Interest on a late TDS payment is not deductible as an expense

Facts and Issues of the case

The assessee company is engaged in the business of construction services in respect of commercial/industrial building and civil structures. AO disallowed of interest on TDS of Rs.5,45,375. From the details of break-up submitted by the assessee, the AO held that Rs.5,45,375 was an expense towards interest on TDS which is penal in nature and not allowable u/s. 37(1) of the Act.

Observations by the Court

At the outset it has to be mentioned that the question whether interest paid u/s.201(1A) of the Act, is an allowable business expenditure has to be examined within the parameters of Sec.37(1) of the Act and not on the basis of the prohibition contained in Sec.40a(ii) of the Act. Sec.37(1) of the Act provides that expenditure which is not capital or personal in nature laid out or expended wholly and exclusively for the purpose of business shall be allowed in computing the income chargeable under the head “profits and gains of business or profession”. Sec.40(ii) provides that any sum paid on account of any rate or tax levied on the profits and 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”. Both these sections operate in different fields, the former is an enabling provision while the latter is a disabling provision.

In our considered view this contention of the AR is completely out of context as we have already held that Sec.40(a)(ii) is not relevant to the present issue before us at all. Moreover, the levy of interest on delayed payment of TDS u/s.201(1A) though held to compensatory in nature, the allowability of the same cannot be decided simply based on that. The levy of 201(1A) is a levy for delay in the remittance of tax that is deducted and not paid into the government account and is levied towards the use of funds belonging to the exchequer.

The interest u/s.201(1A) can be equated to the levy of interest u/s.234. Interest u/s.234 is a levy on delay in the payment of income tax and the TDS is nothing but the income tax paid on behalf of the payee and therefore the interest on the same u/s.201(1A) is also in the nature of interest levied on the income tax. On that count also interest on delayed payment of TDS cannot be claimed as a deduction. We hold that interest on delayed payment of TDS is not an allowable deduction and dismiss the ground raised by the assessee.