Patna ITAT: Interest on Delayed Payment of Sales Tax, Service Tax & Employer’s PF Contribution Allowable; TDS Interest Not Deductible

Pure Spiritss Limited Vs ACIT (ITAT Patna)

Patna ITAT: Interest on Delayed Payment of Sales Tax, Service Tax & Employer’s PF Contribution Allowable; TDS Interest Not Deductible

The Patna ITAT partly allowed the assessee’s appeal by drawing a clear distinction between compensatory and non-deductible statutory interest under section 37(1). The Tribunal held that interest on delayed payment of sales tax/VAT, service tax and employer’s PF contribution is compensatory in nature and allowable as a business deduction, whereas interest on delayed remittance of TDS and employees’ PF contribution is not deductible, as such payments do not relate to the computation of business profits and cannot be regarded as expenditure incurred wholly and exclusively for business. The Tribunal also directed the Assessing Officer to verify the assessee’s claim that a portion of the interest had been disallowed twice, and to grant appropriate relief if the claim was found to be correct.

On the issue of section 14A read with Rule 8D, the Tribunal observed that if the assessee had not earned any exempt income during the relevant assessment year, no disallowance under section 14A could survive. The matter was restored to the Assessing Officer to verify whether any exempt income had actually been earned and, if not, to delete the disallowance in line with the Calcutta High Court decision in PCIT v. REI Agro Ltd. The appeal was accordingly partly allowed for statistical purposes.

Cases Discussed

• Principal Commissioner of Income-tax vs. REI Agro Ltd. (Calcutta High Court), [2022] 140 taxmann.com 71 (Calcutta)
• Checkmate Services (P.) Ltd. v. Commissioner of Income-tax-1 (Supreme Court of India), [2022] 143 taxmann.com 178 (SC)
• Velankani Information Systems Ltd. v. DCIT (ITAT Bangalore), [2018] 97 taxmann.com 599 (Bangalore – Trib.) / [2018] 173 ITD 19 (Bangalore – Trib.)
• Bharat Commerce & Industries Ltd. vs. Commissioner of Income-tax (Supreme Court of India), [1998] 98 Taxman 151 (SC) / [1998] 230 ITR 733 (SC) / [1998] 145 CTR 340 (SC)
• East India Pharmaceutical Works Ltd. vs. Commissioner of Income-tax (Supreme Court of India), [1997] 91 Taxman 185 (SC) / [1997] 224 ITR 627 (SC) / [1997] 139 CTR 372 (SC)
• Lachmandas Mathuradas vs. Commissioner of Income-tax (Supreme Court of India), [2002] 122 Taxman 828 (SC) / [2002] 254 ITR 799 (SC) / [2002] 174 CTR 579 (SC)
• CIT v. Mysore Electrical Industries Ltd. (Karnataka High Court), [1992] 196 ITR 884 (Kar.)
• CIT Vs. Chennai Properties & Investment Ltd. (Madras High Court), [1999] 239 ITR 435 (Mad.)
• Mahalakshmi Sugar Mills Co. v. CIT (Supreme Court of India), [1980] 123 ITR 429
• Triveni Engg. Works Ltd. v. CIT (Allahabad High Court – Full Bench), [1983] 144 ITR 732 / 15 Taxman 452 (All.) (FB)
• Saraya Sugar Mills (P.) Ltd. v. CIT (Allahabad High Court), [1979] 116 ITR 387 (All.)
• Shalimar Fabricators Pvt. Ltd. vs. ITO (ITAT Kolkata), ITA Nos. 386 & 428/KOL/2021
• Narayani Ispat Pvt. Ltd.
• Analogics Tech India Limited vs. DCIT (ITAT Hyderabad)

FULL TEXT OF THE ORDER OF ITAT PATNA

This appeal filed by the assessee is against the order of the Addl/JCIT(A)- Jodhpur [hereinafter referred to as Ld. Addl/JCIT(A)1 passed u/s 250 of the Income Tax Act, 1961 (hereinafter referred to as `the Act’) for AY 2017-18 dated 10.03.2026.

2. The assessee is in appeal before the Tribunal raising the following grounds of appeal:

“1. The Ld. CIT(A) NFAC erred in law and on the facts of the case to affirm the order of the assessing officer on the disallowance made us 37(1) of the Act for Rs. 43,06,189. The Ld. CIT(A) NFAC erred in adjudicating and affirming with AO that interest on late payments of statutory dues, are penal in nature and not penury in nature.

2. The Ld. CIT(A) NFAC erred in law to partly upheld that as per calculation under rule 8D, as applied by AO would be @1% of the average annual value of entire investment, except investments in NSC, not @1% on the annual average of monthly averages of investments on which exempt income is earned.

3. The appellant craves leave to add, alter, amend, modify or omit any of the grounds during the course of hearing and to produce the documentary evidence as permitted under rule 46A of the income tax Rules 1962.”

