Disallowance upheld u/s 37(1) for interest on delayed payment of TDS, late fees u/s 234E

ITAT confirms disallowance u/s 37(1) interest on delayed payment of services tax, TDS, late fees on delay in filing of TDS returns

In a recent judgment, ITAT Allahabad upheld disallowance u/s 37(1) on account of interest paid on delay in payment of services tax, interest paid on delay in depositing amount of TDS, additional fees on delay in filing of TDS returns and interest paid for service tax.

ABCAUS Case Law Citation:
4732 (2025) (09) abcaus.in ITAT

The assessee company was engaged in the activity of running an educational institution, organizing class for competitive courses and other higher education programmes.   

The case of the assessee was selected for complete scrutiny through CASS for the reason that the assessee had reported higher turnover in service tax return as compared to ITR and abnormal increase in cash deposits during demonetization period as compared to pre-demonetization period. 

The Assessing Officer inter alia noted that assessee under the head “other expenses” had shown interest on service tax, income tax and TDS and has also paid penalty. The Assessing Officer completed the assessment u/s 143(3) of the Act making addition towards these amounts. 

Aggrieved, the assessee carried the matter in appeal before the CIT(A) who dismissed the appeal of the assessee.  Being aggrieved further, the assessee was in appeal before the Income Tax Appellate Tribunal.

The Tribunal noted that the assessee had submitted that the impugned addition was related to expenses relating to service tax, TDS and interest on delayed payment of taxes.  For delayed payment of service tax, interest and penalty was paid.  For delayed payment of TDS, interest and penalty was paid.  The assessee submitted before the Assessing Officer that these expenses were for business expediency and may be allowed. 

The Tribunal observed that out of total disallowance, the assessee had conceded disallowance in the nature of penalty.

The Tribunal further observed that the Hon’ble Supreme Court had ruled that interest paid for delay in furnishing ITR and advance tax is not deductible, as business expenditure.  While passing the above order, Hon’ble Supreme Court has cited many instances of High Court judgments where interest paid on advance tax/income tax has been disallowed. 

The Tribunal also observed that Hon’ble Bombay High Court had observed that it was difficult to understand how, when a business man commits default in discharging his statutory obligation, the consequences of that default could constitute an expenditure exclusively incurred for the purpose of his business.  Further, Hon’ble Calcutta High Court had held that interest paid for delay in filing the income tax return has no connection with the business of the assessee.  

In view of the above, the ITAT opined that CIT(A) had righty confirmed the disallowance on account of interest paid on delay in payment of services tax, interest paid on delay in depositing amount of TDS, additional fees on delay in filing of TDS returns and interest paid for service tax. 

Accordingly, the total disallowance made by the Assessing Officer and confirmed by CIT(A) was sustained and the appeal of the assessee was dismissed.

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ABCAUS Note:
It seems that the ITAT got swayed away by the ruling on allowability of interest paid for delay in filing income tax return or interest on advance tax which is not attached to an expense anyway. It is well settled that interest paid on delayed payment which are in the nature of an expense are not considered a penalty but of compensatory nature, which is deductible u/s  37(1) of the Income Tax Act, 1961. The Hon’ble Supreme Court in Swadeshi Cotton Mills Co. Ltd. v. CIT has clearly laid down that if the penalty imposed on any assessee is of composite nature, then the authority have to bifurcate the penalty into two components – one which is of compensatory nature and other of penal nature and subsequently allow the component / penalty of compensatory nature and disallow the penalty of penal nature.

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