Interest on VAT is Compensatory, Not Penal – ITAT Allows Deduction

Kankariya Automobiles Pvt. Ltd. Vs ITO (ITAT Pune)

Interest on VAT is Compensatory, Not Penal – ITAT Allows Deduction

The Pune ITAT in Kankariya Automobiles Pvt. Ltd. vs ITO allowed deduction of interest on delayed payment of VAT, holding that such interest is compensatory in nature and hence allowable as business expenditure.

The assessee, a vehicle dealer, had debited ₹4.92 lakh towards VAT interest. The AO disallowed the same in a reassessment completed u/s 144, primarily due to non-compliance and the view that VAT was excluded from sales, making related interest non-deductible. The CIT(A) upheld the disallowance by treating the interest as penal in nature, relying on selective readings of judicial precedents.

Before the Tribunal, the assessee relied on the Supreme Court ruling in Lachmandas Mathuradas vs CIT, arguing that interest on arrears of tax is compensatory and allowable. The ITAT observed that the CIT(A) had misinterpreted the Supreme Court decision-in fact, the Apex Court had clearly held such interest to be compensatory and allowable.

Rejecting the Revenue’s stand and distinguishing cases relating to TDS interest u/s 201(1A), the Tribunal held that interest on VAT stands on a different footing and qualifies as a business expenditure. Accordingly, the addition was deleted and the appeal was allowed.

Not all tax-related interest is penal-VAT interest, being compensatory, survives the disallowance axe.

FULL TEXT OF THE ORDER OF ITAT PUNE