3. Brief facts of the case are that the assessee had filed the return of income for AY 2017-18 on 29.08.2017 showing total income at 24,88,26,661/-. The Assessing Officer (hereinafter referred to as Ld. ‘AO’) noted various discrepancies and made an addition of Z7,40,611/ – u/s 40(a)(ia) of the Act for violation of TDS provisions, disallowed a sum of 243,06,189/- u/s 37 of the Act by treating the interest on delayed payment of statutory dues as penal in nature, and made a further disallowance of 22,39,177/- u/s 14A of the Act r.w.s. Rule 8D for investments yielding exempt income and determined the total income of the assessee at 25,41,12,640/-. Aggrieved with the assessment order, the assessee filed an appeal before the Ld. Addl/JCIT(A), who examined the facts and the disallowances made and directed the Ld. AO to verify the claim of the assessee regarding the deduction and deposit of TDS for the disallowance made u/s 40(a)(ia) of the Act and allowed this ground of appeal for statistical purposes. Regarding the disallowance of 243,06,189/- u/s 37(1) of the Act, the Ld. Addl/JCIT(A) upheld the Ld. AO’s view that the interest on delayed payment of statutory dues is penal in nature and not allowable as a business expenditure. On the issue of disallowance u/s 14A of the Act r.w.s. Rule 8D, the Ld. Addl/JCIT(A) held that the Ld. AO correctly applied the rule but directed the Ld. AO to exclude the investments in National Saving Certificates from the computation as the interest income arising from them is taxable. Accordingly, the Ld. Addl/JCIT(A) modified the order of the Ld. AO and partly allowed the appeal of the assessee.

4. Aggrieved with the order of the Ld. Addl/JCIT(A), the assessee has filed the appeal before the Tribunal.

5. Rival submissions were heard and the record and the submissions made have been examined. Ground No. 1 relates to the disallowance of 243,06,189/- u/s 37(1) of the Act on account of interest on late payment of statutory dues. Before us, the Ld. AR drew our attention to page 2 of the assessment order. The Ld. AO had asked the assessee to explain with evidence the expenditure of Z10,93,356/ – in the profit and loss account claimed under the head financial cost. The Ld. AO also noted that the assessee had debited an amount of 232,12,833/- as interest on delayed payments. During the course of the assessment proceedings, the assessee was asked to explain with evidence why the said expenditure should not be disallowed. The assessee responded that the interest on delayed payments includes interest payable due to late payments of statutory dues, mainly sales tax, service tax and state excise and also includes sales tax demand raised during the year of assessment. The Ld. AO inferred that the assessee accepted that the said interest payment was for delay in payment of statutory dues, which itself is in violation of law and consequently, he held the expenditure as penal in nature which was required to be disallowed as per Explanation 1 to sub-section (1) of section 37 of the Act. There was an amount of Z10,93,356/ – which related to prior period expenditure as per the details furnished by the assessee during the course of the assessment proceeding, which were also held to be penal in nature as in response to the query raised, the assessee did not deny that the said payments were penal in nature. The Ld. AO held that the interest payments were for delayed payments of statutory dues which is an offence and in violation of law. Accordingly, the said expenditure was also held to be penal in nature and, therefore, a sum of 243,06,189/- was disallowed u/s 37(1) of the Act read with Explanation 1 thereof. It was submitted by the Ld. AR that the expenditure incurred on account of interest on deposit of statutory dues was an allowable expenditure as it was not prohibited by law, but was compensatory in nature. The Ld. DR relied upon the order of the Ld. CIT(A) and requested that the same may be upheld.

6. We have considered the submissions made, gone through the facts of the case and perused the record and the order of the Ld. CIT(A). Before the Ld. CIT(A), the assessee had submitted that the sum of 232,12,833/- paid during the year as interest on delayed payment of sales tax, TDS, service tax, state excise, etc., was compensatory in nature and not penal in nature and is allowable as a business expenditure u/s 37(1) of the Act. Various case laws were also cited. As regards the sum of Z10,93,356/-, it was submitted that this amount had been disallowed twice as these expenses being prior period expenses were already included in the amount mentioned at 232,12,833/-. The Ld. CIT(A) considered the submission of the assessee as well as the case laws relied upon and stated that since the payments were for delayed payments of statutory dues, which is a violation of law, the said expenditure is penal in nature and hence, it is not allowable as per provisions of section 37(1) of the Act. He further relied upon the decision of ITAT Hyderabad Bench in the case of Analogics Tech India Limited vs. DCIT (citation not mentioned), wherein it has been held that the interest payment on late payment of TDS is not compensatory in nature and is not allowable as a deduction u/s 37(1) of the Act. Therefore, the disallowance of 243,06,189/- made by the Ld. AO was confirmed.

7. It is imperative at this stage to examine Explanation 1 to section 37(1) of the Act as reproduced hereunder:

“37. (1) Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head “Profits and gains of business or profession”.

