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Is Interest paid on Late Deposit of TDS allowed as Business Expenditure u/s 37


is-interest-paid-on-late-deposit-of-tds-allowed-as-business-expenditure-us-37

 

Due to ongoing COVID-19 pandemic and the imposition of nationwide lockdown, many taxpayers were compelled to delay the deposit of TDS for the month of March, April and May 2020 to June 30, 2020 with interest, though at a concessional rate. This has affected many business persons. A question thus arises whether the interest paid on late payment or delayed deposit of TDS/TCS is allowed as a deduction in computing his total income for the AY 2021-22.


    Introduction

    The government has extended the due date for furnishing the statement of TDS under section 200(3) of the Income Tax Act, 1961 (“Act”) for the fourth quarter of FY 2019-20 from 31st May 2020 to 31st July 2020 in order to provide relief to the taxpayers due to outbreak of COVID-19 pandemic. Further, the due date for furnishing the statement of TDS for 1st and 2nd quarter of the FY 2020-21 is extended to March 31, 2021.


    Initially, the relief was provided by the Taxation and other Laws (Relaxation of Certain Provisions) Ordinance, 2020 promulgated on 31st March, 2020 which are subsequently ratified by the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020.


    No extension was provided in the due date to deposit the TDS for the month of March 2020 to May 2020. However, a relief in the form of a lower rate of interest was provided for the delay in deposit of TDS for these periods. Instead of 1.5% per month, the rate of interest was lowered to 0.75% p.m. if the TDS was deposited by June 30, 2020.


    The due date to deposit the TDS for the month of March 2020 was April 30, 2020. The month of April 2020 and May 2020 was under complete lockdown and many taxpayers could not deposit the same by the stipulated due date. Further, partial lockdown was prevailing in many parts of the country in June 2020. Further, there were liquidity problems too which forced the taxpayers to deposit the TDS for April and May 2020 by June 30, 2020 instead of the prescribed due dates of May 7, 2020 and June 7, 2020 respectively.


    Read more on COVID-19 relief on interest for delayed payment of TDS by the government in this article.


    Under the circumstances, the taxpayers’ had to deposit the TDS belatedly with interest. A question arises whether the interest paid on delay in deposit of TDS will be allowed as business expenditure under section 37 or it will be disallowed under section 40(a)(ii)?


    Let us analyze the legal provisions with the help of decided case laws whether interest paid on late payment of TDS is allowable as a business expenditure or not.


    Provisions for payment of interest for late deposit of TDS/TCS


    A person is liable to pay interest for payment of interest under section 201(1A) for failure to deduct tax at source or delay in payment of tax deducted at source and interest under section 206C(7) is levied for failure to collect tax at source or delay in payment of tax collected at source.


    Before understanding the provisions relating to levy of interest for failure to deduct tax at source or delay in payment of TDS, it is important to first understand the provisions relating to the due date for payment of TDS to the credit of the Government account.


    Section 192 to 195 gives various items of payments on which tax is to be deducted by the payer. The tax deducted by the payer is required to be paid to the credit of the Government as follows:


    1. Tax deducted during the month of April to February should be paid to the credit of the Government on or before 7 days from the end of the month in which the deduction is made.


    2. Tax deducted during the month of March should be paid to the credit of the Government on or before 30th day of April.


    3. Tax deducted under section 194-IA (i.e., on immovable property), Section 194-IB (i.e. on rent) and Section 194M (i.e., on certain sum paid by an Individual/HUF) should be paid to the credit of the Government on or before 30 days from the end of the month in which deduction is made. 


    Section 200 of the Act imposes a duty on the person deducting tax to pay within the prescribed time, the sum so deducted to the credit of the Central Government or as the Board directs.


