Interest on late payment of GST is compensatory and not penal for deduction u/s 37.

Interest paid on delayed payment of GST/VAT is compensatory and not penal in nature for allowability under section 37.

In a recent judgment, ITAT Delhi has held that interest paid on delayed remittance of GST / VAT is compensatory and not penal in nature for the purpose of allowability of deduction under section 37.

ABCAUS Case Law Citation:
4632 (2025) (07) abcaus.in ITAT

In the instant case, the assessee had challenged the order passed by the CIT(A) National Faceless Appeal Centre (NFAC).

The only issue to be decided in this appeal was as to whether the interest paid on delayed remittance of GST / VAT could be treated as compensatory or penal in nature for the purpose of allowability of deduction under section 37 of the Income Tax Act, 1961 (the Act).

The appellant assessee was a partnership firm carrying on the business of authorized sales and service agent of M/s Tata Motors Limited (commercial vehicles). In the scrutiny assessment proceedings, the Assessing Officer (AO) sought to treat the interest paid for late payment of GST and VAT to be penal in nature and accordingly disallowed the same under section 37 of the Act. 

In first appeal, the Assessee submitted that the said interest payment would be compensatory in nature as it was incurred only for  delayed remittance of statutory dues to the account of the Central Government. However, the plea of the Assessee was not appreciated by the learned CIT(A).

The Tribunal noted that the  issue as to whether the said interest payment would be compensatory in nature so as to make it allowable deduction was subject matter of consideration by the Hon’ble Supreme Court in a case where the High Court had proceeded on the basis that the interest on arrears of sales tax is penal in nature and had rejected the contention of the assessee that it was compensatory in nature. In taking the said view the High Court had placed reliance on its Full Bench’s decision. However, the judgment of the Full Bench was reversed by the larger Bench of the High Court wherein it had been held that interest on arrears of tax is compensatory in nature and not penal. Also, a similar matter was dealt by the Apex Court in another case. In view of the above, the Hon’ble Supreme Court answered the question in favour of the assessee and against the revenue.

Following the said decision of the Hon’ble Supreme Court, the Tribunal held that the interest paid on delayed remittance of GST and VAT would be allowable deduction as it is only compensatory in nature and not penal in nature.

Accordingly, the appeal of the Assessee was allowed.

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