Explanation 1.—For the removal of doubts, it is hereby declared that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure.”

8. The assessee has filed written submissions before us, along with a paper book in the course of the appeal, which are extracted as under:

“C. The AO sought details of interest paid, as appearing in the interest ledger. We quote the relevant part of the assessment order

D. The assessee submitted –

Out of which the following were interest on delayed payments of statutory dues

E. Out of above the highlighted interest are on late payments of statutory dues amounted to Rs. 32,18,833. The AO stated in his order:- PAGE 2 PARA B OF ASSTT ORDER

In its P & L account under the head Finance Cost assessee has debited an amount of Rs.32,12,833/ – as Interest on delayed payments. During the course of assessment proceedings assessee was asked to explain with evidences why the said expenditure should not be disallowed. In response, assessee vide letter dated 25.11.2019 submitted that interest on delayed payments includes interest payable due to late payments of statutory dues mainly sales tax, service tax and state excise. It also includes sales tax demand raised during the year on assessment. From the submission of assessee it is evident that assessee also accepts that the said interest payment is for delay in payment of statutory dues which itself is violation of law. Accordingly the said expenditure is penal in nature and required to be disallowed.

F. The assessee during the assessment proceeding submitted ledgers of all such payments with narrations. The AO did not accept the explanation of the assessee and added the interest Rs.32,18,833 us 37(1) PAGE 3 PARA B OF ORDER

In its submission assessee did not deny that the said payments were penal in nature. From the observation of the said expenditure it is clear that the said interest payments are for delay in payment of statutory dues which itself is violation of law. Accordingly the said expenditure is penal in nature and required to be disallowed. As per the provisions of section 37 of IT. Act 1961, any expenditure which is penal in nature is not an allowable expenditure. Accordingly, said expenditure of Rs. 43,06,189/ – (32,12,833 10,93,356) is required to be disallowed as per the provisions of section 37 of I.T. Act 1961. Considering the aforesaid facts and discussion, Rs. 43,06,189/ – is disallowed and added back to the total income of the assessee as per the provisions of sec. 37 of I.T. Act, 1961.

G. The fact of another addition of Rs. 10,93,356 comes on the issue of expenses of prior period expenses of Rs. 16,11,130 disclosed in the Tax Audit report as Annexure E. PAGE NO 98 OF PB

H. Out of which Rs. 10,93,356 were in nature of interest on statutory dues and rest Rs. 5,1 7,774 were principal amount of statutory dues, both of principal and interest of earlier years accrued and paid in this financial year.

I. Whereas, Rs.32,12,833 (Supra) includes this amount of Rs. 10,93,356 interest on late payment of statutory dues earlier years added with Rs. 21,19,477 interest on late payment of statutory dues of current financial year 2016-17.

J. Rs. 10,93,356 was not over and above Rs.32,12,833, but was already included in it. As the AO sought details on different context, same were furnished. However, without going into nature and purpose of details submitted, AO added Rs. 10,93,356 twice, one as part of disallowance of Rs.32,12,833 and again as Rs. 10,93,356 from expenses related to earlier years.  PAGE 103 OF PB

K. The Ld. CIT(A) NFAC in their order upheld the decision of the AO

I have considered the submission of the appellant as well as case law. The above payments are delayed in payment of statutory dues which is violation of law. The said expenditure is penal in nature, hence, it is not allowable as per provisions of section 37 of the L.T. Act. The Honourable ITAT Hyderabad in the case of Analogics Tech India Limited Vs DCIT (ITAT Hyderabad) held that interest payment on late payment of TDS is not compensatory in nature and is not allowable as deduction u/ s 3 7(1) of the Income Tax Act. Since, the above payments are penal in nature, hence, they are not allowable as expenditure. Thus, disallowance of Rs.43,06,189/ – made by the AO is confirmed.  PAGE 19-21 PARA 6.6 OF APPELLATE ORDER

L. Before arguing on admit-ability of interest paid on statutory dues as deductible expense, we submit the payments of statutory dues are deductible on payment basis in line of provisions of section 43B.

M. The interest on West Bengal value added Tax or on Professional Tax or on Sales Tax are deductible, being compensatory in nature not Penal. The plethora of judgements have clarified the stand. Some of the decision of Apex courts in recent past as well of the jurisdictional Hon’ble ITAT are enclosed.

a. Jaykishor Chaturvedi vs_SEBI on 15 July_2025-SC

b. Consolidated Coffes Ltd Vs Ag Income tax SC

c. Shalimar Fabricators Put Ltd Kolkata vs ITO Ward6. 1 Kolkata ITAT Kolkata

d. Acit Co 3 2 Kolkata vs Narayani Sons Put Ltd on 21 August 2018-ITAT Kol

N. The appellant submit the copies of West Bengal Value added Tax 2003, to demonstrate that “interest” and “Penalty” are distinguished in nature. The former is compensatory in nature whereas the latter is punitive. PAGE 165­192 OF PB

O.  Another point of consideration is Interest on TDS us 201 should be distinguished with interest payable on late payment of Advance Tax payment. TDS is the liability to be paid to Government of deduction made from the payees account and delay in payment to Government is compensatory in nature.”

