ITAT Patna in Pure Spiritss Limited Vs ACIT: Denies Deduction for Penal TDS Interest, Allows Compensatory Interest Paid on Sales Tax and Service Tax
Summary: The assessee, for AY 2017–18, challenged additions and disallowances arising from assessment proceedings, including Rs. 43,06,189/- under Section 37(1) for interest on delayed statutory payments and Rs. 2,39,177/- under Section 14A read with Rule 8D. The first appellate authority had upheld the disallowance of interest on delayed statutory dues as penal in nature and sustained the application of Rule 8D, while directing exclusion of National Saving Certificates whose income was taxable. Before the Tribunal, the assessee contended that interest on delayed sales tax, VAT and service tax was compensatory and that Rs. 10,93,356/- had been included twice in the interest expenditure. The ITAT Patna in Pure Spiritss Limited Vs ACIT considered the distinction between interest relating to indirect statutory levies and interest on income-tax or TDS, referring to Shalimar Fabricators Pvt. Ltd. v. ITO, Lachmandas Mathuradas v. Commissioner of Income-tax and Bharat Commerce & Industries Ltd. v. Commissioner of Income-tax. It held that interest on delayed sales tax, VAT and service tax was allowable, while interest on delayed TDS and employees’ contribution was not allowable. The matter was restored to the Assessing Officer to verify the alleged duplicate disallowance and the nature of individual components.
Facts:
1. The assessee filed its return of income for the Assessment Year 2017–18 on 29.08.2017, declaring a total income of Rs. 4,88,26,661/-. During the course of assessment proceedings, the Assessing Officer noticed various discrepancies and consequently made an addition of Rs. 7,40,611/- under Section 40(a)(ia) of the Income-tax Act, 1961 for alleged violation of the provisions relating to deduction of tax at source. The Assessing Officer further disallowed a sum of Rs. 43,06,189/- under Section 37(1) of the Act by treating the interest paid on delayed payment of statutory dues as expenditure of a penal nature. In addition thereto, a further disallowance of Rs.2,39,177/- was made under Section 14A read with Rule 8D of the Income-tax Rules, 1962 in respect of investments yielding exempt income. Consequently, the total income of the assessee was assessed at Rs.5,41,12,640/-.
2. Being aggrieved by the assessment order, the assessee preferred an appeal before the learned Addl./JCIT(A). Upon examination of the facts and the disallowances made by the Assessing Officer, the learned Addl./JCIT(A) directed the Assessing Officer to verify the assessee’s claim regarding deduction and deposit of tax deducted at source in relation to the disallowance made under Section 40(a)(ia) of the Act and allowed the corresponding ground for statistical purposes. In respect of the disallowance of Rs.43,06,189/- made under Section 37(1) of the Act, the learned Addl./JCIT(A) upheld the finding of the Assessing Officer that the interest paid on delayed payment of statutory dues was penal in nature and, therefore, not allowable as a business expenditure.
3. With regard to the disallowance made under Section 14A of the Act read with Rule 8D of the Income-tax Rules, 1962, the learned Addl./JCIT(A) held that the Assessing Officer had correctly applied the provisions of Rule 8D. However, the Assessing Officer was directed to exclude the investments made in National Saving Certificates (NSCs) from the computation, as the interest income arising therefrom was taxable. Accordingly, the order of the Assessing Officer was modified to that extent and the appeal was partly allowed.
4. Aggrieved by the order passed by the learned Addl./JCIT(A), the assessee preferred the present appeal before the Income Tax Appellate Tribunal.
Issues:
1. Whether the interest amounting to Rs.43,06,189/- paid on delayed payment of statutory dues was liable to be disallowed under Section 37(1) of the Income-tax Act, 1961, on the ground that such interest was penal in nature and not an allowable business expenditure.
