The Hyderabad bench of the Income Tax Appellate Tribunal (ITAT) confirmed the disallowances under Section 37(1) of the Income Tax Act, 1961 for the interest paid towards late payment of Tax Deducted at Source (TDS) is not compensatory in nature.
The assessee is a company that filed its return of income declaring a total income of Rs.14,01,29,900/-. The assessee company was selected for complete scrutiny under CASS for the reason of “large expenditure by way of penalty or fine for violation of any law for the time being in force.”
During the course of the relevant financial year, the assessee was engaged in manufacturing activity and disclosed a turnover of Rs.1,60,06,46,867/-. As per the 3CD Report, the assessee had debited Rs.34,37,934/- as financial charges for late payment of income tax. However, in the Income Tax Return, the same was not disallowed under Section 37 of the Income Tax Act. On perusal of the P & L Statement filed by the assessee, it was observed that the assessee had claimed Rs.76,11,490/- under the head an “expenditure by way of statutory payments”.
The Assessing Officer was not convinced by the assessee’s replies and made the addition of Rs.2,49,233/- towards ESI & PF, Rs.12,19,936/- towards interest on TDS and Rs.26,95,847/- towards interest on GST. Accordingly, the Assessing Officer completed the assessment and passed the order under Section 143(3) read with Section 144B of the Income Tax Act.
The Authorized Representative submitted that the interest paid on delayed payments of Provident Fund (PF)/ Employee State Insurance (ESI) is compensatory in nature. It was further submitted that the nomenclature assigned to the payment by the statute should not preclude its allowance as a deduction under Section 37(1) of the Income Tax Act.
The Departmental Representative placed heavy reliance on the authorities below. To justify the conclusions reached by the Commissioner of Income Tax (Appeal) [CIT(A)] that the assessee is not entitled to claim the deduction in respect of the delayed remittance of the employees’ contribution of PF and ESI, he placed reliance on the decision reported in Checkmate Services Pvt. Ltd., Vs. CIT.
The Two-member bench comprising of R.K. Panda (Vice-President) and Laliet Kumar (Judicial member) observed that there was no merit in the submission of the assessee as the assessee has not paid the contribution under ESI and PF Act within the time provided by the said Act.
Therefore, the view of the CIT(A) was that if the delayed payment itself is not allowable, the question of allowing interest thereon is beyond dispute. Firstly, the payment made towards the ESI & PF should be allowable and thereafter, the question of paying the interest thereon would arise. Thus, the bench held that there is nothing illegality or irregularity in making the disallowance under Section 36(1)(va) of the Income Tax Act. Accordingly, the appeal of the assessee was dismissed.
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