Allowability of Interest on delayed payment of TDS

[Vivek Jalan]

For claiming an expenditure while determining the taxable income, an assessee should satisfy the twin conditions of allowance of expenditure pursuant to the provisions of Sec.30 to 37 of the Act. And that the said expenditure is not subject to disallowance under section. 40, 43B etc. These need to be complied even for claiming the interest paid on late payment/remittance of TDS. Interest on late payment of TDS is not penal in nature; since it is compensatory in nature, and should be eligible for deduction u/s 37 of Act as it is expended wholly and exclusively for business purpose and payment of interest on late remittance of TDS is neither an offence nor prohibited by Law.

However, a divergent view is that payment of interest takes colour from the nature of the levy with reference to which such interest is paid and the tax required to be but not paid in time, which renders the assessee liable for payment of interest and may be construed as being in the nature of a direct tax and similar to the income tax payable under the Income Tax Act. Hence, the interest paid under Section 201(1A) of the Act, may be considered as not assuming the character of business expenditure and may not be regarded as a compensatory payment.

While divergent views are possible, yet the matter was held against the taxpayer in the case of INDIA FLYSAFE AVIATION LTD. VERSUS DCIT, CIRCLE-12 (1) , NEW DELHI - 2024 (1) TMI 696 - ITAT DELHI. This matter however seems not settled as of now.