to the State as tax or Income Tax would augment the capital of the assessee and the expenditure incurred towards the normal interest paid for the period of such retention would assume character of business expenditure and hold that an assessee could not possibly claim that it was borrowing from the State, the amounts payable to it as Income Tax, and utilizing the same as capital in its business, to contend that the interest paid for the period of delay in payment of tax amounted to a business expenditure. Decided against the assessee.

Summary

Issues:
Disallowance of interest on delayed deposit of TDS as deduction.

Analysis:
The appeal concerned an order passed by the Commissioner of Income Tax (Appeals) against the assessee, relating to the allowability of an amount debited for interest on delayed deposits of tax deducted at source (TDS). The assessee contended that the interest paid was compensatory in nature, not penal, and should be an allowable deduction. The Assessing Officer disagreed, adding the amount to the assessee's income. The assessee then approached the Tribunal, citing judicial precedents supporting the deductibility of such interest payments.

The Authorized Representative argued that the interest expenditure on late TDS deposit was allowable based on the ITAT Kolkata Bench's decisions in various cases. Conversely, the CIT-DR contended that interest on unpaid TDS liability was not deductible, citing judgments from the Madras High Court and Bombay High Court. The Tribunal examined the arguments and reviewed relevant case laws.

The Tribunal noted that the Kolkata Bench consistently allowed interest on late TDS payments as a deduction in several cases. However, the Bangalore Bench and Ahmedabad Bench held contrary views, following the Madras High Court's decision that such interest payments were in the nature of tax and not deductible. The Tribunal also referred to a Delhi Bench decision aligning with the Madras High Court's judgment.

Considering the legal precedents and the nature of the interest paid, the Tribunal concluded that the interest was not related to the business of the assessee and could not be allowed as a deduction under the Income Tax Act. Citing the Madras High Court's ruling that income tax is not a business expenditure, the Tribunal upheld the CIT(A)'s decision to disallow the interest payment as a deduction. Consequently, the appeal of the assessee was dismissed, affirming the addition made on account of interest paid on late TDS deposits.

In conclusion, the Tribunal's decision was based on the interpretation of legal precedents and the nature of the interest payment, ultimately upholding the disallowance of the interest on delayed TDS deposits as a deduction.