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 allowable as business expenditure, upholding CIT(A)'s deletion. However, TDS interest was deemed non-allowable as it forms part of tax liability, not business expenditure, favoring revenue. Regarding traveling expenses, the tribunal found AO's 5% adhoc disallowance without specific evidence of personal use impermissible for a company, upholding CIT(A)'s deletion. Appeal was partly allowed in assessee's favor.

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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 Tax
The 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 TDS
The 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 Expenses
The 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.

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