Service Tax Penalty Not Deductible as Business Expenditure u/s 37(1) of Income Tax Act: ITAT [Read Order]

The Kolkata Bench of Income Tax Appellate Tribunal (ITAT) has held that the service tax penalty is not deductible as business expenditure under Section 37(1) of the Income Tax Act 1961.

The assesseeSoltek Insolation Pvt. Ltd filed return of income declaring total income. Subsequently, order under Section 143(1) was passed assessing the income of the assessee by disallowing a sum under Section 36(1)(va) of the Act on account of delayed deposit of employee’s contribution to PF & ESI, under Section 37 of the Act. Further disallowance of a sum was made by invoking the provisions of section 43B of the Act.  

Section 37(1) of the Income Tax Act deals with the general deduction related to expenditure.

The Commissioner of Income Tax Appeals (CIT(A)) dismissed the submission made by the assessee in respect of disallowance 36(1) (va) of the Act on account of delayed deposit of employee’s contribution to PF &ESI and partly allowed disallowance made under Section 37 of the Act.

 Somna Ghosh, on behalf of the assessee submitted that, the impugned disallowance must be set aside as it was bad in law by invoking the provisions of section 37(1) of the Act and against the law.

 Ranu Biswas, on behalf of the revenue submitted that, disallowed which comprised of fees on account of penalty under service tax, interest on account of service tax amounting and late fees under goods and service tax was already granted relief to the assessee in respect of interest on account of service tax and late fees under goods and service tax amounting to by following the decision of Hon’ble Supreme Court.

He further upheld the addition on account of penalty which was not covered under the decision of Hon’ble Supreme Court decision in Checkmate Services Pvt. Ltd contending that the addition made by the authorities by disallowing the claim of the assessee towards payment made on account of penalty under service tax was in the form of penal in nature and it was levied for violation of law. The Division Bench of Sonjoy Sarma, (Judicial Member) and Girish Agrawal, (Accountant Member) dismissed the appeal observing that, “We find that addition made by the authorities below by disallowing the claim of the assessee towards payment made on account of penalty of Rs. 40,000/- under service tax is in the form of penal in nature and it was levied for violation of law, therefore, the said penalty of Rs. 40,000/- is not admissible as an expenditure as per Explanation 1 to Section 37(1) of the Act.”

To Read the full text of the Order CLICK HERE

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