Kerala HC Disallows Deduction u/s 37 for Interest on Agricultural Income Tax Payment Delays [Read Order]
Since the principal AIT was not an admissible deduction under the Income Tax Act, the interest on it was also inherently non-deductible.
The Kerala High Court has dismissed an appeal ruling that interest paid on delayed Agricultural Income Tax (AIT) payments cannot be claimed as a business deduction under section 37 of the Income Tax Act, 1961.
The court addressed an Income Tax Appeal filed by Aspinwall and Company Limited, challenging the order of the Income Tax Appellate Tribunal (ITAT).
The issue was whether the interest paid by the assessee on delayed AIT dues, amounting to ₹94,00,179, was an allowable expenditure under Section 37 ofthe Income Tax Act, 1961.
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The appellant, Aspinwall and Company Limited, argued that the interest levied under the Kerala Agricultural Income Tax Act was "compensatory in nature" rather than penal, and therefore should be treated as a deductible business expense incurred for the purpose of the business.
They relied on several precedents to support their contention that such interest payments are legitimate business costs.
The respondent, the Commissioner of Income Tax, countered that since agricultural income itself is exempt from income tax under Section 10(1) of the Act, the AIT paid was not an allowable deduction.
Consequently, the interest paid on this non-deductible tax should also be disallowed. The revenue argued that the character of the interest follows the character of the principal amount.
The bench, comprising Justice A. Muhammed Mustaque and Justice Harisankar V. Menon, ruled in favor of the revenue. The court held that for an expense to be deductible under Section 37, it must be incurred "for the purpose of the business."
The judges found that delaying a tax payment cannot be considered to be in the business interest of the assessee, and thus the interest paid for such a delay was not an expenditure laid out for business purposes.
The court further reasoned that the interest "takes its colour from the tax" it was charged on. Since the principal AIT was not an admissible deduction under the Income Tax Act, the interest on it was also inherently non-deductible.
The court distinguished the precedents cited by the appellant, noting that in those cases, the underlying tax or cess was an allowable deduction, unlike AIT in this matter.
Accordingly, the court concluded that the assessee was not entitled to the deduction and dismissed the appeal, answering the legal question against Aspinwall and Company Limited and in favor of the revenu
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