    Section 201 of the Act deals with the consequences of the failure to deduct the amount of tax which is required to be deducted by an assessee from the payments made by it to the extent required under the Act. The deduction at source is required to be made on salary under Section 192, on interest paid on securities under Section 193, on dividends under Section 194, on interest other than interest on securities under Section 194A, and the other payments referred to in Section 195. Section 198 of the Act provides that tax so deducted is to be shown for the purpose of computing the income of the recipient of the amount in respect of which the tax has been deducted, as the income of such recipient, and credit for the amount of the tax so deducted is to be given to such recipient under Section 199 of the Act. The consequences of failure to deduct or failure to remit the amount deducted as required under the Act are set out in Section 201. If the payer does not deduct or remit the tax, he would be deemed to be an assessee in default in respect of the tax. Such person, however, is not liable to a penalty under Section 221, if the Income-tax Officer is satisfied that the failure to deduct or remit was for good and sufficient reasons. Sub-section (1A) of Section 201 without prejudice to the provisions of Sub-section (1) provides the person who fails to deduct or remit the amount of deduction in the manner required under the Act is liable to pay interest at the rates specified in that Sub-section from the date on which tax was deductible to the date on which such tax is actually paid.


    As per section 201, if any person who is liable to deduct tax at source does not deduct it or after so deducting fails to pay, the whole or any part of the tax to the credit of the Government, then, such person, shall be liable to pay simple interest as given below:


    (i) Interest shall be levied at 1% for every month or part of a month on the amount of such tax from the date on which such tax was deductible to the date on which such tax was deducted.


    (ii) Interest shall be levied at 1.5% for every month or part of a month on the amount of such tax from the date on which such tax was deducted to the date on which such tax was actually remitted to the credit of the Government.


    In other words, interest will be levied at 1% for every month or part of a month for delay in deduction and at 1.5% for every month or part of a month for delay in remittance after deduction.


    Similarly, Section 206C gives various items on which tax is to be collected at source. The tax so collected is to be paid to the credit of the Government within a period of 7 days from the last day of the month in which the tax is collected at source. Where it is collected by an office of the Government then it shall be paid to the credit of the Central Government on the same day. If such payment is made without Income-tax challan.


    As per section 206C(7), if the person responsible for collecting tax does not collect the tax or after collecting the tax fails to pay it to the credit of Government within the due date prescribed in this regard, then he shall be liable to pay simple interest at the rate of 1% per month or part thereof on the amount of such tax. Interest shall be levied for a period from the date on which such tax was collectable to the date on which the tax was actually paid.


    Provisions of Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 related to interest on late deposit of TDS/TCS


    Section 3(2) of the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 provides for charging interest on delay in the deposit of TDS/TCS after the prescribed due date as per the Income Tax Act.


    It should be noted that section 3(2) of Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 did not extend the due date of payment of TDS/TCS but provides relief to the extent that if the TDS/TCS is deposited after the prescribed due date then interest shall be paid at a reduced rate than the prescribed rate of interest. The reduced rate is kept flat at 0.75% p.m. irrespective of the normal prescribed rate of interest. Hence the normal rate of interest for delay in deposit of TDS/TCS after deduction is 0f 1.50% is reduced to 0.75% p.m.


    There is one more relaxation given in the form of a reduced period for which interest is payable. In case of delay in deposit of TDS, interest is payable for the period commencing from the date of deduction to the date of deposit. In this case, Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 has reduced the period and under the relaxation provisions, the interest for delay in deposit of TDS shall be required to be computed from the due date till the actual date of deposit of TDS/TCS.


    There are many cases where a person may not have defaulted in payment of TDS/TCS beyond the due date earlier. However, due to sudden nationwide lockdown announced in late March 2020 which continued uninterruptedly till May 2020 has forced those taxpayers to deposit the TDS/TCS belatedly beyond the due date for which he was compelled to pay interest although at a reduced rate and for the reduced period.


    Under the circumstances, it is imperative to analyze whether such interest paid on a belated deposit of TDS/TCS after the due date is allowed as business expenditure. If it is allowed against business income then under which provisions of the Act it will be allowed as deduction. In case it is disallowed then what are the related provisions related to disallowance of such interest paid on belated deposit of TDS/TCS.


