Late payment of TDS interest is not deductible as a business expenditure

Facts and Issue of the Case

Ground No. 2 is relates to disallowance of an addition of Rs.9 ,70,248/- on account of disallowance of interest on TDS payments. The Facts of the case are that the assessee submitted copy of ledger account of interest on TDS. The assessee itself agreed that interest on TDS amounting to Rs. 9 ,70,248/- has not been added back in the computation of Income. Interest on TDS is not allowable as per provision of Income Tax Act, 1961. Accordingly, expenses of Rs. 9 ,70 ,248 /- were disallowed and added back to the income of the assessee.

Observation by the Court

The court had considered the order of the AO and facts on records and find that the assessee has submitted copy of ledger account of interest on TDS is not allowable expenses as per IT Act, 1961 . The assessee itself also agreed that interest on TDS is not allowable expenses, therefore, the AO disallowed the expenses of interest on TDS of Rs.9 ,70 ,248/-. Interest on TDS is not an allowable expenditure. In this case the assessee itself agreed for the assessment before the AO and this fact is not disputed by the ld. AR in the appellate proceeding. It is undisputed law that income tax inputs interest, penalty also and the same is not allowable as per provisions of Section 40( a)( ii) of the Act. Notwithstanding the contentions of the assessee before the revenue authorities, we have examined the issue of allowability as per the provisions of Income Tax Act and in the background of the various judicial pronouncements.

Sec. 201( 1 A) of the Income- tax Act mandates Assessee to pay simple interest @ 1 .5 % per month or part of the month in case of delay in remittance of TDS amount deducted, to the treasury of the Central Government. The pertinent question arises in the instant appeal is whether the interest paid on late payment of TDS after deduction can be claimed as expenditure for determining the taxable income. For claiming an expenditure and arriving at the taxable income, the I.T. Act, 1961 fundamentally stipulates twin conditions viz. allowance of expenditure as per Sec.30 to 37 of the Act and non- allowable expenditure as per section 40 , 43 B. The same are applicable for claiming the interest paid on late remittance of TDS.

Interest as defined in section 2 ( 28A) of the Act means interest payable in any manner in respect of any moneys borrowed or debt incurred and includes any service fee or other charge in respect of the moneys borrowed or debt incurred or in respect of any credit facility which has not been utilized. Hence, Section 36 ( 1)( iii) of the Act allows a deduction for interest paid on capital borrowed while computing the business income of the taxpayer. It provides deduction of the interest paid in respect of capital borrowed for the purpose of the business or profession.

Unlike section 2 ( 28A), clause ( iii) of section 36( 1 ) does not use the term ‘debt incurred’. Hence, section 2 (28 A) defines ‘interest’ in a wider sense whereas Section 36 ( 1)( iii) has used it in a restrictive manner. Therefore, it may be concluded that there must be a loan on which interest is paid for claiming allowance u/ s 36 ( 1)( iii) of the Act. Existence of lender and borrower are must in case of a loan transaction. Hence, it can be safely concluded that non- payment of taxes does not amount to the borrowing of capital from the Government and hence interest paid for delayed deposit of taxes is not covered under section 36 (1 )( iii) of the Act. Section 37 is a residuary section which allows business expenditure in computing the taxable business income of an Assessee. Expenses allowed as deductions against Profits and Gains of Business or Profession are covered from Section 30 to 36 of the Act. Section 37 ( 1 ) provides that any expenditure incurred ( except expenditure described in sections 30 to 36, capital expenditure or personal expenses of the assessee), 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”. Interest on late payment of TDS is not covered under Section 30- 36 of the Act and thus qualifies for consideration u/ s 37. It is neither capital expenditure nor personal expenditure of the Assessee. Further, Courts have time and again held that interest expenses on late payment of taxes which are compensatory in nature should be treated as expended wholly and exclusively for the purposes of the business or profession since responsibility of payment of taxes including deduction and remittance of TDS is part and parcel of the business operations and the assessee has no right to utilize such monies collected from others on behalf of the government.

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 paid under Section 201( 1 A) of the Act, therefore, would not assume the character of business expenditure and cannot be regarded as a compensatory payment.

The Income Tax Appellate Tribunal ( ITAT), Delhi Bench in the case of M/s. New Modern Bazaar Departmental Store Pvt. Ltd. is a Pvt. Ltd. held that the interest on Late Payment of TDS does not constitute Business Expenditure. In this case the assessee argued before the ld. CIT( A) that interest on late deposit of TDS is compensatory and not penal in nature. The ld. CIT( A) held that interest paid under the provisions of the Act is not a deductible expenditure, not compensatory in nature. Thus, he confirmed the action of the Assessing Officer. The assessee submitted that the interest is compensatory in nature and a part of business operations of the assessee. Had the same amount has been taken as loan from a bank, the interest paid on the same anyway would have been allowed as deduction u/s 36 . The Revenue 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.