Late TDS Deposit Interest not deductible as Business Expenditure

Shiva Pharmachem Ltd Vs DCIT (ITAT Ahmedabad)

Introduction: The case of Shiva Pharmachem Ltd vs. DCIT was brought before the Income Tax Appellate Tribunal (ITAT) Ahmedabad, addressing issues related to disallowances under section 14A of the Income Tax Act, 1961, Deduction under section 36(1)(va) for delayed deposit of employee’s contribution to PF and disallowances of Interest paid under section 201(1A) of Income Tax Act for late deposit of TDS.

No section 14A Disallowance Without Exempt Income

The appeal filed by Shiva Pharmachem Ltd challenged the order of the Commissioner of Income-Tax (Appeals) [CIT(A)] regarding disallowance under section 14A of the Act for the assessment year 2017-18. The main ground of dispute was whether disallowance could be made under section 14A in the absence of any exempt income earned during the year.

The assessee argued that since no exempt income was earned, the provisions of section 14A were not applicable. This argument was supported by the jurisdictional High Court’s decision in CIT vs. Corrtech Energy P.Ltd., which held that disallowance isn’t warranted without any exempt income.

The CIT(A), however, relied on a CBDT Circular and upheld the disallowance, leading to the appeal. The ITAT acknowledged the CBDT Circular but referred to the jurisdictional High Court’s decision as binding. Additionally, the ITAT noted the subsequent amendment to section 14A through the Finance Act, 2022, indicating prospective application and supporting the jurisdictional High Court’s interpretation.

Deduction under section 36(1)(va) for delayed deposit of employee’s contribution to PF cannot be allowed

The appellant (assessee) had claimed a deduction of Rs. 13,26,362 as payment of employees’ contribution to the Provident Fund (PF) made on a specific date. The claim was based on the argument that the payment was made within the same financial year. The appellant relied on decisions of High Courts and ITAT to support their claim.

The issue of disallowance of employees’ contribution to ESI/PF deposited late under section 36(1)(va) of the Income Tax Act was settled by a recent verdict of the Hon’ble Supreme Court in the case of Checkmate Services P. Ltd. vs. CIT. The Supreme Court held that deduction under section 36(1)(va) for delayed deposit of employee’s contribution to PF cannot be allowed.

The appellant’s counsel did not challenge the fact that the employees’ contribution had been deposited late. Therefore, the authority saw no reason to interfere with the order of the Ld.CIT(A) confirming the disallowance of Rs. 13,26,362 under section 36(1)(va) of the Act.

Interest paid under section 201(1A) of Income Tax Act for late deposit of TDS is not deductible as a business expenditure

Ground raised by the appellant, concerning the disallowance of interest paid on late payment of Tax Deducted at Source (TDS), was also discussed. The appellant argued that there is no provision in the Act to disallow such interest payment. They stated that the TDS amount didn’t represent the assessee’s tax liability and was not of a penal nature. Therefore, the appellant believed the disallowance was unjustified.

The issue of disallowance of interest on TDS was also addressed, and it was noted that the appellant’s counsel was unable to contest the findings of the Ld.CIT(A) and the legal authorities that interest paid under section 201(1A) of the Act for the late deposit of TDS is not deductible as a business expenditure.

Conclusion: The ITAT Ahmedabad ruled in favor of Shiva Pharmachem Ltd, emphasizing that disallowance under section 14A cannot be made in the absence of any exempt income earned during the year. The ITAT highlighted the binding effect of the jurisdictional High Court’s decision and the prospective nature of the legislative amendment.

This ruling reinforces the principle that legal interpretations by higher judicial authorities hold precedence over circulars issued by administrative bodies. It also demonstrates the significance of adhering to legal interpretations while making tax-related decisions.

FULL TEXT OF THE ORDER OF ITAT AHMEDABAD

Present appeal has been filed by the assessee against order passed by the ld.Commissioner of Income-Tax(A), National Faceless Appeal Centre (NFAC), Delhi[hereinafter referred to as “ld.CIT(A)”] dated 26.7.2021 under section 250(6) of the Income Tax Act, 1961 (“the Act” for short)pertaining to Asst.Year 2017-18.

2. Ground no.1 raised by the assessee reads as under:

“1. The Hon’ble CIT(A) has erred in confirming the disallowance of Rs.12,61,456/- made by Learned AO by invoking provisions of section 14A of the Act r.w.r 8D of the Act. Since the appellant has not earned any exempt income during the year under consideration, the provisions of section 14A r.w.r 8D of the Income Tax rules are not applicable. It is therefore submitted that the addition confirmed by the CIT(A) is unjust and uncalled for. It be held so now and addition made by the AO be deleted.”