    Meaning of ‘interest’ under the Income Tax Act


    The term “interest” is defined in section 2(28A) of the Act, in the following manner:


    Unless the context otherwise required, “interest” means interest payable in any manner in respect of any moneys borrowed or debt incurred (including a deposit, claim or other similar right or obligation) and includes any service fee or other charge in respect of the moneys borrowed or debt incurred or in respect of any credit facility which has not been utilised.


    Though the law has used the term ‘interest’ in section 201/206C for the delay in deposit of TDS/TCS, one has to see whether the term ‘interest’ as used fits in the definition of interest as defined in section 2(28A).


    The term interest is used in the definition in the context of money borrowed or debt incurred. It is clear from the definition of ‘interest’ in section 2(28A) that before any amount paid is construed as interest, it has to be established that the same is payable in respect of any money borrowed or debt incurred.


    Deduction for interest paid on delayed deposit of TDS u/s 36(1)(iii)


    Section 36(1)(iii) of the Act allows a deduction for interest paid on capital borrowed while computing the business income of the taxpayer. It provides for deduction of the amount of the interest paid in respect of capital borrowed for the purpose of the business or profession. The essential ingredients of this clause are-

    a) Interest 

    b) Borrowed capital, and

    c) For the purpose of business and profession.


    Unlike section 2(28A), clause (iii) of section 36(1) does not use the term ‘debt incurred’. Hence, section 2(28A) defines ‘interest’ in a wider sense whereas Section 36(1)(iii) has used it in a restrictive manner.


    The expression “borrowed money” means real borrowing or real lending. It must be construed in its natural and ordinary meaning and implies a real borrowing and real lending. It requires the existence of a borrower and a lender and that there must be a real borrowing. [K.M.S. Lakshmanier And Sons vs. CIT 1953 AIR 145:1953 SCR 1057 (SC)]


    Although a loan of money undoubtedly results in a debt, every debt does not involve a loan. To be admissible as an allowance under clause (iii), interest must be paid in respect of capital borrowed. Interest paid, but not in respect of capital borrowed cannot be allowed. ‘Borrowed capital’ means money and not any other asset purchased on credit.[Bombay Steam Navigation Co. Pvt. Ltd. Vs. CIT (1963) 56 ITR 52 (SC)]


    In the commercial world, there is a pointed distinction between the deposit and the loan. For the loan, there must be a settlement or agreement between the parties that a particular amount would be given by one party to another party. The terms would be that it would be refunded or returned either on-demand or on the directions of the creditor and particular interest would be paid on the said amount. For the purpose of the loan, there must be an interaction between the parties and there must be a concluded contract. [Arun Family Trust vs. CIT (2008) 298 ITR 437 (Guj.)(HC)]


    In the case of Martin and Harris Pvt. Ltd. vs. CIT [1994] 73 Taxman 555 (Cal.), the Calcutta High Court did not accept the contention of the assessee of treating the interest on late deposit of TDS as interest on borrowings. 


    From the ratio of above decisions, it may be concluded that there must be a loan on which interest is paid for claiming allowance u/s 36(1)(iii). There must exist a lender and borrower in case of a loan transaction.


    Therefore, unless there is a borrowing of capital, there cannot be any deduction u/s 36(1)(iii). This view gets support from the decision of Hon’ble Supreme Court in the case of Bharat Commerce and Industries [1998] 230 ITR 733 (SC). In this case, the assessee contends that the taxes which were payable were delayed and to that extent, the assessee's financial resources increased. These increased resources became available for business purposes. Hence the interest which is paid to the Government under Section 139 and 215 represent, in effect, interest on capital that would have been borrowed by the assessee otherwise. Hence these amounts should be allowed as a deduction under Section 37 as expenses incurred wholly and exclusively for the purpose of its business. However, the Supreme Court has rejected the argument advanced by the assessee that retention of money payable to the State as tax or income-tax would augment the capital of the assessee and the expenditure incurred, namely, interest paid for the period of such retention would assume the character of business expenditure. The court held that an assessee could not possibly claim that it was borrowing from the State, the amounts payable by it as income-tax, and utilising the same as capital in its business, to contend that the interest paid for the period of delay in payment of tax amounted to an item of business expenditure.


