Interest for late payment of service tax not penal in nature u/s 37 but only compensatory – ITAT

Interest for late payment of service tax not penal in nature but only compensatory. ITAT deletes disallowance made under section 37

ABCAUS Case Law Citation:
ABCAUS 2465 (2018) 08

The instant appeal was filed by the assessee directed against CIT(A)’s order in holding that the interest on delayed payment of service tax was penal in nature and not compensatory in nature.

The scrutiny assessment u/s 143(3) of the Income Tax Act 1961 (the Act) of the appellant assessee was completed by the Assessing Officer (AO) by adding back u/s 37 of the Act, an amount claimed as a deduction by the assessee, being interest on service tax paid as the AO held that the interest on service tax was not an allowable deduction.

Aggrieved by the order of the Assessing Officer, the assessee preferred appeal to the first appellate authority (CIT-A). Before the first appellate authority, it was submitted that the interest payment was compensatory in nature and therefore, was an allowable deduction in view of the judgment of the Hon’ble Supreme Court and the Hon’ble High Court.

The CIT(A) held that the judgments relied upon by the assessee were not applicable. He held that any interest paid for the delay caused without adducing justifiable reason would rightly attract penal action which in turn cannot be seen as compensatory in nature.

He observed that it was not the case of the appellant that they had genuine difficulties in making the payment within stipulated date. It was also not the case of the appellant that the charging of interest on delayed payment of service tax could be brought into the ambit of section 37 of the Act more particularly when no reason for the delay caused was adduced.

The CIT(A) held that under the Income Tax Act, the expenditure which is penal in nature similar to that of the appellant for which the reason for the delay had not been explained, cannot be allowed at all.

Accordingly, the CIT(A), in the absence of reason explained for the delay caused in making the payment to the exchequer, confirmed the disallowance made and dismissed the appeal of the assessee.

The Tribunal observed that the judicial pronouncements on the issue are very clear. If a payment is compensatory, the same is an allowable deduction under the Income-tax Act. On the other hand, if the payment is penal in nature, the same cannot be allowed as a deduction.

It was further observed that in the instant case, the assessee had paid interest at the rate of 15% on the delayed payment of service tax. Admittedly in this case the service taxes were not collected by the assessee from its customers. The assessee on its own had paid the service tax along with the interest at the rate of 15%.

The Tribunal noted that it was clearly discernable from the provisions of the concerned Act that the interest paid by assessee was compensatory and not penal. There were other provisions under the Service-tax Act which are penal in nature. The interest paid by the assessee at the rate of 15%, were not payments made under the penal provisions.

Therefore, the Tribunal going by the dictum laid down by the judgments of the Hon’ble Supreme Court and the Hon’ble High Court held that the interest paid for the service tax payment was not penal in nature but only compensatory. Hence, the same was to be allowed as deduction under the Income-tax Act.  

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