Interest paid on late TDS payments is not eligible for a deduction under Section 37(1)
Fact and issue of the case
This appeal is filed by the assessee, feeling aggrieved by the order of Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi dt.10.03.2023 invoking proceedings under section 143(3) of the Income Tax Act, 1961 (in short, “the Act”).
The grounds raised by the assessee read as under :
The order of the Appellate Commissioner is contrary to law, facts and circumstances of the case.
The Appellate Commissioner erred in confirming the disallowance of an amount of Rs.2,49,233/- being interest on PF/ESI paid.
The Appellate Commissioner erred in confirming the disallowance of an amount of Rs.12,19,936/- being interest on TDS paid.
The Appellate Commissioner erred in confirming the disallowance of an amount of Rs.26,95,847/- being interest on GST paid.”
The brief facts of the case are that assessee is a company filed its return of income on 31.10.2018 declaring total income of Rs.14,01,29,900/-. Assessee company was selected for complete scrutiny under CASS for the reason “large expenditure by way of penalty or fine for violation of any law for the time being in force.” During the course of relevant financial year, assessee was engaged in manufacturing activity and disclosed turnover of Rs.1,60,06,46,867/-. As per 3CD Report, assessee had debited Rs.34,37,934/- as financial charges for late payment of income tax. However, in ITR, the same was not disallowed u/s 37 of the Act. On perusal of the P & L Statement filed by the assessee, it was observed that assessee had claimed Rs.76,11,490/- under the head “expenditure by way of statutory payments”. The department was not convinced with the reply given the assessee to the notice u/s 143(2) of the Act and hence, issued show cause notice asking for explanation as to why an amount of Rs.76,62,297/- claimed under head “expenditure by way of statutory payments” should not be disallowed. Thus, the case was heard from time to time and the required information called for by the department was submitted. However, the Assessing Officer was not convinced by the assessee’s replies and made the addition of Rs.2,49,233/- towards ESI & PF, Rs.12,19,936/- towards interest on TDS and Rs.26,95,847/- towards interest on GST. Accordingly, the Assessing Officer completed the assessment and passed order on 29.04.2021 u/s 143(3) r.w.s. 144B of the I.T. Act.
Feeling aggrieved with the order passed by the assessing officer, assessee filed appeal and thereafter, it was migrated to the ld.CIT(A), NFAC, Delhi, who dismissed the appeal of the assessee.
Aggrieved with the order of ld.CIT(A), assessee is now in appeal before us.
Ground No.1 is general in nature and requires no adjudication.
Ground No.2. Before us, ld. AR submitted that the interest paid on delayed payments of PF/ESI is compensatory in nature. The ld. AR submitted that the nomenclature assigned to the payment by the statute should not preclude its allowance as a deduction under section 37(1) of the Income Tax Act. In this context, he pointed out that various judicial decisions have upheld the principle that the true nature of a payment should be considered rather than its official name as defined under the law and he also referred to the decision of the Supreme Court in the case of Prakash Cottons Mills Vs. CIT Bombay and the decision of Mumbai Tribunal in the case of Neelkamal Realtors Suburban Pvt Ltd Vs ACIT, (ITA No.86/Mum/2021).
On the other hand, the ld. DR placed heavy reliance on the authorities below. To justify the conclusions reached by the learned CIT(A) that the assessee is not entitled to claim the deduction in respect of the delayed remittance of the employees’ contribution of PF and ESI, he placed reliance on the decision reported in Checkmate Services Pvt. Ltd., Vs. CIT,  143 taxmann.com 178 (SC).
We have gone through the record in the light of the submissions made on either side. 8. Under section 2(24)(x) of the Act, the ‘income’ includes any sum received by the assessee from his employees as contributions to any provident fund or superannuation fund or any fund set up under the provisions of the Employees State Insurance Act, 1948 (34 of 1948) or any other fund for the welfare of the employees. It, therefore, goes without saying that this deemed income has to be treated as the income of the assessee, the moment such an amount comes to the possession of the assessee. It is open for the assessee to claim deduction of the same under section 36(1)(va) of the Act by complying with the said provision.
