Appellate Tribunal overturns disallowance of interest on service tax, deeming it compensatory not penalty.

The Appellate Tribunal allowed the appeal filed by the investment company, overturning the decision of the Commissioner of Income Tax (Appeals) regarding the disallowance of interest on service tax under section 37(1) of the Income Tax Act. The Tribunal held that the interest on belated service tax payments is compensatory and not a penalty, thus directing the deletion of the disallowance. The order was pronounced in Chennai on 2nd November 2022.

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Issues:
1. Disallowance of interest on service tax as an allowable expenditure under section 37(1) of the Income Tax Act.

Analysis:
The appeal was filed against an order passed by the Commissioner of Income Tax (Appeals) pertaining to the assessment year 2017-18. The assessee, an investment company, filed a return of income admitting Nil total income. The assessment was completed under section 143(3) of the Income-tax Act, 1961, making an addition of Rs. 4,03,000 towards interest on service tax under section 37 of the Act. The assessee's appeal was rejected by the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi. The issue revolved around the disallowance of interest on service tax by the Assessing Officer, who treated it as a penalty under section 37(1) of the Act.

Upon hearing the arguments and reviewing the material, the Appellate Tribunal found that the interest paid on belated service tax payments is compensatory in nature and not a penalty. Therefore, the Tribunal concluded that the disallowance of interest on service tax under section 37(1) was erroneous. The Tribunal held that the Commissioner of Income Tax (Appeals) erred in sustaining the addition made by the Assessing Officer and directed the deletion of the disallowance of interest on service tax.

Consequently, the appeal filed by the assessee was allowed by the Appellate Tribunal, overturning the decision of the Commissioner of Income Tax (Appeals). The Tribunal pronounced the order in Chennai on 2nd November 2022.

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