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August 15, 2020

Are late fees of GST return allowed as an expense in Income Tax?

by Rubina Dsouza in GST, Income Tax

Are late fees of GST return allowed as an expense in Income Tax?


While computing the profit and gains from business or profession, there are certain expenditures which are disallowed. This means that the income tax department does not allow the benefit of such expenditures and the assesses are required to pay taxes on such expenditures by adding it back to the net profits.

Expenses allowed as deductions against Profits and Gains of Business or Profession are covered from Section 30 to 37 of the Income Tax Act. Section 37(1) says that any expenditure (except expenditure described in sections 30 to 36, capital expenditure or personal expenses of the assessee), expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head, “Profits and Gains of Business or Profession”.

Any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by any law shall not be deemed to have been incurred for the purpose of the business or profession and no allowance or deduction shall be made in respect of such expenditure.

Basically, unlawful expenditure is not allowable as deduction. These provisions apply only to ‘business expenditure’ and not to ‘business loss’ and, hence, loss arising as a result of seizure and confiscation of illegal stock-in-trade is allowable as a business loss against income from illegal business.

Will late fee under GST be covered under section 37 and subsequently be allowed as a deduction or will it be disallowed under Section 40(a)(ii)? 

What is late fee under GST?

As per GST laws, Late Fee is an amount charged for delay in filing GST returns. It can be referred to as an overdue fine. The late fee is also applicable for the delay in filing Nil returns. In a major relief to GST taxpayers, the government decided to cap the maximum late fee for Form GSTR-3B at Rs 500 per return for the tax period July 2017 to July 2020. The reduced fee will be levied only if returns are filed before September 30, 2020.

What is disallowance under Section 40(a)(ii)?

According to Section 40(a)(ii), any sum paid on account of any rate or tax levied on the profits or gains of any business or profession or assessed at a proportion of, or otherwise on the basis of, any such profits or gains shall not be deducted in computing the income chargeable under the head “Profits and gains of business or profession”

Section 40(a)(ii) only deals with the amount in relation to the rate of tax levied on profits and gains from business or profession. Therefore, GST late fee will not be disallowed under sec 40(a)(ii).

Expenses which are in the nature of ‘rate’ or ‘tax’ are specifically disallowed under section 40(a)(ii) while computing the business income. If the GST Act itself is wording it as “Fee”, therefore it cannot treated as “Penalty” or “offence”.  If the late filing of the return is allowed under the relevant Act, then how can it be treated as violation of law?

Will late fees be allowed as a deduction under Section 37?

The condition to be satisfied with respect to the allowance of deductions u/s 37 is that it should be for the purpose of business or profession and it should not be paid for infraction of laws. Now the question is whether GST late fee will come under infraction of law? 

Offence in general means a breach of Law or Act or any illegal act and penalty is defined as the punishment for committing an offence.

In the case of Millennia Developers (P) Limited v DCIT (2010), High court of Karnataka decided that any regulation fees paid to municipal authority for compounding of offence is not available for deduction under section 37 as the same was in the nature of penalty.  

In CIT v Neelavathi & Others (2010) the Karnataka High Court held that any payment to police or rowdies for getting protection from them is illegal and should not be allowed. 

Late fee is not paid for a purpose which is an offence or prohibited. In fact, late fees are paid for the purpose of the compliance with the Act. Hence, it will be allowed under Section 37 as it is is not an offence or prohibited under any law.

Therefore, late fees paid for delay in filing GST returns will be allowed as a deduction under Income Tax.

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