Income Tax: Interest on late payment of TDS disallowable u/s 40(a)(ii): ITAT

Interest on TDS

Sec. 201( 1 A) of the Income Tax Act,1961 mandates Assessee to pay simple interest @ 1 .5 % per month or part of the month in case of delay in remittance of TDS amount deducted, to the treasury of the Central Government. The pertinent question arises as to whether the interest paid on late payment of TDS can be claimed as expenditure for determining the taxable income.

It is pertinent to mention here that for claiming an expenditure and arriving at the taxable income, the Income Tax Act, 1961 fundamentally stipulates twin conditions viz. allowance of expenditure as per Sec.30 to 37 of the Act and non- allowable expenditure as per section 40 , 43 B.

Section 40(a)(ii) of the Income Tax Act, 1961 disallows any sum paid on account of any rate or tax levied on the profits or gains of any business or profession or assessed at a proportion of, or otherwise on the basis of, any such profits or gains. Now the question arises as to whether interest paid on delayed deposition of TDS is covered under disallowance of Section 40(a)(ii) or not. In this regard there is a latest ruling of ITAT which is discussed as under:

The Pune bench of the Income Tax Appellate Tribunal (ITAT) in its recent ruling in the case of Rajendra Sukhdev Mirgane, has held that the interest on late payment of TDS cannot be allowable as deduction under section 40(a)(ii) of the Income Tax Act, 1961.

The assessee, Rajendra Sukhdev Mirgane, is a Builder and Contractor, who filed the return of income declaring total income at Rs.2.18 crore. During the course of assessment proceedings, the Assessing Officer (AO) observed that the assessee debited interest of Rs.3,13,414/- on late payment of TDS. This amount was not allowed as deduction, which view got countenanced in the first appeal. Aggrieved thereby, the assessee has come up in appeal before the Tribunal

The ITAT after hearing the rival submissions and going through the relevant material on record, noted that it is an admitted position that the assessee was required to deduct and pay tax at source. There
was delay in making the payment of tax, which led to the charging of interest by the Income-tax Department to the tune of Rs.3,13,414/-.

Shri R.S. Syal, Vice President and Shri Partha Sarathi Chaudhury, Judicial Member accordingly upheld the order of AO and adjudged that neither the amount of income-tax nor interest on income-tax (TDS in instant case) can be allowed as deduction, which is strictly prohibited in terms of section 40(a)(ii) of the Act.

It is further pertinent to mention here that The Income Tax Appellate Tribunal ( ITAT), Delhi Bench in the case of M/s. New Modern Bazaar Departmental Store Pvt. Ltd. had held that the interest on Late Payment of TDS does not constitute Business Expenditure. In this case the assessee argued before the ld. CIT( A) that interest on late deposit of TDS is compensatory and not penal in nature. The ld. CIT( A) held that interest paid under the provisions of the Act is not a deductible expenditure, not compensatory in nature. Thus, he confirmed the action of the Assessing Officer. The assessee in this case had unsucessfully submitted that the interest is compensatory in nature and a part of business operations of the assessee. Had the same amount has been taken as loan from a bank, the interest paid on the same anyway would have been allowed as deduction u/s 36 . The Revenue had successfully submitted that interest on late deposit of TDS is neither an expenditure wholly and exclusively incurred for the purpose of business and further it is a payment, which is in the form of tax so it is not an allowable expenditure.

READ / DOWNLOAD ORDER:

Rajendra_Sukhdev_MirganeTW.pdf

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One thought on “Income Tax: Interest on late payment of TDS disallowable u/s 40(a)(ii): ITAT

  1. It is wrong. The interest on late payment is definitely compensatory in nature. Suppose assessee takes loan to pay TDS on time then no interest on TDS but on loan & that would be allowable.

    In another scenario because of late payment of TDS assessee’s other interest cost got reduced…there IT dept. doesn’t allow to increase the interest.

    Thire scenario if assessee had deposit maturing after TDS due datea & he didn’t break it as he may loose… so what of interest income till the actual payment of TDS from due date… Will IT dept allow to reduce income. The stand is totally unjustified.

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