9. Before us, the Ld. AR submitted that these expenses are not penal in nature but compensatory in nature (mentioned as ‘penury’ in nature in the grounds of appeal). Our attention was drawn to page 25 of the paper book to the findings of the Coordinate Bench in the case of Shalimar Fabricators Pvt. Ltd. vs. ITO in ITA Nos. 386 & 428/KOL/2021 for AYs 2017-18 & AY 2018-19 order dated 03.03.2022 wherein at page 30, the decision of the Hon’ble Supreme Court in the case of Lachmandas Mathuradas vs. Commissioner of Income-tax [2002] 122 Taxman 828 (SC)/[2002] 254 ITR 799 (SC)/[2002] 174 CTR 579 (SC)[16-01-1997] has been distinguished to hold that the interest for the delay in payment of service tax and TDS is compensatory in nature and is not in the nature of penalty in the instant case on hand. Since the assessee has relied upon this decision of the coordinate bench, therefore, para 15 thereof, which is relevant, is extracted as under:

“15. Before us, the ld. Counsel for the assessee stated that this issue deserves to be allowed in favour of the assessee in view of the decision of this Tribunal in the case of Narayani Ispat Pvt. Ltd. (supra). We find that this Tribunal has adjudicated the very same issue observing as follows:

“7. We have heard the rival contentions of both the parties and perused the material available on record. In the instant case, AO has disallowed the interest expenses incurred by the assessee on account of late deposit of service tax and TDS after having reliance on the judgment of Hon’ble Supreme Court in the case of Bharat Commerce Industries Ltd. Vs. CIT (1998) (Supra). The relevant extract of the judgment reads as under:

FACTS

During the year under consideration, the assessee failed to pay advance tax equivalent to 75 per cent of estimated tax. The Assessing Officer levied interest under section 215 as well as under section 139. The assessee claimed that since taxes which were payable were delayed, the assessee’s financial resources increased which were available for business purposes. Hence, the interest which was paid to the Government was interest on capital that would be borrowed by the assessee otherwise. Hence, the amounts should be allowed as deduction. The revenue did not allow such deduction. The High Court affirmed the view.

On appeal to the Supreme Court:

HELD

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 or 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. Interest which is paid for delayed payment of advance tax on such income cannot be considered as expenditure wholly and exclusively for the purpose of business. Under the Act, the payment of such interest is inextricably connected with the assessee’s tax liability. If income-tax itself is not permissible deduction under section 37, any interest payable for default committed by the assessee in discharging his statutory objection under the Act, which is calculated with reference to the tax on income, cannot be allowed as a deduction. {emphasis supplied}

Therefore, it was to be held that deduction of interest levied under sections 139 and 215 would not be allowable under section 37.

In the above judgment, the claim of the assessee for interest expenses was denied as it defaulted to make the payment of advance tax as per the provisions of the Act. The advance tax is nothing but income tax only which the assessee has to pay on his income. In the instant case the default relates to the delay in the payment of advance tax and consequently interest was charged on the delayed payment of advance tax. In the above judgment the Hon’ble Apex Court held that as Income Tax paid by the assessee is not allowable deduction and therefore interest emanating from the delayed payment of income tax (advance tax) is also not allowable deduction.

However the facts of the instant case before us are distinguishable as in the case before us the interest was paid for delayed payment of service tax & TDS. The interest for the delay in making the payment of service tax & TDS is compensatory in nature. As such the interest on delayed payment is not in the nature of penalty in the instant case on hand.

The issue of delay in the payment of service tax is directly covered by the judgment of Hon’ble Apex Court in the case of Lachmandas Mathura Vs. CIT reported in 254 ITR 799 in favour of assessee. The relevant extract of the judgment is reproduced below:

“The High Court has proceeded on the basis that the interest on arrears of sales tax is penal in nature and has rejected the contention of the assessee that it is compensatory in nature. In taking the said view the High Court has placed reliance on its Full Bench’s decision in Saraya Sugar Mills (P.) Ltd. v. CIT [1979] 116 ITR 387 (All.) The learned counsel appearing for the appellant-assessee states that the said judgment of the Full Bench has been reversed by the larger Bench of the High Court in Triveni Engg. Works Ltd. v. CIT [1983] 144 ITR 732 (All.) (FB) wherein it has been held that interest on arrears of tax is compensatory in nature and not penal. This question has also been considered by this Court in Civil Appeal No. 830 of 1979 titled Saraya Sugar Mills (P.) Ltd. v. CIT decided on 29-2-1996. In that view of the matter, the appeal is allowed and question Nos. 1 and 2 are answered in favour of the assessee and against the revenue.”