    The contention of the assessee seems to be that he had avoided borrowing money for payment of tax by obtaining instalments from the department and paying interest. Therefore, the payment of interest should be considered as equivalent to his paying interest on borrowed money for payment of tax. The submission has to be stated to be rejected. Obtaining instalments from the department and paying interest cannot be considered as equivalent to borrowing money from a third party for payment of tax and paying interest on such borrowed money. The assessee's argument, if taken to its logical conclusion, would amount to saying that the assessee had, in effect, borrowed money from the income tax department to pay tax for which he was paying interest to the income tax department. Such is clearly not the case, as it cannot be. Hence, the claim of the assessee for deduction of interest on non-payment of taxes under section 36(1)(iii) is rejected by the Court.


    Hence, it can be safely concluded that non-payment of taxes does not amount to the borrowing of capital from the government and hence interest paid for delayed deposit of taxes is not covered under section 36(1)(iii).


    Admissibility of deduction under section 37(1) read with section 40(a)(ii)


    Section 37 is a residuary section which allows business expenditure in computing the business income of an assessee.


    Expenses allowed as deductions against Profits and Gains of Business or Profession are covered from Section 30 to 37 of the Act. Section 37(1) provides that any expenditure (except expenditure described in sections 30 to 36, capital expenditure or personal expenses of the assessee), expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head, “Profits and Gains of Business or Profession”.


    The Explanation 1 to section 37 (1) clarifies that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by any law shall not be deemed to have been incurred for the purpose of the business or profession and no allowance or deduction shall be made in respect of such expenditure.


    Section 40(a)(ii) disallows any sum paid on account of any rate or tax levied on the profits or gains of any business or profession or assessed at a proportion of, or otherwise on the basis of, any such profits or gains.


    It has been held that if tax is disallowed expenditure then the interest thereon should also be disallowed. Section 40(a)(ii) disallows the tax on the income of the assessee. Therefore, it is crucial to understand whether TDS is a tax on the income of the assessee. 


    Section 190 of the Act states that the tax on income may be paid by way of advance tax or by way of TDS/TCS. Further, sub-section (2) of section 190 states that the deduction of tax or collection of charge is independent of the charge of tax on income. Further, section 198 states that tax deducted is a part of the income received by the deductee except for TDS under section 194N which deals with TDS on cash withdrawals.


    Section 199 of the Act in clear terms provides that any deduction of tax and payment thereof to the Central Government shall be treated as a payment of tax on behalf of the person from whose income the deduction was made. In other words, TDS shall be treated as the tax paid on behalf of the person in respect of whose income such payment of tax has been made.


    Therefore, it is crystal clear that ‘TDS’ is not a tax on the income of the deductor. Instead, it is a tax on the income of the deductee.


    The issue of interest paid on late or delayed deposit of TDS and its allowability as deduction as business expenditure is a matter of continuous litigation between the assessee and the income tax department.


    Let us understand the concept of TDS and its allowability with the help of an example. Mr. Rakesh has paid a sum of Rs. 1,00,000 to a professional on which he has deducted TDS of Rs. 10,000. He has paid Rs. 90,000 to the professional and deposited the TDS  of Rs. 10,000 into the government account. By virtue of provisions of section 198, Rs. 1,00,000 is the income of the professional whereas Mr. Rakesh will claim a deduction of Rs. 1,00,000 as expenses for payment to the professional.


    In this example, even if Rakesh deposits the TDS of Rs. 10,000 belated i.e. after the prescribed due date to the account of the government the position does not get altered. That is, the income of the professional will be taken as Rs. 1,00,000 and Mr. Rakesh will get a deduction of Rs. 1,00,000 u/s 37 since it is incurred for the purpose of his business.


