2022 (1) TMI 1327 - AT - Income Tax

Disallowance of interest on delayed payment of TDS - assessee has claimed expenses on account of interest on TDS which is not an allowable expense under the provisions of the Income-tax Act 1961 - HELD THAT - We may refer to the decision of Lachmandas Mathuradas 1997 (12) TMI 16 - SUPREME COURT wherein it was held that interest on arrears or on outstanding balance of sales tax is compensatory in nature and would be allowable as deduction in computing profits of a business. Referring to the same decision ITAT in the case of Narayani Ispat (P) Ltd. 2017 (10) TMI 67 - ITAT KOLKATA has held that interest expenses on account of delayed payment of service tax as well as TDS is an allowable expenditure. Similar proposition has been laid down in other case laws that such interest is compensatory in nature and is allowable expenditure. Appeal of the assessee stands allowed.

Summary

Issues:
Disallowance of interest on delayed payment of TDS as an allowable expense under the Income-tax Act, 1961.

Analysis:

Issue 1: Disallowance of interest on delayed payment of TDS

The Assessing Officer disallowed the claimed expenses of Rs.5,96,890 on account of interest on TDS, stating it is not allowable under the Income-tax Act, 1961. The ld. CIT (A) upheld this decision, citing section 201 r.w.s. 40 of the Act. The assessee argued that the interest paid on delayed TDS payment is compensatory in nature and should be considered an allowable expenditure under section 37(1) of the Act. The assessee presented various case laws supporting this argument, emphasizing that the disallowance under section 40(a)(ii) pertains to income tax paid or payable by the assessee, not interest on TDS. The ITAT referred to precedents such as Lachmandas Mathuradas vs. CIT, where it was held that interest on arrears or outstanding balance of sales tax is compensatory and deductible. The ITAT also cited the case of Narayani Ispat (P) Ltd, where interest expenses on delayed service tax and TDS payments were allowed as expenditure. Based on these precedents, the ITAT set aside the lower authorities' orders and ruled in favor of the assessee, allowing the appeal.

In conclusion, the ITAT held that interest on delayed payment of TDS is compensatory in nature and qualifies as an allowable expenditure under the Income-tax Act, 1961. The decision was based on established case laws supporting the deductibility of such interest payments. The appeal by the assessee was allowed, overturning the disallowance of interest on TDS by the lower authorities.

This detailed analysis covers the issues involved in the judgment regarding the disallowance of interest on delayed payment of TDS and provides a comprehensive overview of the arguments presented, legal provisions cited, and the final decision rendered by the ITAT.