3. The issue raised in the above ground relates to disallowance of expenditure incurred for the purpose of earning exempt income in terms of provisions of section 14A of the Act. The quantum of disallowance in dispute before us, confirmed by the ld.CIT(A) is Rs.12,61,456/-.

4. We have noted from the order of the authorities below that the assessee had repeatedly contended that it had not earned exempt income during the year, and therefore, no disallowance needs to be made. This fact, we find, has not been controverted either by the AO or by the ld.CIT(A). On the contrary, the ld.CI(A) has confirmed the addition relying upon the CBDT Circular No.5/2014 dated 11.2.2014 wherein it was clarified that disallowance of expenditure under section 14A is to be made even in the absence of any exempt income earned in a particular year. We are unable to agree with the ld.CIT(A) on this count. The Hon’ble jurisdictional High Court in the case of CIT Vs. Corrtech Energy P.Ltd., (2014) 45 com 116 (Guj) has held that in theabsence of any exempt income earned, there is no case for making any disallowance of expenses under section 14A of the Act. There is no dispute vis-à-vis the fact that the law as interpreted by the jurisdictional High Court would have binding force on all authorities below as opposed to Circular issued by the CBDT which are contrary to the law as interpreted by the judicial authorities.

5. We may further point out that Finance Act, 2022 had amended section 14A by inserting a non-obstinate clause and an Explanation after the proviso providing for disallowance of expenses even in the absence of any exempt income earned. This amendment to the section was held to be prospective in operation by the Hon’ble Apex Court in the case of Pr.CIT Vs. M/s. Era Infrastructure India Ltd., 141 taxmann.com 289 (Del). Therefore, for the impugned assessment year, the decision rendered by the Hon’ble jurisdictional High Court in the case of Corrtech Energy P.Ltd. (supra) would apply, following which, we hold that in the absence of any exempt income there is no case for making disallowance under section 14A of the Act.

Ground no.1 raised by the assessee is allowed.

6. Ground No. 2 raised by the assesse reads as under:

“The Hon’ble CIT(A) has erred in confirming the disallowance of Rs.13,26;362/- being payment of employees’ contribution to Provident Fund made on 17/03/2017. Relying on various decisions of Hon’ble High Courts/ITAT your appellant has rightly claimed the same since the payment in question was made during the same financial year. Accordingly your appellant had rightly claimed the deduction which be directed to be allowed now.”

7. Vis-a-vis the grievance raised by the assessee of disallowance of employees contribution to ESI/PF deposited late in terms of section 36(1)(va) of the Act, the issue has come to rest by the recent verdict of Hon’ble Supreme Court in the case of Checkmate Services P.Ltd. Vs. CIT, 143 taxmann.com178 (SC) holding that deduction under section 36(1)(va) in respect of delayed deposit of amount collected from employee’s contribution to PF cannot be allowed as deduction.

8. The Ld.Counsel for the assessee has not controverted the fact noted by the Revenue authorities of the employees contribution being deposited delayed to the tune of Rs.13,26,362/-. In view of the same we see no reason to interfere in the order of the Ld.CIT(A) confirming the disallowance u/s 36(1)(va) of the Act amounting to Rs.13,26,362/-.

Ground No.2 raised by the assessee is accordingly dismissed

9. Ground No.3 raised by the assessee reads as under

“The Hon’ble CIT(A) has erred in confirming the disallowance of the interest paid on late payment of TDS. Your appellant submits that there is no provision in the Act to disallow such interest payment, since the TDS amount did not represent the tax of assessee. Further the same is also not penal in nature and therefore it is submitted that the disallowance is not justified. The AO be directed to delete the same.”

10. The issue relates to disallowance of interest on TDS made by the AO and confirmed by the Ld.CIT(A) holding at para 5(c) of his order as under:

Ld. Counsel for the assessee was unable to controvert the findings of the Ld.CIT(A) on the proposition of law laid down by various higher judicial authorities that interest paid under section 201(1A) of the Act in late deposit of TDS is not deductible as business expenditure.

11. In view of the above admitted legal position, the ground nos. 3 is dismissed.

12. In the result, the appeal of the assessee is partly allowed.

Order pronounced in the Court on 26th July, 2023 at Ahmedabad.