A division bench of the Delhi ITAT held that penalty paid in connection with sales tax demand is not compensatory in nature, and therefore, not allowable as business expenditure under section 37 of the Income Tax Act, 1961.
In the instant case, the Assessee paid penalty amount of Rs.86,72,759/- for delay in remitting sales tax within the prescribed time. While filing income tax returns, the assessee claimed deduction of expenditure paid in respect of interest and penalty paid on tax demand. However, the Assessing Officer rejected the claim finding that penalties have been levied in addition to the tax and interest payable by the assessee and therefore same were not compensatory in nature and therefore, not allowable in terms of Explanation -1 to section 37 of the Act.
During the appellate proceedings, the assessee contended that though it was termed as ‘penalty’, it was in the nature of interest for compensating the Commercial Tax Department for delay in the paying taxes due beyond the stipulated period and, thus, it was allowable in terms of Explanation -1 below section 37 of the Act.
The bench noticed the Apex Court decision in Swadeshi Cotton Mills Vs. CIT Ltd wherein it was held that, ‘where the amount paid is partly penal and partly compensatory, the amount to the extent that it is compensatory could be allowed as deduction’.
Analyzing the relevant provisions of the Jharkhand VAT Act, the bench observed that “It is evident from clear language of the relevant section that the penalty levied is not compensatory in the nature, as it is for default of failure to furnish return under the VAT Act.”
Accordingly, the bench upheld the the findings of the Assessing Officer.
Read the full text of the Order below.