In view of the above judgment, there remains no doubt that the interest expense on the delayed payment of service tax is allowable deduction.

The above principles can be applied to the interest expenses levied on account of delayed payment of TDS as it relates to the expenses claimed by the assessee which are subject to the TDS provisions. The assessee claims the specified expenses of certain amount in its profit & loss account and thereafter the assessee from the payment to the party deducts certain percentage as specified under the Act as TDS and pays to the Government Exchequer. The amount of TDS represents the amount of income tax of the party on whose behalf the payment was deducted & paid to the Government Exchequer. Thus the TDS amount does not represent the tax of the assessee but it is the tax of the party which has been paid by the assessee. Thus any delay in the payment of TDS by the assessee cannot be linked to the income tax of the assessee and consequently the principles laid down by the Hon’ble Apex Court in the case of Bharat Commerce Industries Ltd. Vs. CIT (1998) reported in 230 ITR 733 cannot be applied to the case on hand. Thus, in our considered view, the principle laid down by the Hon’ble Supreme Court in the case of Bharat Commerce Industries Ltd. (supra) is not applicable in the instant facts of the case. Thus, we hold that the Assessing Officer in the instant case has wrongly applied the principle laid down by the Hon’ble Supreme Court in the case of Bharat Commerce Industries Ltd. (supra). We also find that the Hon’ble Supreme Court in the case of Lachmandas Mathura (Supra) has allowed the deduction on account of interest on late deposit of sales tax u/s 37(1) of the Act. In view of the above, we conclude that the interest expenses claimed by the assessee on account of delayed deposit of service tax as well as TDS liability are allowable expenses u/s 37(1) of the Act. In this view of the matter, we find no reason to interfere in the order of Ld. CIT(A) and we uphold the same. Hence, this ground of Revenue is dismissed.”

10. We find that the Hon’ble Supreme Court in the case of Bharat Commerce & Industries Ltd. vs. Commissioner of Income-tax [1998] 98 Taxman 151 (SC)/[1998] 230 ITR 733 (SC)/[1998] 145 CTR 340 (SC)[05-03-1998] have very categorically held as under:

“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 or 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. Interest which is paid for delayed payment of advance tax on such income cannot be considered as expenditure wholly and exclusively for the purpose of business.”

11. Similarly, in the case of Lachmandas Mathuradas vs. Commissioner of Income-tax [2002] 122 Taxman 828 (SC)/[2002] 254 ITR 799 (SC)/[2002] 174 CTR 579 (SC)[16-01-1997], it has been held that In taking decision the High Court had placed reliance on its Full Bench’s decision in Saraya Sugar Mills (P.) Ltd. v. CIT [1979] 116 ITR 387 (All.). The said judgment of the Full Bench had been reversed by the larger Bench of the High Court in Triveni Engg. Works Ltd. v. CIT [1983] 144 ITR 732/ 15 Taxman 452 (All.) (FB), wherein it had been held that interest on arrears of tax is compensatory in nature and not penal. That question had also been considered by the Supreme Court in Saraya Sugar Mills (P.) Ltd. v. CIT [Civil Appeal No. 830 of 1979 dated 29-2-1996]. In that view of the matter, the appeal was to be allowed.

12. The Ld. AR has also filed additional case laws after the conclusion of the hearing but the same are not related to the facts of the case. However, we note that in the case of M/s. New Modern Bazaar Departmental Store Pvt. Ltd Vs. ITO, Ward : 31 (1) New Delhi order dated 08/04/2021 [ITAT DELHI BENCH “E”: NEW DELHI], the issue has been elaborately discussed and interest on delayed payment of TDS is held to be not an allowable expenditure; the relevant extract from the order being as under:

7. We have carefully considered the rival contentions. The above issue has already been considered by Hon’ble Madras High Court in CIT Vs. Chennai Properties & Investment Ltd. (1999) 239 ITR 435 (Mad.) wherein it has been held that interest under Section 201(1A) of the Act paid by the assessee does not assume the character of business expenditure and also cannot be regarded as compensatory payment. The above decision of the Hon’ble Madras High Court has also been dealt with exclusively by the various benches of the ITAT, specifically in Velankani Information Systems Ltd. V DCIT [2018] 97 taxmann.com 599 (Bangalore – Trib.)/[2018] 173 ITD 19 (Bangalore – Trib.) wherein considering various decisions of the Tribunal had followed the decision of the Hon’ble Madras High Court in CIT Vs. Chennai Properties & Investment Ltd. (supra) as under :-

“21. As far as delay in remittance of tax deducted at source u/ s. 201(1A) of the Act is concerned, we find that the Hon’ble Madras High Court has taken a view that interest paid u/ s. 201(1A) is also in the nature of tax and notwithstanding the fact that it is not the tax liability of the assessee, the same cannot be allowed as a deduction. The following were the relevant observations of the Hon’ble Madras High Court:—

“14. As already noticed the payment of interest takes colour from the nature of the levy with reference to which such interest is paid and the tax required to be but not paid in time, which rendered the assessee liable for payment of interest was in the nature of a direct tax and similar to the income-tax payable under the Income-tax Act. The interest paid under Section 201(1A) of the Act, therefore, would not assume the character of business expenditure and cannot be regarded as a compensatory payment as contended by learned counsel for the assessee.

