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TDS IS PART OF SUM PAYABLE TO PAYEE and is trading liability- interest paid for delayed deposit of TDS is allowable expenditure

Income Tax - By: - CA DEV KUMAR KOTHARI - Dated:- 13-10-2017 - References and links: Lachmandas Mathura vs. CIT 254 ITR 799 (SC) 1997 (12) TMI 16 - SUPREME Court Interest paid on sales tax arrears is deductible u/s. 37(1) Ld. CIT(A) after considering the submission of assessee has deleted the addition made Commissioner Of Income-Tax Versus Mysore Electrical Industries Limited 1991 (3) TMI 30 - KARNATAKA High Court - Interest for failure to pay PF contribution was held deductible u/s. 37(1). Bhar .....

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s payable for such late deposit. This is in relation to business expenditure. Therefore, interest paid for delay in deposit of TDS/ TCS is also a business expenditure. In this article author had discussed several aspects of TDS/TCS . Recently honourable Kolkata ITAT has considered this issue and allowed such interest under section 37. This judgment of ITAT, on issue of interest for late deposit of TDS seems to be first reported judgment. In the judgment ITAT has also not referred to any other ju .....

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ected in respect of prescribed transactions and then deposited within prescribed period. TDS and TCS are part of trading or business operations: In case of assessee engaged in business or profession he employ people or receives services from others, purchase or sell goods in course of business. TDS and TCS are intimately connected to such business operations. Just like GST, VAT, sales tax, profession tax, or any other tax collected from other parties or otherwise payable in account of other gove .....

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example: A. Suppose gross salary payable is ₹ 1000 K, out of which following deductions are made For PF ₹ 100 K For profession tax Rs. 10 K TDS Rs. 90 K Net salary payable to employees ₹ 800 K In accounting entry ₹ 1000K will be debited to salary account, deductions will be credited to respective accounts. Then when payments are made respective account will be debited. Salary of ₹ 1000 K (Rs. ten lakh) is allowable expenditure. PF, PT, and TDS are sums withheld by .....

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st salary income. Therefore, the amount first deducted and then paid or deposited for PF, P.Tax and TDS are part and parcel of salary payable by employer. B. payment to contractor: Suppose gross sum payable to a contractor is Rs. ten lakh, out of which TDS is ₹ 20K. The assessee shall pay ₹ 980K to contractor and deposit ₹ 20K as TDS for which contractor shall get credit against income-tax payable by him. C. payment to professionals: Suppose gross sum payable to a professional .....

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balance amount shall be payable to the contractor or professional. Similarly in case of payment of salary, the amount of TDS can be lower, if employees had made investments in tax saving scheme and furnished evidence to the employer. TDS is against personal liability of tax payable by payee: Above discussions and examples are given just to emphasise that the payment of salary to employees or to contractors and professionals are made in course of business or profession and TDS is a part of full a .....

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previous year. A tax deductor, may not have tax liability due to exemption or loss. Even if there is no personal liability of income-tax, still he is liable to deduct or collect tax if makes payment of prescribed sums from which tax is to be deducted or collected. This also make clear that the amount of TDS is not part of tax payable by tax deductor on his income. The tax deductor has to pay his income-tax separately. This can be by way of TDs of various sums received by him if they are subject .....

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t of interest for such delay, then interest so payable / paid will be allowable expenditure. Allowability of interest payable under two circumstances: In case TDS / TCS is deposited late, interest is payable by tax deductor / tax collector. As discussed earlier, TDS is in discharge of business expenditure. Therefore, in case there is delay in deposit of TDS, interest paid for such delay should be allowed as business expenditure being incidental to business or profession and in relation to busine .....

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ayed deposit of statutory liabilities like Excise duty, GST, VAT, sales tax, Cess, is well settled. Generally interest payable is compensatory in nature and is allowable. In other words, when it is compensatory in nature and is not in nature of penalty it is allowable. However, allowability of interest for late deposit of TDS is a bit new area of litigation. Based on discussion, made hereinbefore, author had always considered that interest for delayed deposit of TDS/ TCS is allowable expenditure .....

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. The relevant ground (with highlights added by author about interest on delayed deposit of TDS) reads as follows: On the facts and circumstances of the case, the Learned CIT(A) is not justified in deleting disallowance of interest of ₹ 15,880/- on service tax and Rs.70,000/- on TDS because of the fact that the assessee failed to deposit the taxes of other parties to the other parties to the Central Government account within due time. xxx Relevant facts on the issue of interest on TDS are .....

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ted in 1998 (3) TMI 2 - SUPREME Court and disallowed the claim of such interest On appeal of assessee the Ld. CIT(A) allowed the claim . Considering submission of assessee the the ratio laid down by the Hon'ble Supreme Court in the case of Bharat Commerce Industries Ltd. (supra) has been misunderstood by the AO as, in that case, the disallowance was made on account of interest under section 215 of the Act due to the delay in the payment of income tax on the income disclosed under Voluntary D .....

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tion was held deductible u/s. 37(1) . Ld. CIT(A) after considering the submission of assessee has deleted the addition made by the AO by observing as under:- 4-. Ground No. (i) relates to disallowance of ₹ 86,657/- made by the Assessing Officer The total amount of ₹ 86,657/- includes ₹ 15,880/- towards interest paid on service tax and ₹ 70,777/- towards interest disallowed the same following the decision of Hon'ble Supreme Court in the case of Bharat Commerce And Indu .....

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ose of business. Therefore, the AO was not justified to disallow the same. Hence, he is directed to delete the addition. Analysis of order of ITAT on issue of interest for TDS: Tribunal considered the rival contentions of both the parties and perused the material available on record. The AO has disallowed the interest expenses incurred by the assessee on account of late deposit of TDS after having reliance on the judgment of Hon'ble Supreme Court in the case of Bharat Commerce Industries Ltd .....

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x liability. If income-tax itself is not permissible deduction under section 37, any interest payable for default committed by the assessee in discharging his statutory objection under the Act, which is calculated with reference to the tax on income, cannot be allowed as a deduction. Therefore, it was to be held that deduction of interest levied under sections 139 and 215 would not be allowable under section 37. Per author: (** At present such interest on own tax liability will be u/s 234A, 234B .....

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CIT 254 ITR 799 (SC) 1997 (12) TMI 16 - SUPREME Court in favour of assessee. The relevant extract of the judgment is reproduced below (highlights added): The High Court has proceeded on the basis that the interest on arrears of sales tax is penal in nature and has rejected the contention of the assessee that it is compensatory in nature. In taking the said view the High Court has placed reliance on its Full Bench's decision in Saraya Sugar Mills (P.) Ltd. v. CIT 1978 (5) TMI 22 - ALLAHABAD H .....

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raya Sugar Mills (P.) Ltd. v. CIT decided on 29-2-1996. In that view of the matter, the appeal is allowed and question Nos. 1 and 2 are answered in favour of the assessee and against the revenue. Tribunal held that in view of the above judgment, there remains no doubt that the interest expense on the delayed payment of service tax is allowable deduction. Then Tribunal held that The above principles can be applied to the interest expenses levied on account of delayed payment of TDS as it relates .....

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