In claiming the deduction u/s. 37(1) for interest u/s. 201(1A), an issue arises as to whether such interest can be considered to be incurred wholly and exclusively for the purpose of business or profession. The issue is relevant for a large number of assesses. The Supreme Court decision in the case of Bharat Commerce & Industries Ltd. vs. CIT (198) 230 ITR 733 (SC), held that interest on late payment of Income Tax was not allowable. It held that the interest levied u/s. 139 and section 215 of the Income-tax Act was not deductible as a business expenditure u/s. 37(1) of the Act. The court held that the income tax was a tax on profit of the business and was therefore not allowable as a deduction. Similarly, interest also was not deductible as the same was inextricably connected with the assessee’s tax liability; if the income tax was not a permissible deduction u/s. 37, any interest payable for default in payment of such income tax could not be allowed as a deduction. In arriving at the conclusion, the court followed its own decision in the cases of East India Pharmaceutical Works Ltd, 224 ITR 627 and Smt. Padmavati Jaikrishna, 166 ITR 176, where decisions dealt with the issue of deductibility of interest paid on moneys borrowed for payment of income tax.
The Court held that –
‘…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 of 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 or profits…’
In another judgement, The Hon’ble Supreme Court in the case of Lachmandas Mathuradas vs. CIT (2002) 254 ITR 799 (SC) held that interest on arrears or on outstanding balance of sales tax is compensatory in nature and would be allowable as deduction in computing profits of a business. Referring to the same decision, ITAT in the case of Narayani Ispat (P) Ltd in ITA No.2127/Kol/2014 for AY 2010-11 vide order dated 20.08.2017 has held that interest expenses on account of delayed payment of service tax as well as TDS is an allowable expenditure.
On the same lines, it was held in the case of UNIVERSAL ENERGIES LTD Vs DCIT, CIRCLE 18 (1), NEW DELHI [2023-VIL-110-ITAT-DEL] that Interest on delayed payment of TDS is allowable as a deduction.
Hence, it can be construed that interest on delayed payment of a statutory liability would take its colour from the principal amount and thus, it could be considered to be incurred wholly and exclusively for the purpose of business and consequently, such interest cannot be claimed as a deduction, in case the principal amount paid can be so claimed as a deduction. TDS, by itself, does not represent income tax of the assessee, but is a deduction from the payment made to a party in respect of expenses claimed by the assessee. So long as the expenses from which tax is deducted, relate to the business of the assessee, the TDS thereon would also be considered to be relating to the business of the assessee and therefore, interest on delayed payment of such TDS would be considered to be incurred wholly and exclusively for the purpose of business. Similarly, GST/Service Tax are allowable as a deduction to the assessee and hence the delayed payment of Interest also should be allowable as a deduction.
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