Interest payment on late payment of tax at source is not eligible business expenditure and thus not deductible

Summary: Payment of interest on late deposit of TDS by the assessee leviable u/s 201(1A) of the Income Tax Act is neither an expenditure only and exclusively incurred for the purpose of the business and therefore the same is not allowable as deduction u/s 37(1) of the Act.

Brief Facts: The assessee is a private limited company engaged in the business of trading of groceries. It filed its ITR declaring income of Rs. 84,68,150/-. The Ld. AO on scrutiny found that assessee has debited to P&L A/c a sum of Rs. 32,793/- being interest u/s 201(1A) of the Act for late deposit of TDS. The above information was found from the tax audit report furnished by the assesee. It was claimed by the assessee as allowable expenditure u/s 37(1) of the Act. The Ld. AO noted that any expenditure incurred by an assessee for any purpose, which is an offence or prohibited by law, shall not be deemed to have been incurred for the purposes of business of profession and no deduction shall be made in respect of the above expenditure. Therefore, the AO was of the view that interest on delayed payment of TDS is not an allowable expense. Aggrieved, the assessee filed an appeal with CIT(A) who held that interest on late deposit of TDS is not a deductible expenditure as it is not compensatory in nature. Thus, he confirmed the action of the AO. The assessee preferred further appeal with Tribunal.

Submission before ITAT:

• The assessee furnished its arguments in statements of facts filed with appeal but did not appear in physical.
• The Ld. DR submitted that interest on late deposit of TDS is neither an expenditure wholly and exclusively incurred for the purpose of business and further it is a payment, which is in the form of tax so it is not an allowable expenditure.
• He further submitted that even otherwise there is no evidence that it is merely compensatory in nature. He therefore submitted that the above interest on late payment of TDS has rightly been disallowed.

Observation of ITAT:

• The above issue has already been considered by Hon’ble Madras High Court in CIT Vs. Chennai Properties & Investment Ltd. (1999) 239 ITR 435 (Mad.) wherein it has been held that interest under section 201(1A) paid by the assessee does not assume the character of business expenditure and also cannot be regarded as compensatory payment.
• The decision of Hon’ble Madras High Court has also been followed by various benches of ITAT, specifically in Velankani Information Systems Limited Vs. DCIT [2018] taxmann.com 599 (Bangalore- Trib.) as under: -

“As far as delay in remittance of TDS u/s 201(1A) of the Act is concerned, we find that the Hon’ble Madras High Court has taken a view that interest u/s 201(1A) is also in the nature of tax and notwithstanding the fact that is not the tax liability of the assessee, the same cannot be allowed as deduction. The following were the relevant observations of the Hon’ble Madras High Court: -

1. As already noticed the payment of interest takes colour from the nature of the levy with reference to which such interest is paid and the tax required to be but not paid in time, which rendered the assessee liable for payment of interest was in the nature of a direct tax and similar to the income-tax payable under the Income Tax Act. The interest paud u/s 201(1A) of the Act, therefore, would not assume the character of business expenditure and cannot be regarded as a compensatory payment.
2. Counsel for the assessee in support of his submission that the interest paid by the assessee was merely compensatory in character besides relying on the case of Makalakshmi Sugar Mills Co. also relied on the decision of the apex court in the cases of Prakash Cotton Mills Pvt. Ltd. V. CIT [1993] 201 ITR 684; Malwa Vansapati and Chemical Co. v. CIT [1997] 225 ITR 383 and CIT vs. Ahmedabad Cotton Manufacturing Co. Ltd. [1994] 205 ITR 163. In all these cases, the court was concerned with an indirect tax payable by the assessee in the course of its business and admissible as business expenditure.
3. The ratio of those cases is not applicable here. Income-tax is not allowable as business expenditure. The amount of tax deducted is not an item of expenditure.
4. We therefore, follow the decision of Hon’ble Madras High Court and uphold the order of CIT(A) in so far as it relates to disallowance of interest on delayed payment of TDS u/s 201(1A) of the Act.”

Judgement by ITAT:

Held that interest payment on late payment of TDS is not eligible business expenditure for deduction and it is not compensatory in nature. Payment of interest on late deposit of TDS leivable u/s 201(1A) is neither an expenditure only and exclusively incurred for the purpose of the business and therefore the same is not allowable as deduction u/s 37(1) of the Act.

One more judgement has been recently rendered by ITAT Bangalore in the case of Jindal Aluminimum Limited ITA No. 31/Bang/2019 having similar facts where interest on TDS is held as ineligible business expenditure.