Interest paid on TDS, Fee u/s 234E or late fees paid to ROC-Whether deductible as business expenditure or disallowed u/s 40 and/or 37(1)

In every business or profession, often payments are incurred towards Interest on delayed payment of TDS, late fee payment to RoC or late fee u/s 234E. Whether these expenses are allowed as business expenditure or disallowed under section 40(a)(ii) or 37(1) Income Tax Act, 1961?

The question is with respect to the following amounts:

(1)   Interest paid for delayed payment of tax deducted at source (TDS)

(2)   Late Fee paid for default in furnishing TDS Statement/returns u/s 234E

(3)   Additional/Late fee paid by company to Registrar of Companies for delayed filing of various forms and returns

Kindly note that there is no section that specifically deals with the allowability of above type of payments. However the following two sections are important in this regard.

- Section 40-related to amounts not deductible; and
- Section 37-related to allowability of expenses generally

Section 40-Amounts not deductible
Section 40(a)(ii) specifically disallows income tax paid as a deductible expenditure. However none of the payments described above falls within the ambit of this section.

Section 37-General
Section 37(1) provides for a general deduction for all expenditure laid out wholly and exclusively for the purpose of the business or profession. The relevant exclusions made by the section along with the Explanation 1 are the following:

(i)    Expenses of capital nature,

(ii)    Expenses which are personal in nature,

(iii)   Expenses incurred for any purpose which is an offence by law,

(iv)   Expenses incurred for any purpose which is prohibited by law,

All the three type of payments in question squarely falls within the ambit of section 37(1) and the question of their deductibility or allowability depends on the fact whether these expenses can be regarded as expenditure laid out wholly and exclusively for the purpose of the business or profession or hit by the exclusions provided.

Exclusions (i) and (ii) above are not applicable to the question in hand. Further exclusion (iii) and (iv) are applicable only if the purpose of the expenditure is an offence or is prohibited. Kindly note that interest or late fee (as in question) is not paid for a purpose which is an offence or prohibited. In fact the interest and late fee (as in question) are paid for the purpose of the compliance with the Income Tax Act and/or the Companies Act. Therefore the exclusions (iii) and (iv) are also not applicable to the interest /late fee paid as per question 1 to 3 as above.

Now what is left is the soul of the section 37(1) and the allowability or disallowance of the interest  or late fee thus depend on the basic criterion, which is ;

“whether the interest paid can be considered as expenditure laid out wholly and exclusively for the purpose of the business or profession?”

The Judicial View

The Hon’ble Supreme Court in Bharat Commerce and Industries Ltd. Vs CIT (5509/1985) has ruled that interest paid for delay in furnishing ITR and Advance Tax is not deductible as business expenditure. The Court observed that;

“it  is difficult to see how the interest so paid for not paying the requisite amount  of advance  tax  as  prescribed  can  be considered as expenditure laid  out wholly and exclusively for the purpose of  business.”

Though the above judgement does not deal with the issue of interest paid for late deposit of TDS, late fee under section 234E or late/additional filing fee paid to the Registrar of Companies, the Court has made it very clear that such payments can not be considered as business expenditure.

In the above judgement, the Hon’ble Supreme Court has cited many instances High Court judgements where interest paid on advance tax/income tax has been disallowed. In particular, in the case of   Aruna Mills Ltd.   v.   CIT   [1957] 31 ITR 153, the Bombay High Court 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. Download judgement Click Here >>

Conclusion

Going by the judicial interpretation, all the three type of payments being interest and late/additional fee payable as a consequence of default in discharging a statutory liability can not be considered as expenditure laid out wholly and exclusively for the purpose of  business or profession and hence are not deductible by virtue of section 37(1).

Reporting under Tax Audit Report Form-3CD  

As per the revised Form-3CD, these amounts can be reported under clause 21(a) under the heading expenditure by way of penalty or fine for violation of any law for the time being force. However in case of difference of opinion, such expenses should be made part of observations in para 3 and 5 of Form-3CA or Form-3CB respectively as the case may be.