2. Whether the disallowance made under Section 14A of the Income-tax Act, 1961 read with Rule 8D of the Income-tax Rules, 1962 was correctly computed by the Assessing Officer, particularly with regard to the inclusion of investments which did not yield exempt income and the investments in National Saving Certificates (NSCs).
3. Whether the assessee claim regarding the duplication of disallowance of Rs. 10,93,356/- forming part of the total disallowance under Section 37(1) required verification by the Assessing Officer.
Observations:
1. The Hon’ble Tribunal observed that the principal dispute under Ground No. 1 pertained to the disallowance of Rs. 43,06,189/- under Section 37(1) of the Income-tax Act, 1961 on account of interest paid on delayed payment of statutory dues. It noted that during the assessment proceedings, the Assessing Officer had called upon the assessee to explain the expenditure claimed under the head “Finance Cost”, which included Rs. 32,12,833/- towards interest on delayed payments and Rs. 10,93,356/- relating to prior period expenditure. The Assessing Officer treated the said payments as interest on delayed payment of statutory dues and, holding the same to be penal in nature and covered by Explanation 1 to Section 37(1), disallowed the entire amount of Rs. 43,06,189/-.
2. The Hon’ble Tribunal further observed that before the first appellate authority, the assessee had contended that the amount of Rs. 32,12,833/- represented interest paid on delayed payment of sales tax, TDS, service tax, State Excise and other statutory dues, which was compensatory in nature and, therefore, allowable under Section 37(1) of the Act. It was also contended that the amount of Rs. 10,93,356/-, being prior period interest expenditure, had already been included in the figure of Rs. 32,12,833/-, resulting in double disallowance. The learned CIT(A), however, affirmed the action of the Assessing Officer by holding that the delayed payment of statutory dues constituted violation of law and that the interest paid thereon was penal in nature. Reliance was placed upon the decision of the ITAT Hyderabad Bench in Analogics Tech India Ltd. v. DCIT (ITAT, Hyderabad), wherein interest on delayed payment of TDS was held to be not allowable under Section 37(1) of the Act. The Hon’ble Tribunal thereafter examined the scope of Explanation 1 to Section 37(1) of the Act, which provides that any expenditure incurred for a purpose which is an offence or prohibited by law shall not be deemed to have been incurred for the purposes of business or profession and no deduction shall be allowed in respect thereof.
3. The Hon’ble Tribunal took note of the detailed written submissions filed by the assessee explaining the composition of the interest expenditure amounting to Rs. 32,12,833/-, comprising interest on delayed payment of sales tax, service tax, provident fund, statutory dues and taxes. The Tribunal further noticed the assessee’s contention that the separate addition of Rs. 10,93,356/- represented interest already forming part of the aforesaid amount and had, therefore, been disallowed twice by the Assessing Officer.
4. The Hon’ble Tribunal further considered the assessee’s contention that interest payable on delayed payment of indirect taxes such as sales tax, VAT and service tax was compensatory in nature and distinguishable from interest payable on delayed payment of income-tax or TDS. The Tribunal also considered the judicial precedents relied upon by the assessee, including Shalimar Fabricators Pvt. Ltd. v. ITO (ITA Nos. 386 & 428/KOL/2021), wherein, following the decision of the Hon’ble Supreme Court in Lachmandas Mathuradas v. Commissioner of Income-tax [2002] 122 Taxman 828 (SC), it had been held that interest on delayed payment of service tax and TDS was compensatory in nature.
5. The Hon’ble Tribunal further examined the decision of the Hon’ble Supreme Court in Bharat Commerce & Industries Ltd. v. Commissioner of Income-tax [1998] 98 Taxman 151 (SC), wherein it was held that interest paid for default in payment of advance tax or income-tax cannot be regarded as expenditure incurred wholly and exclusively for the purposes of business, since such liability arises only after computation of business income. The Tribunal observed that the said principle was applicable to liabilities relatable to income-tax and advance tax.