Explanation-1 added by amendment by way of Finance Act, 2021 with effect from 01/04/2021 explains the term ‘due date’ and it does not impact any rights, liabilities and disabilities created by the provision. Such provisions which will only explain certain terms of the existing provision do not create any new rights or liabilities but only the rights and liabilities that were created by the provisions stood explained by the explanation, and, therefore, such explanations will take effect from the date of the provision itself.
Observation of the court
We have heard the rival submissions and perused the material on record. Section 50 of the GST Act provides that the assessee is liable to pay the interest which shall not be exceeding 18% on the unpaid tax / delayed payment of GST with the Government. Now the question arises is whether the payment of 18% tax on the delayed / unpaid tax is said to be compensatory or penal in nature. This issue on the face of it is covered in favour of the assessee by the decision of the coordinate Benches relied upon by the assessee. In fact, in the recent decision of the jurisdictional High Court in the case of Megha Engineering & Infrastructures Ltd.  104 com 393 (Telangana), the Hon’ble High Court had an occasion to examine the provision of section 50 of the GST Act and after examining it, it has recorded that the interest paid u/s 50 of the Act is compensatory in nature. The relevant portion of the said decision is as under :
Having thus seen the scheme of Sections 39, 41, 16 and 49, let us now take a look at Section50 about which present dispute revolves, which reads as under:
Interest on delayed payment of tax.—
(1) Every person who is liable to pay tax in accordance with the provisions of this Act or the rules made there under, but fails to pay the tax or any part thereof to the Government within the period prescribed, shall for the period for which the tax or any part thereof remains unpaid, pay, on his own, interest at such rate, not exceeding eighteen per cent., as may be notified by the Government on the recommendations of the Council.
(2) The interest under sub-section (1) shall be calculated, in such manner as may be prescribed, from the day succeeding the day on which such tax was due to be paid.
(3) A taxable person who makes an undue or excess claim of input tax credit under sub-section (10) of section 42 or undue or excess reduction in output tax liability under sub-section (10) of section 43, shall pay interest on such undue or excess claim or on such undue or excess reduction, as the case may be, at such rate not exceeding twenty-four per cent., as may be notified by the Government on the recommendations of the Council.”
It is seen from Sub-section (1) of Section50 that the liability to pay interest arises automatically, when a person who is liable to pay tax, fails to pay the tax to the Government within the period prescribed. The liability to pay interest is in respect of the period for which the tax remains unpaid. In fact, the liability to pay interest under Section50 (1) arises even without any assessment, as the person is required to pay such interest “on his own”. 30. While Sub-Section (1) of Section50 speaks about the liability to pay interest under one contingency, viz., the failure to pay tax within the period prescribed, Sub-Section (3) of Section50 speaks about the liability to pay interest under a different contingency. Whenever an undue or excess claim of ITC is made or whenever an undue or excess reduction in out-put tax liability is made, a liability to pay interest arises under Subsection (3). The words “on his own” used in Sub-section (1), are not used in Sub-section (3) of Section 50.” 31. Therefore, it is clear that the liability to pay interest under Section 50(1) is self-imposed and also automatic, without any determination by any one. Hence, the stand taken by the department that the liability is compensatory in nature, appears to be correct.
In view of the categorical finding of jurisdictional High Court holding the liability to pay interest under section 50 is compensatory in nature, hence, we have no doubt that the interest paid by the assessee on delayed payment of GST is compensatory in nature and is, therefore, required to be allowed u/s 37(1) of the Act. Thus, we reverse the finding of the ld.CIT(A) whereby it was held that payment of interest @ 18% is exorbitant and penal in nature. In view of the above, this ground of appeal is required to be allowed. Thus, this ground of the assessee is allowed.
In the result, the appeal of the assessee is partly allowed.
Order pronounced in the Open Court on 8th September, 2023.
In the result, appeal of the assessee is allowed and ruled in favour of the assessee
Read the full order from hereAnalogics-Tech-India-Limited-Vs-DCIT-ITAT-Hyderabad-2