TaxTMI 
TaxTMI 
2026 (7) TMI 966
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....T(A) NFAC erred in law to partly upheld that as per calculation under rule 8D, as applied by AO would be @1% of the average annual value of entire investment, except investments in NSC, not @1% on the annual average of monthly averages of investments on which exempt income is earned. 3. The appellant craves leave to add, alter, amend, modify or omit any of the grounds during the course of hearing and to produce the documentary evidence as permitted under rule 46A of the income tax Rules 1962." 3. Brief facts of the case are that the assessee had filed the return of income for AY 2017-18 on 29.08.2017 showing total income at Rs.4,88,26,661/-. The Assessing Officer (hereinafter referred to as Ld. 'AO') noted various discrepancies and made an addition of Rs.7,40,611/- u/s 40(a)(ia) of the Act for violation of TDS provisions, disallowed a sum of Rs.43,06,189/- u/s 37 of the Act by treating the interest on delayed payment of statutory dues as penal in nature, and made a further disallowance of Rs.2,39,177/- u/s 14A of the Act r.w.s. Rule 8D for investments yielding exempt income and determined the total income of the assessee at Rs.5,41,12,640/-. Aggrieved with the a....
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.... an amount of Rs.10,93,356/- which related to prior period expenditure as per the details furnished by the assessee during the course of the assessment proceeding, which were also held to be penal in nature as in response to the query raised, the assessee did not deny that the said payments were penal in nature. The Ld. AO held that the interest payments were for delayed payments of statutory dues which is an offence and in violation of law. Accordingly, the said expenditure was also held to be penal in nature and, therefore, a sum of Rs.43,06,189/- was disallowed u/s 37(1) of the Act read with Explanation 1 thereof. It was submitted by the Ld. AR that the expenditure incurred on account of interest on deposit of statutory dues was an allowable expenditure as it was not prohibited by law, but was compensatory in nature. The Ld. DR relied upon the order of the Ld. CIT(A) and requested that the same may be upheld. 6. We have considered the submissions made, gone through the facts of the case and perused the record and the order of the Ld. CIT(A). Before the Ld. CIT(A), the assessee had submitted that the sum of Rs.32,12,833/- paid during the year as interest on delayed payment of ....
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....s.17,75,258 Interest on Unsecured Loan A/c Rs. 8,69,495 Interest on Cash Credit A/c. Rs. 86,28,913 Interest on Car Loan - HO Rs. 6,403 Interest on delayed payment Rs. 5,30,418 Interest & taxes Rs. 6,65,226 Interest paid on car loan Rs. 1,36,848 Interest on Loan (PNB) - HO Rs. 90,704 Interest on PF - HO Rs. 14,738 Interest on Sales Tax - HO Rs. 2,52,828 Interest on Sales Tax - Ranchi Rs. 12,838 Interest on Taxes Rs. 15,80,306 Interest on Statutory dues Rs. 89,100 Interest on tax Rs. 67,379 Total Rs. 1,47,20,454 Out of which the following were interest on delayed payments of statutory dues i. Interest on delayed payment Rs. 5,30,418 ii. Interest & taxes Rs. 6,65,226 !!! Interest on PF-HO Rs. 14,738 iv. Interest on Sales Tax-HO Rs. 2,52,828 Interest on Sales Tax - Ranchi Rs. 12,838 vi. Interest on Taxes Rs. 15,80,306 vii. Interest on Statutory dues Rs. 89,100 viii. Interest on tax Rs. 67,379 TOTAL Rs. 32,12,833 E. Out of above the highlighted interest are on late payments of statutory dues amounted to Rs. 32,18,833. The AO stated i....
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.... this amount of Rs. 10,93,356 interest on late payment of statutory dues earlier years added with Rs. 21,19,477 interest on late payment of statutory dues of current financial year 2016-17. J. Rs. 10,93,356 was not over and above Rs. 32,12,833, but was already included in it. As the AO sought details on different context, same were furnished. However, without going into nature and purpose of details submitted, AO added Rs. 10,93,356 twice, one as part of disallowance of Rs. 32,12,833 and again as Rs. 10,93,356 from expenses related to earlier years. PAGE 103 OF PB K. The Ld. CIT(A) NFAC in their order upheld the decision of the AO I have considered the submission of the appellant as well as case law. The above payments are delayed in payment of statutory dues which is violation of law. The said expenditure is penal in nature, hence, it is not allowable as per provisions of section 37 of the L.T. Act. The Honourable ITAT Hyderabad in the case of Analogics Tech India Limited Vs DCIT (ITAT Hyderabad) held that interest payment on late payment of TDS is not compensatory in nature and is not allowable as deduction u/s 37(1) of the Income Tax Act. Sinc....
