Reversal of Interest u/s 23 of MSMED Act Cannot Attract Addition In Absence of Deduction Claim: ITAT Directs AO to Verify [Read Order]

The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) ruled that the reversal of interest provided under Section 23 of the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act), cannot attract any addition to income where the assessee had not claimed such interest as a deduction while computing taxable income. Therefore, the Tribunal directed the Assessing Officer (AO) to verify whether any deduction had in fact been claimed and if not then to delete the addition.

The appellant-assessee, Siemens Limited, a resident corporate entity for the Assessment Year 2020-2021, filed a return of income that was processed under Section 143(1) of the Income Tax Act, 1961. The Centralised Processing Centre (CPC) made an upward adjustment of ₹6.62 crore due to the reversal of interest granted under Section 23 of the MSMED Act, 2006. This upward adjustment was made on the basis that the CPC determined that interest payable to micro and small suppliers based on late payments is not an allowable deduction.

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The Additional/Joint Commissioner of Income Tax (Appeals) Kolkata sided with the CPC and prescribed that such interest is prohibited under the provisions of Section 23 of the MSMED Act, 2006, and therefore should be added back to the taxable income.

Aggrieved by the order, the assessee approached the ITAT contending that the addition was unwarranted, as the interest provision created was never claimed as a deduction while computing income. The cause behind the litigation was the automated adjustment made during return processing, despite the assessee’s assertion that the reversal of a non-deducted provision could not result in taxable income.

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The Bench comprising Saktijit Dey, Vice President, and Jagadish, Accountant Member, noted that the assessee’s specific claim was that although a provision for interest was created in the books, no deduction was claimed while computing taxable income under the Income Tax Act, 1961. The ITAT held that if such a factual position is verified and found to be correct, the reversal of the provision cannot give rise to any taxable addition.

Accordingly, the Tribunal directed the AO to verify whether the interest provision under the MSMED Act, 2006, was ever claimed as a deduction and, if not, to delete the addition. The appeal was allowed for statistical purposes with a direction to provide a reasonable opportunity of being heard to the assessee.

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