Service Tax Delay Interest Is Compensatory and Deductible: ITAT Mumbai

Saltwater Studio LLP Vs ACIT-30(2) (ITAT Mumbai)

Summary: ITAT Mumbai partly allowed the assessee’s appeal for AY 2017-18 on the two grounds pressed before it. On limitation, the assessment order was passed on 10.12.2019 and the assessee had instructed its representative to file an appeal, but the file was misplaced and the Covid-19 pandemic and lockdown intervened. The appeal was ultimately filed on 28.08.2021. Considering the exclusion of the pandemic period and the Supreme Court’s suo motu extension of limitation, the Tribunal found that the remaining delay was around 90 days and arose from misplacement of the file/miscommunication between the assessee and its representative. It held that the assessee should not be penalised for the omission and condoned the delay. On merits, the AO had disallowed Rs.3,27,026/- representing interest paid on delayed service tax, which the assessee had accepted for taxation during assessment.

The Tribunal held that there is no estoppel against law and examined the character of the payment. Following the co-ordinate Bench ruling in Neelkamal Realtors Suburban Pvt. Ltd. Vs. ACIT, which in turn relied on Emdee Digitronics Pvt. Ltd. Vs. PCIT and M/s Naaraayani Sons Pvt. Limited, the Tribunal held that interest on delayed payment of service tax is compensatory rather than penal. Since the Service Tax law itself permits belated payment of tax along with interest, such interest is not hit by Explanation 1 to Section 37(1) of the Income Tax Act, 1961. The deduction of Rs.3,27,026/- was accordingly allowed.