15. Counsel for the assessee in support of his submission that the interest paid by the assessee was merely compensatory in character besides relying on the case of Makalakshmi Sugar Mills Co. also relied on the decision of the apex court in the cases of Prakash Cotton Mills Put Ltd. v. CIT [1993] 201 ITR 684; Malwa Vanaspati and Chemical Co. v. CIT [1997] 225 ITR 383 and CIT v. Ahmedabad Cotton Manufacturing Co. Ltd. [1994] 20517’R 163. In all these cases, the court was concerned with an indirect tax payable by the assessee in the course of its business and admissible as business expenditure. Further liability for interest which had been incurred by the assessee therein was regarded as compensatory in nature and allowable as business expenditure.

16. The ratio of those cases is not applicable here. Income-tax is not allowable as business expenditure. The amount deducted as tax is not an item of expenditure. The amount not deducted and remitted has the character of tax and has to be remitted to the State and cannot be utilised by the assessee for its own business. The Supreme Court in the case of Bharat Commerce and Industries [1998] 230 ITR 733, rejected the argument advanced by the assessee that retention of money payable to the State as tax or incometax would augment the capital of the assessee and the expenditure incurred, namely, interest paid for the period of such retention would assume character of business expenditure. The court held that an assessee could not possibly claim that it was borrowing from the State, the amounts payable by it as income-tax, and utilising the same as capital in its business, to contend that the interest paid for the period of delay in payment of tax amounted to a business expenditure”. (emphasis supplied)

22. The decision cited by the ld. counsel for the assessee of Kolkata Bench of the Tribunal on the issue is contrary to the decision of the Hon’ble Madras High Court. Though the decision of the Tribunal is later in point of time, judicial discipline demands that the decision of the Hon’ble Madras High Court is to be followed. It is also worthwhile to mention that the Kolkata Bench of Tribunal in the case of Narayani Ispat (P.) Ltd. (supra), which was cited by the ld. counsel for the assessee, did not consider or did not have an occasion to consider the decision of the Hon’ble Madras High Court in the case of Chennai Properties and Investment Ltd. (supra). In these circumstances, we follow the decision of the Hon’ble Madras High Court & uphold the order of the CIT(A) insofar as it relates to disallowance of interest on delayed remittance of tax deducted at source u/ s. 201(1A) of the Act.”

8. In view of this, we do not find any merit in the appeal of the assessee and hold that interest payment on late payment of tax at source is not eligible business expenditure for deduction and it is not compensatory in nature.

12.1 Thus, on the above facts and in view of the decisions discussed, while the interest on delayed payment of sales tax can be considered as the interest paid for preserving or promoting the business of the assessee, as sales tax is an expenditure which is directly relatable to the computation of profit, and the provisions of section 43B of the Act also mention allowability of such expenditure payment basis and is a deduction otherwise allowable under this Act; however, the same cannot be said to be applicable for income tax or even tax deducted at source, as for the purpose of TDS the assessee steps into the shoes of a drawing and disbursing officer vis-à-vis the payee, and the payment is in no way connected with preserving or promoting the business of the assessee. As regards interest for the default in non-compliance with the provisions of TDS, the liability is of the principal officer and u/s 37(1) of the Act, only the expenditure which is laid out and expended wholly and exclusively for the purpose of business or profession is to be allowed. Therefore, neither TDS nor interest on TDS can be said to be laid out and expended wholly and exclusively for the purpose of business or profession nor the TDS is an allowable expenditure, therefore, the interest on the same is disallowed. Further, in the case of Bharat Commerce & Industries Ltd. (supra), interest levied on the assessee for delay in filing the return is held to be not allowable as a business expenditure. Similarly, interest payment on money borrowed for payment of income tax or advance tax could not be allowed as a deduction as held in the case of East India Pharmaceutical Works Ltd. vs. Commissioner of Income-tax [1997] 91 Taxman 185 (SC)/[1997] 224 ITR 627 (SC)/[1997] 139 CTR 372 (SC)[11-03-1997]. That being so, relying upon the principle laid down by the Hon’ble Supreme Court in the case of Bharat Commerce Industries Limited (supra) and CIT Vs. Chennai Properties & Investment Ltd. (supra), we hold that interest on delayed payment of TDS, though not in the nature of penalty, nevertheless is not liable to be deducted as an expenditure, as TDS is payable after it is deducted by the assessee and has no connection with the computation of profit of the assessee.