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....lied upon this decision of the coordinate bench, therefore, para 15 thereof, which is relevant, is extracted as under: "15. Before us, the ld. Counsel for the assessee stated that this issue deserves to be allowed in favour of the assessee in view of the decision of this Tribunal in the case of Narayani Ispat Pvt. Ltd. (supra). We find that this Tribunal has adjudicated the very same issue observing as follows: "7. We have heard the rival contentions of both the parties and perused the material available on record. In the instant case, AO has disallowed the interest expenses incurred by the assessee on account of late deposit of service tax and TDS after having reliance on the judgment of Hon'ble Supreme Court in the case of Bharat Commerce Industries Ltd. Vs. CIT (1998) (Supra). The relevant extract of the judgment reads as under: FACTS During the year under consideration, the assessee failed to pay advance tax equivalent to 75 per cent of estimated tax. The Assessing Officer levied interest under section 215 as well as under section 139. The assessee claimed that since taxes which were payable were delayed, the assessee's financial reso....
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....ing from the delayed payment of income tax (advance tax) is also not allowable deduction. However the facts of the instant case before us are distinguishable as in the case before us the interest was paid for delayed payment of service tax & TDS. The interest for the delay in making the payment of service tax & TDS is compensatory in nature. As such the interest on delayed payment is not in the nature of penalty in the instant case on hand. The issue of delay in the payment of service tax is directly covered by the judgment of Hon'ble Apex Court in the case of Lachmandas Mathura Vs. CIT reported in 254 ITR 799 in favour of assessee. The relevant extract of the judgment is reproduced below: "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 [1979] 116 ITR 387 (All.) The learned counsel appearing for the appellant-assessee states that the said judgment of the Full Bench has been reversed by the ....
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....e allowable expenses u/s 37(1) of the Act. In this view of the matter, we find no reason to interfere in the order of Ld. CIT(A) and we uphold the same. Hence, this ground of Revenue is dismissed." 10. We find that the Hon'ble Supreme Court in the case of Bharat Commerce & Industries Ltd. vs. Commissioner of Income-tax [1998] 98 Taxman 151 (SC)/[1998] 230 ITR 733 (SC)/[1998] 145 CTR 340 (SC)[05-03-1998] have very categorically held as under: "When interest is paid for committing a default in respect of a statutory liability to pay advance tax, the amount paid and the expenditure incurred in that connection is in no way connected with preserving or promoting the business of the assessee. This is not expenditure which is incurred and which has to be taken into account before the profits of the business are calculated. The liability in the case of payment of income- tax and interest for delayed payment of income-tax or advance tax arises on the computation of the profits and gains of business. The tax which is payable is on the assessee's income after the income is determined. This cannot, therefore, be considered as an expenditure for the purpose of earning any income....
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....ce of tax deducted at source u/s. 201(1A) of the Act is concerned, we find that the Hon'ble Madras High Court has taken a view that interest paid u/s. 201(1A) is also in the nature of tax and notwithstanding the fact that it is not the tax liability of the assessee, the same cannot be allowed as a deduction. The following were the relevant observations of the Hon'ble Madras High Court:- "14. As already noticed the payment of interest takes colour from the nature of the levy with reference to which such interest is paid and the tax required to be but not paid in time, which rendered the assessee liable for payment of interest was in the nature of a direct tax and similar to the income-tax payable under the Income-tax Act. The interest paid under Section 201(1A) of the Act, therefore, would not assume the character of business expenditure and cannot be regarded as a compensatory payment as contended by learned counsel for the assessee. 15. Counsel for the assessee in support of his submission that the interest paid by the assessee was merely compensatory in character besides relying on the case of Makalakshmi Sugar Mills Co. also relied on the decision of th....
