Interest paid to MSME for delayed payment is not allowable

Dy. CIT (LTU) Vs. Bosch Ltd. (ITAT Bangalore)

Section 23 of MSMED Act has specifically provided that the interest paid to the Micro, Small & Medium Enterprises on account of delayed payment is not allowable as deduction from income.

Section 23 of MSMED Act has specifically prohibited the assessee from claiming the deduction from the income on account of interest paid to MSME. Section 24 is having overriding effect to the extent of any inconsistent provisions contained in any other law for the time being. We further note that as per the section 15 of the MSMED Act, the liability of the buyer to make the payment to MSME within the period as agreed between the parties or in case there is a delay beyond 45 days from the date of acceptance or date of deemed acceptance the interest payable as per section 16 shall be three times of the bank rate notified by the RBI. Thus as per section 16 of the MSMED Act, the payment of interest on delayed payment is in the nature of penalty or it is penal interest. Therefore once the payment of interest on delayed payment to MSME is regarded as a penal in nature then the said expenditure is otherwise not allowable under section 37 of the Income Tax Act, 1961 (in short ‘the Act’). Hence, in view of the specific provisions under MSMED Act, 2006 for payment of interest to the MSME being penal in nature and having the overriding effect of sections 15 to 23, we do not find any error or illegality in the orders of the authorities below in disallowing this claim of interest paid to the MSME.