13. Further, in the case of Lachmandas Mathuradas (supra), the interest on arrears or on outstanding balance of sales tax being compensatory in nature is held to be an admissible deduction. Service tax being similar in nature to sales tax for the services rendered, which is collected by the assessee from the recipient, and since the service tax paid is indirect tax and deductible as per law, therefore, the interest on delayed payment of service tax can be said to be compensatory in nature and therefore, the same is allowed.

14. Similarly, where the assessee failed to pay the contribution under the provisions of the Employees’ Provident Funds Act to the concerned trust and consequently, it had to pay interest thereon, interest so paid by the assessee was not penalty and, therefore, was allowable as deduction as has been held in the case of CIT v. Mysore Electrical Industries Ltd. [1992] 196 ITR 884 (Kar.) wherein The compensatory payment has been held to be deductible, because it is an accretion to the main payment as observed by the Supreme Court in Mahalakshmi Sugar Mills Co. v. CIT [1980] 123 ITR 429. However, it is to be examined whether the interest relates to employees’ or employer’s contribution to PF as delayed payment of employees’ contribution is not allowable as a deduction as per the decision of the Hon’ble Supreme Court in the case of Checkmate Services (P.) Ltd. v. Commissioner of Income-tax-1 [2022] 143 taxmann.com 178 (SC) wherein it has been held as under:

• The distinction between an employer’s contribution which is its primary liability under law – in terms of section 36(1)(iv), and its liability to deposit amounts received by it or deducted by it (Section 36(1)(va)) is, thus crucial. The former forms part of the employers’ income, and the later retains its character as an income (albeit deemed), by virtue of section 2(24)(x) – unless the conditions spelt by Explanation to section 36(1)(va) are satisfied i.e., depositing such amount received or deducted from the employee on or before the due date. In other words, there is a marked distinction between the nature and character of the two amounts – the employer’s liability is to be paid out of its income whereas the second is deemed an income, by definition, since it is the deduction from the employees’ income and held in trust by the employer. This marked distinction has to be borne while interpreting the obligation of every assessee under section 43B. [Para 53]
• The reasoning in the impugned judgment that the non obstante clause would not in any manner dilute or override the employer’s obligation to deposit the amounts retained by it or deducted by it from the employee’s income, unless the condition that it is deposited on or before the due date, is correct and justified. The non obstante clause has to be understood in the context of the entire provision of section 43B which is to ensure timely payment before the returns are filed, of certain liabilities which are to be borne by the assessee in the form of tax, interest payment and other statutory liability. In the case of these liabilities, what constitutes the due date is defined by the statute. Nevertheless, the assessees are given some leeway in that as long as deposits are made beyond the due date, but before the date of filing the return, the deduction is allowed. That, however, cannot apply in the case of amounts which are held in trust, as it is in the case of employees’ contributions- which are deducted from their income. They are not part of the assessee employer’s income, nor are they heads of deduction per se in the form of statutory pay out. They are others’ income, monies, only deemed to be income, with the object of ensuring that they are paid within the due date specified in the particular law. They have to be deposited in terms of such welfare enactments. It is upon deposit, in terms of those enactments and on or before the due dates mandated by such concerned law, that the amount which is otherwise retained, and deemed an income, is treated as a deduction. Thus, it is an essential condition for the deduction that such amounts are deposited on or before the due date. If such interpretation were to be adopted, the non obstante clause under section 43B or anything contained in that provision would not absolve the assessee from its liability to deposit the employee’s contribution on or before the due date as a condition for deduction. [Para 54]

15. Since the delayed payment of employees’ contribution is an income and is not allowable as a deduction even on payment basis under section 43B of the Act, therefore, following the principle laid down in Bharat Commerce & Industries Ltd. (supra) Mahalakshmi Sugar Mills Co. v. CIT [1980] 123 ITR 429 (supra), the same cannot be said to be laid out or expended wholly and exclusively for the purpose of the business or compensatory in nature.

16. Therefore, we have no hesitation in concurring with the view of the Ld. CIT(A) that the interest on delayed deposit of TDS and delayed payment of employees’ contribution is not an allowable expenditure. However, since the entire disallowance has been confirmed, we set aside the remaining findings of the Ld. CIT(A) on this issue and remand this issue before the Ld. AO, who shall examine the expenditures including the claim that the sum of Z10,93,356/- has already been included in the figure of 232,12,833/-, and if it is found to be so, delete the addition of Z10,93,356/- made and for the rest of the amount, only the interest paid on late deposit of VAT/ sales tax, entry tax, PF contribution of employer and service tax shall be allowed and the rest of the amount relating to interest on late deposit of TDS and other dues related to tax etc. and employees’ contribution is directed to be disallowed. Hence Ground No. 1 of the appeal is partly allowed for statistical purposes.