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....nterest on delayed remittance of tax deducted at source u/s. 201(1A) of the Act." 8. In view of this, we do not find any merit in the appeal of the assessee and hold that interest payment on late payment of tax at source is not eligible business expenditure for deduction and it is not compensatory in nature. 12.1 Thus, on the above facts and in view of the decisions discussed, while the interest on delayed payment of sales tax can be considered as the interest paid for preserving or promoting the business of the assessee, as sales tax is an expenditure which is directly relatable to the computation of profit, and the provisions of section 43B of the Act also mention allowability of such expenditure payment basis and is a deduction otherwise allowable under this Act; however, the same cannot be said to be applicable for income tax or even tax deducted at source, as for the purpose of TDS the assessee steps into the shoes of a drawing and disbursing officer vis-à-vis the payee, and the payment is in no way connected with preserving or promoting the business of the assessee. As regards interest for the default in non-compliance with the provisions of TDS, the liabil....
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....n accretion to the main payment as observed by the Supreme Court in Mahalakshmi Sugar Mills Co. v. CIT [1980] 123 ITR 429. However, it is to be examined whether the interest relates to employees' or employer's contribution to PF as delayed payment of employees' contribution is not allowable as a deduction as per the decision of the Hon'ble Supreme Court in the case of Checkmate Services (P.) Ltd. v. Commissioner of Income-tax-1 [2022] 143 taxmann.com 178 (SC) wherein it has been held as under: ■ The distinction between an employer's contribution which is its primary liability under law - in terms of section 36(1)(iv), and its liability to deposit amounts received by it or deducted by it (Section 36(1)(va)) is, thus crucial. The former forms part of the employers' income, and the later retains its character as an income (albeit deemed), by virtue of section 2(24)(x) - unless the conditions spelt by Explanation to section 36(1)(va) are satisfied i.e., depositing such amount received or deducted from the employee on or before the due date. In other words, there is a marked distinction between the nature and character of the two amounts - the employer's liabi....
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....ome and is not allowable as a deduction even on payment basis under section 43B of the Act, therefore, following the principle laid down in Bharat Commerce & Industries Ltd. (supra) Mahalakshmi Sugar Mills Co. v. CIT [1980] 123 ITR 429 (supra), the same cannot be said to be laid out or expended wholly and exclusively for the purpose of the business or compensatory in nature. 16. Therefore, we have no hesitation in concurring with the view of the Ld. CIT(A) that the interest on delayed deposit of TDS and delayed payment of employees' contribution is not an allowable expenditure. However, since the entire disallowance has been confirmed, we set aside the remaining findings of the Ld. CIT(A) on this issue and remand this issue before the Ld. AO, who shall examine the expenditures including the claim that the sum of Rs.10,93,356/- has already been included in the figure of Rs.32,12,833/-, and if it is found to be so, delete the addition of Rs.10,93,356/- made and for the rest of the amount, only the interest paid on late deposit of VAT/sales tax, entry tax, PF contribution of employer and service tax shall be allowed and the rest of the amount relating to interest on late deposit of....
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.... 144 r.w. Rule 8D of the IT. Rules, 1962 amounting to Rs. 3,38,558/- which is of the average of annual investments made by the appellant and has added Rs. 2,39.177/-(338558-99381) w/s 14A for the year under consideration. As per the rule 8D mentioned above. the AO has rightly applied 1% of the annual average of investment for calculation w/s 14A r.w. r. 8D. However, the AO has included investment of NSC for calculation of 144 r.w.r. 8D, interest income arising out of the above mentioned investment is not exempt and taxable in nature. Therefore, such investment should be excluded for computing the disallowance w/s 144 r.w.r. 8D. Therefore, the AO is directed to re-compute the disallowance u/s 144 r.w.r. 8D. PAGE 25 PARA 6.9 OF APPELLATE ORDER U. The appellant plead that apart from exclusion of NSC from the calculation under rule 8D r.w.s 14A, as directed by Ld. CIT(A) NFAC; the AO be directed to re-compute the disallowance based on investments which have fetched exempt income during the year, if any. V. The appellant rely upon the following judgements of Hon'ble Supreme Court and jurisdictional ITAT on the issue:- a. South Indian Bank vs CIT S....