2023 (3) TMI 1389 - AT - Income Tax

Interest paid on late payment of service tax - allowable business expenditure u/s 37(1) or not? - whether interest paid on late payment of service tax is compensatory in nature and cannot be held it to be penal in nature? - HELD THAT - It is noted that the assessee has claimed as expense the interest incurred which was due to belated payment of service tax which has been disallowed by the AO holding it to be penal in nature, whereas it is noted that the interest paid by the assessee on delayed payment of service tax is compensatory in nature and is allowable expenditure u/s 37(1). It is noted that the Service Tax Act itself provide for payment of interest to the Government-Treasury if there is delay in payment of Service Tax. And since the Service Tax Act itself allowed belated payment of the Tax along with interest, the Explanation-1 to 37 of the Act is not attracted. And therefore, ground is allowed.

Summary

Issues involved: Delay in filing appeal and disallowance of interest paid on late payment of service tax.

For the issue of delay in filing appeal, the appellant raised two grounds, one of which was the delay in filing the appeal. The appellant argued that the delay was mainly due to the Covid-19 pandemic and miscommunication between the assessee and the authorized representative. The appellant contended that the delay should be condoned considering the exceptional circumstances of the pandemic and the misplacement of the file. The Tribunal agreed with the appellant's arguments and allowed the ground related to the delay in filing the appeal.

Regarding the disallowance of interest paid on late payment of service tax, the AO disallowed the claimed expense of Rs. 3,27,026 on the grounds that it was penal in nature. However, the appellant argued that the interest paid on late payment of service tax was compensatory in nature and should be considered as an allowable expenditure under section 37(1) of the Income Tax Act, 1961. The Tribunal referred to a similar case where it was held that such expenses are not disallowable under section 37(1) of the Act. The Tribunal observed that the Service Tax Act itself allows for payment of interest in case of delayed payment of service tax, indicating that the interest paid by the appellant was compensatory in nature. Therefore, the Tribunal allowed the ground related to the disallowance of interest paid on late payment of service tax.

In conclusion, the Tribunal partly allowed all the appeals of the assessee, ruling in favor of the appellant on the grounds of delay in filing appeal and the disallowance of interest paid on late payment of service tax.