2024 (5) TMI 1354 - AT - Income Tax

GST interest allowed as business expenditure but TDS interest disallowed under section 37(1)

ITAT Indore ruled on three expenditure disallowances under section 37(1). The tribunal held that GST interest is compensatory, not penal, and thus ... Disallowance of of interest on GST/service tax u/s 37(1) - Allowable business expenditure or not? - as per DR interest was levied due to default on the part of the assessee in payment of the taxes under GST Act and Rules and therefore, in view of the explanation-1 to section 37(1) of the Act the deduction of such levy is not allowable - CIT(A) deleted addition - HELD THAT:- The interest on the outstanding GST is only compensatory in nature and is not a levy of penalty for infraction of law. The interest on delayed payment is otherwise does not fall in the ambit of any payment for offence and therefore, the said expenditure cannot be disallowed by invoking explanation-1 to section 37(1) of the Act. Hence, we do not find any error or illegality in the impugned order of the CIT(A) qua this issue of disallowance of interest on GST. Decided in favour of assessee. Disallowance of interest on TDS - DR has submitted that the CIT(A) has committed an error in considering the interest on TDS similar to the interest on GST or sales tax - CIT(A) deleted addition - HELD THAT:- TDS is tax liability of the assessee and in case there is a default or delay in deposit of TDS the assessee would be liable to pay the tax being assessee in default. Therefore, the payment of interest on delayed deposit of TDS would become part and parcel of tax liability of the assessee similar to the interest u/s 234A, 234B, 234C, 234D. Accordingly interest on belated deposit of TDS or non-deposit of TDS by the assessee would not be an allowable claim of expenditure. Though the same may not fall in the ambit of explanation-1 to section 37(1) of the Act but the said expenditure cannot be regarded as expenditure incurred wholly and exclusively for the purpose of business of the assessee. The income tax liability as well as interest as income tax liability cannot be allowed as expenditure incurred for the business of the assessee. As decided in M/s. Bhopal Dugdh Sangh Sahakari Maryadit, Bhopal 2022 (7) TMI 380 - ITAT INDORE] interest on late payment of TDS is not allowable as business deduction and the lower authorities have rightly disallowed the same. Decided in favour of revenue. Adhoc disallowance of traveling expenses - AO on examination of the ledger account and invoice furnished by the assessee found that the assessee failed to substantiate the fact that expenditure under the head of traveling expenses are wholly and exclusively incurred for the purpose of the business - CIT(A) deleted addition - HELD THAT:- It is manifest from the impugned order of the AO that a general remark has been made by the AO about the personal nature of the expenditure as the AO has stated that element of personal nature in these expenses cannot be ruled out. The AO has not asked the assessee to produce any further supporting evidence but proceeded to make adhoc disallowance of 5%. The assessee is a company and therefore, the question of personal elements in the expenses incurred on traveling without specifically pointing out the fact that certain travels were undertaken by management personals of the assessee company for their personal trip and not for the business trip does not arise. In absence of any such defect or incident brought on record by the AO an adhoc disallowance is not permissible. CIT(A) has deleted the disallowance made by the AO by considering the various binding legal precedence on this point. Accordingly in the facts and circumstances as discussed above we do not find any error or illegality in the impugned order of the CIT(A) qua this issue the same is upheld. Decided in favour of assessee. Appeal of assessee partly allowed. Issues Involved:1. Disallowance of interest on GST/Service Tax.2. Disallowance of interest on TDS.3. Adhoc disallowance of traveling expenses.Summary:Issue 1: Disallowance of Interest on GST/Service TaxThe Revenue contended that the CIT(A) erred in deleting the disallowance of Rs. 1,44,54,016/- made by the AO on account of interest on GST/Service Tax. The AO invoked explanation to section 37(1) of the Act, arguing that the interest was due to default in tax payment, thus not allowable. However, the CIT(A) found that the interest on outstanding GST is compensatory, not penal, and cited the Supreme Court judgments in M/s. Mahalakshmi Sugar Mills Co. Ltd. v. Commissioner of Income Tax and Lachmandas Mathuradas v. Commissioner of Income Tax. The Tribunal upheld CIT(A)'s decision, concluding that the interest on delayed GST payment does not fall under explanation-1 to section 37(1) and is therefore allowable.Issue 2: Disallowance of Interest on TDSThe Revenue argued that CIT(A) erred in deleting the disallowance of Rs. 8,15,177/- on account of interest on TDS, asserting that TDS is an income tax liability and not an allowable expense. The Tribunal agreed with the Revenue, noting that interest on delayed TDS payment is part of the tax liability and not incurred wholly and exclusively for business purposes. The Tribunal cited the case of M/s. Bhopal Dugdh Sangh Sahakari Maryadit, Bhopal vs. DCIT, and other relevant judgments, concluding that such interest is not allowable as a business expense. The Tribunal set aside the CIT(A)'s order on this issue and restored the AO's decision.Issue 3: Adhoc Disallowance of Traveling ExpensesThe Revenue contended that the CIT(A) erred in deleting the adhoc disallowance of Rs. 12,69,075/- made by the AO, who had disallowed 5% of traveling expenses due to the potential personal nature of the expenses. The CIT(A) found that the AO made the disallowance based on general observations without specific defects in the books or vouchers. The Tribunal upheld the CIT(A)'s decision, referencing multiple judicial precedents that disallow adhoc disallowances without tangible evidence or specific inquiries. The Tribunal affirmed that the AO cannot make such disallowances based on presumptions.Conclusion:The Tribunal partly allowed the appeal, upholding the CIT(A)'s decisions on the disallowance of interest on GST/Service Tax and adhoc disallowance of traveling expenses, while setting aside the CIT(A)'s decision on the disallowance of interest on TDS.