Interest on delayed tax payment not deductible as business expense under Income-tax Act

The court held that interest for delayed payment of tax deducted from employees' salaries under section 201(1A) of the Income-tax Act is not deductible as a business expense. The interest was deemed a consequence of non-compliance with tax laws, akin to penalties and not an allowable deduction under section 37 of the Act. The court emphasized that such interest on tax itself is not deductible, ruling in favor of the revenue and directing the assessee to bear the reference costs.

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Issues Involved:
The judgment involves the issue of whether the interest for delayed payment of tax deducted on salary of employees, charged under section 201(1A) of the Income-tax Act, 1961, is deductible in computing the business income of the assessee for the assessment year 1977-78.

Summary:
The assessee claimed deduction of interest under section 201(1A) of the Act on tax not deposited in time from employees' salaries. The IAC disallowed the deduction, considering it a penalty for non-compliance with tax laws. The Commissioner (Appeals) and Tribunal upheld the disallowance, stating it was additional tax and not an allowable expense.

The Tribunal rejected the argument that interest was on the salary portion deducted from employees, stating it was akin to other taxes and penalties. The assessee contended that the interest should be deductible under section 37 of the Act, but the court disagreed, emphasizing the consequences of failure to deduct or pay tax under section 201.

The court explained that the interest was a consequence of the assessee's default in paying deducted tax on time, leading to being treated as an assessee-in-default. It clarified that the interest was on tax deducted, not on salary, and highlighted the statutory charge on the defaulter's assets for the tax and interest amount.

The court emphasized that interest for non-compliance with tax provisions is not deductible, citing precedents where such interest was not allowed as a deduction. It differentiated cases where interest was considered compensation for delayed payments, stating that tax itself is not deductible, hence interest on it cannot be allowed.

In conclusion, the court ruled in favor of the revenue, denying the deduction of interest for delayed tax payment. The assessee was directed to bear the costs of the reference.

*Banerjee, J.* - in agreement with the judgment.

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