6. The Hon’ble Tribunal also considered the decision of the Hon’ble Supreme Court in Lachmandas Mathuradas v. Commissioner of Income-tax (supra), wherein it was held that interest payable on arrears of sales tax is compensatory in nature and not penal, and therefore allowable as deduction.
7. The Hon’ble Tribunal further considered the decision of the ITAT Delhi Bench in M/s New Modern Bazaar Departmental Store Pvt. Ltd. v. ITO, wherein, following the judgment of the Hon’ble Madras High Court in CIT v. Chennai Properties & Investment Ltd. [1998] 98 Taxman 151 (SC), it was held that interest payable under Section 201(1A) on delayed deposit of TDS assumes the character of tax and cannot be regarded as allowable business expenditure.
8. Upon consideration of the statutory provisions and the judicial precedents, the Hon’ble Tribunal observed that interest on delayed payment of sales tax, VAT and service tax, being statutory levies directly connected with business operations and otherwise allowable under Section 43B of the Act, is compensatory in nature and allowable as deduction. However, interest on delayed payment of TDS, being a liability arising after deduction of tax on behalf of the payee and having no nexus with computation of business profits, cannot be regarded as expenditure incurred wholly and exclusively for the purposes of business and is therefore not allowable under Section 37(1). The Tribunal further observed that interest on delayed payment of employees’ contribution to provident fund also could not be regarded as allowable expenditure in view of the decision of the Hon’ble Supreme Court in Checkmate Services (P.) Ltd. v. Commissioner of Income-tax-1 [2022] 143 taxmann.com 178 (SC).
9. Accordingly, the Hon’ble Tribunal concurred with the finding of the learned CIT(A) that interest on delayed deposit of TDS and employees’ contribution was not allowable. However, since the entire disallowance had been sustained without examining the nature of each component, the matter was restored to the file of the Assessing Officer for verification of the assessee’s claim that the amount of 10,93,356/- had already been included in the amount of Rs.32,12,833/-. The Assessing Officer was directed to delete the addition of Rs. 10,93,356/-, if found to have been disallowed twice, and to allow deduction only in respect of interest paid on delayed payment of VAT/sales tax, entry tax, employer’s contribution to provident fund and service tax, while sustaining the disallowance relating to interest on delayed payment of TDS, tax-related dues and employees’ contribution. Ground No. 1 was accordingly partly allowed for statistical purposes. With respect to Ground No. 2 relating to disallowance under Section 14A read with Rule 8D, the Hon’ble Tribunal observed that the Assessing Officer had made an additional disallowance of Rs. 2,39,177/- after computing the total disallowance at Rs.3,38,558/-, as against the suo motu disallowance of Rs. Rs.99,381/- made by the assessee. The learned CIT(A) upheld the application of Rule 8D but directed exclusion of investments in National Saving Certificates (NSCs) on the ground that the income arising therefrom was taxable.
10. The Hon’ble Tribunal further observed that the assessee had contended that no exempt income had been earned during the relevant previous year and that the voluntary disallowance had been made due to incorrect professional advice. Since the computation of income was not available on record, the Tribunal directed the Assessing Officer to verify whether any exempt income had in fact been earned. It was further directed that if no exempt income was found to have been earned, the disallowance under Section 14A should be deleted in accordance with the decision of the Hon’ble Calcutta High Court in Principal Commissioner of Income-tax v. REI Agro Ltd.[2022] 140 taxmann.com 71 (Calcutta), which held that disallowance under Section 14A can be made only with reference to investments yielding exempt income. The disallowance was directed to remain restricted to the amount voluntarily disallowed by the assessee in the absence of evidence of any other exempt income. Ground No. 2 was accordingly partly allowed for statistical purposes.
11. The Hon’ble Tribunal lastly observed that Ground No. 3 was not pressed by the assessee and was accordingly dismissed. Consequently, the appeal of the assessee was partly allowed for statistical purposes.
