Late fee on TDS payments and payment of interest on GST is allowable expenditure u/s 37 of the Income Tax Act – ITAT
In a recent judgment, the ITAT Chennai has held that late fee paid on TDS payments and interest on late payment of GST is allowable under Section 37 of the Income Tax Act, as it does not represent expenses incurred for a purpose that is illegal or prohibited by law.
ABCAUS Case Law Citation:
ABCAUS 4057 (2024) (05) ITAT
In the instant case, the assessee had challenged the order passed by the CIT(A) in confirming disallowances u/s 37(1) on account of late fee on TDS payments u/s 234E of the Act and payment of interest on late payment of GST.
Both the Assessing Officer (AO) and the CIT(A) was of the view that interest and late/additional fee payable as a consequence of default in discharging a statutory liability cannot be considered as expenditure laid out wholly and exclusively for the purpose of business.
Before the Tribunal the assessee relied upon various orders including the co-ordinate bench order and argued that interest paid on belated payments of service tax is not a penalty, which can be disallowed u/s 37 of the Act.
The Tribunal observed that the vires of Section 234E of the Income Tax Act, 1961 was challenged before the Hon’ble Jurisdictional High Court which observed that the case of the Revenue was itself that the section 234E is not a penalty. Penalty is levied under Section 271(H) and is not automatic. Penalty is levied only when tax is deducted at source along with interest fee is not deposited and statement is not filed within one year. If the above two conditions are satisfied, then penalty is not leviable. On the other hand, Section 234(E) of the Act is only a late fee at the rate of Rs.200/- per day. The Hon’ble High Court observed that Revenue was right in contending that Section 234(E) of the Act is compensatory and is meant to ensure that assessee files the statement in time, so that the Department can clear the returns of thepersons connected with the assessee, i.e., from whom tax has been deducted at source without any delay and accurately with increasing or overloading the burden of the department.
The Tribunal further observed that the Hon’ble Supreme Court ruled that when an assessing authority examines claim for a deductible expenditure under section 37, which is nature of penalty, it should oversee that whether any law or act required such payment to be made as a way of punishment for violation of any law. If it is not found that penalty is paid for any violation of law, then it should be allowed as a business expenditure to the assessee under Section 37.
Similarly, the Hon’ble Supreme Court in another case held that t was held 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.
The Tribunal further observed that the Co-ordinate Bench has held that interest expense on late deposit of VAT, service tax, TDS etc. are allowable expenditure under section 37(1) of the Act. Further, VAT laws, provident laws and service tax laws clearly provide for payment of interest if there is a delay in payment of fees. Therefore, it is apparent that those respective laws allowed the belated payment along with interest. Therefore, those are not affected by explanation–1 to section 37(1) of the Act.
Following the ratio laid down in various judgments, the Tribunal held that the late fee paid on TDS payments is compensatory in nature rather than penal and is an allowable expenditure under Section 37 of the Income Tax Act, as it does not represent expenses incurred for a purpose that is illegal or prohibited by law. Similarly, interest payment on late payment of GST is also allowable u/s 37 of the Act.
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