17. Ground No. 2 relates to the disallowance made u/s 14A of the Act read with Rule 8D of the Income Tax Rules, 1962. The Ld. AO made the disallowance of 22,39,177/- as against the sum of Z99,381/- disallowed by the assessee suo moto, as according to him the disallowance of 23,38,558/- was worked out as per Rule 8D. The Ld. CIT(A) upheld the disallowance but directed exclusion of the same on account of NSC. Since the interest on NSC is not exempt, this ground was partly allowed as per para 6.9 extracted as under:

“6.9 The appellant has suo-moto disallowed of Rs.99,381/ – u/ sl4A of the I.T. Act. The AO had re-calculated the disallowance u/s 14A r.w. Rule 8D of the IT. Rules, 1962 amounting to Rs. 3,38,558/- which is of the average of annual investments made by the appellant and has added Rs. 2,39,177/ – (338558 -99381) u/s 14A for the year under consideration. As per the rule 8D mentioned above, the AO has rightly applied 1% of the annual average of investment for calculation u/s 14A r.w.r. 8D.

However, the AO has included investment of NSC for calculation of 14A r. w. r. 8D, interest income arising out of the above mentioned investment is not exempt and taxable in nature. Therefore, such investment should be excluded for computing the disallowance u/s 14A r.w.r. 8D. Therefore, the AO is directed to recompute the disallowance u/s 14A r. w. r. 8D.

Therefore, ground No. 4 is partly allowed.”

17. Before us the assessee has filed submission in this regard as under:

“R. The assessee submitted that the total investments as on 31.03.2017 are consisting ofi-

PAGE 129 OF PB

S. The income from NSC is not exempt. The gain on sale of shares are offered for tax. There is no other income. No income is claimed as exempt.

T. The Ld. CIT(A) held:-

6.9 The appellant has suo-moto disallowed of Rs.99,381/- u/ sl4A of the I.T. Act. The AO had re-calculated the disallowance u/s 144 r.w. Rule 8D of the IT. Rules, 1962 amounting to Rs. 3,38,558/- which is of the average of annual investments made by the appellant and has added Rs. 2,39.177/ – (338558-99381) w/s 14A for the year under consideration. As per the rule 8D mentioned above. the AO has rightly applied 1% of the annual average of investment for calculation w/s 14A r.w. r. 8D. However, the AO has included investment of NSC for calculation of 144 r.w.r. 8D, interest income arising out of the above mentioned investment is not exempt and taxable in nature. Therefore, such investment should be excluded for computing the disallowance w/s 144 r.w.r. 8D. Therefore, the AO is directed to re-compute the disallowance u/s 144 r.w.r. 8D.

PAGE 25 PARA 6.9 OF APPELLATE ORDER

U. The appellant plead that apart from exclusion of NSC from the calculation under rule 8D r.w.s 14A, as directed by Ld. CIT(A) NFAC; the AO be directed to re-compute the disallowance based on investments which have fetched exempt income during the year, if any.

V. The appellant rely upon the following judgements of Hon’ble Supreme Court and jurisdictional ITAT on the issue:-

a. South Indian Bank vs CIT SC Judgement 09-Sep-2021

b. Max-opp-Investment-Ltd. -Vs. -CIT-Supreme-Court-of-India

c . Sreeleathers Limited, Kolkata vs D. C.I. T., Circle 8(2)„ Kolkata on 30 October, 2025

d. CHNVHB Health Insurance Co. Ltd vs ACIT, Circle-6(1), Kol ITA No 511 Kol 2025″

18. We have considered the submission made. The Ld. DR relied upon the order of the Ld. CIT(A) and requested that the same may be upheld. Since the assessee had itself disallowed the sum of 299,381/- u/s 14A, while at the same time in paper book page 16 it is mentioned that there was no exempt income, it was queried by the Bench as to why the disallowance was made when there was no exempt income, the Ld. AR submitted that the same was done on account of incorrect advice given to the assessee by the then consultant. The Ld. AR drew our attention to page 16 of the paper book being the balance sheet. However, the computation of the income shown in the return of income has not been filed. Therefore, the Ld. AO is directed to verify whether there was any exempt income and in case there was no exempt income, the disallowance made u/s 14A is directed to be excluded in view of the decision in the case of Principal Commissioner of Income-tax vs. REI Agro Ltd. [2022] 140 taxmann.com 71 (Calcutta)[07-03-2022] that the disallowance can be done only by taking into consideration the investment which has given rise to that income which does not form part of total income. Therefore, the Ld. AO is directed to delete this addition after verifying that there was no exempt income which was earned by the assessee and the same is directed to be restricted to that suo moto disallowed by the assessee in the absence of any evidence that any other exempt income was earned. Hence, Ground No. 2 is also partly allowed for statistical purposes.

19. Ground No. 3 was not pressed, hence, the same is dismissed.

20. In the result, the appeal filed by the assessee is partly allowed for statistical purposes.

Order pronounced in the open Court on 13th July, 2026.