    Therefore TDS of Rs. 10,000 is allowed as deduction whether paid within the due date or after the due date. There is no provision in the law which disallows Rs. 10,000 of TDS amount in the given example. Therefore, a logical conclusion is that when the TDS is allowed as a deduction then following the ratio of the decision of the Hon’ble Supreme Court in the case of Bharat Commerce & Industries Ltd (1998) 230 ITR 733 (SC), the interest paid on delayed deposit of TDS shall also be allowed as deduction. The ratio of the case was that if income-tax itself is not a permissible deduction under section 37, any interest payable for default committed by the assessee in discharging his statutory obligation under the Income Tax Act, which is calculated with reference to the tax on income, cannot be allowed as a deduction. Therefore, interest payable under sections 139 and 215 cannot be allowed as deduction. In the absence of any specific provision in the law prescribed for disallowance of the interest on TDS, the same is allowable as per the provisions of section 37(1) in the hands of the deductor.


    This logic did not find favour before the ITAT Ahmedabad in the case of ITO vs. Royal Packaging (ITA No. 1363/Ahd/2010), decided on 29.04.2011 for the AY 2005-06. In para 7 of the order, the Tribunal held as under (emphasis added by the author)-


    7. We have heard both the sides. In the assessment order the Assessing Officer disallowed interest of Rs.11,676/- on the ground that interest on TDS is not allowable expense. The reasoning giving by Assessing Officer is that when TDS is not allowable, how interest on same is allowable. However, in the impugned order Ld. CIT(A) accepted the contention of assessee that when assessee received interest on tax refund the same is taxable in same manner the interest on late payment of TDS is allowable expense. It is pertinent to note that it is not the case of assessee that benefit of netting of interest paid to the Department and received from the Department be allowed. It appears that assessee deducted TDS and deposited the same late with the Income-tax Department. As a result of this, it paid interest of Rs.11,676/-. The Hon’ble Supreme Court income Bharat Commerce & Industries v. CIT (1998) 230 ITR 733 (SC) held that interest for late payment of direct taxes is not deductible. Therefore disallowance of interest of Rs.11,676/- is restored. This ground of appeal is allowed.


    From the reading of the reasons given by the Assessing Officer, it can be said that the case was not argued properly before the Tribunal since it was not controverted or rebutted. This case was not further appealed before the High Court; may be due to the fact that the amount involved was small. However, this does not mean that the law declared, in this case, is correct. In this case, the interest paid on delay deposit of TDS was disallowed on the ground that the amount of TDS is not allowed as an expense and hence the interest thereon is also liable to be disallowed. In coming to this conclusion, the decision of the Supreme Court in the case of Bharat Commerce & Industries (supra) followed.


    This decision is distinguishable on the ground that the case of Bharat Commerce & Industries (supra) was in relation to income tax whereas the TDS is not an income-tax of the deductor but a tax of the deductee. Further, there is no provision in the law which disallows the amount of TDS itself. TDS is the liability of the deductee which is discharged by deductor because of the statutory obligation cast upon him. If it is considered that TDS is also a direct tax, then all the TDS including those TDS which were deposited within the due date is also not at all allowable.


    However, prior to the decision of the ITAT Ahmedabad, Madras High Court in the case of CIT vs. Chennai Properties and Investment Ltd. (1999) 239 ITR 435 (Mad.) has held the same issue against the assessee and disallowed the interest paid under section 201(1A). It was held that it cannot assume the character of business expenditure and is not allowable as a deduction as the liability to pay interest is directly related to the failure to deduct or remit the tax deducted at source.


    In para 8 and para 14 of the Judgement, the High Court observed as follows-


    8. The liability for deduction of tax arises by reason of the provisions of the Act. Under Section 201, the consequence of failure to comply with the same renders that person liable to be deemed as an assessee in default with all the consequences attached thereto. The liability to pay interest on the amount not deducted or deducted but not paid is directly related to the failure to deduct or remit the amount. The amount required to be deducted is the amount payable as income-tax. The interest paid for the period of delay takes colour from the nature of the principal amount required to be paid, but not paid within time. The principal amount here would be the income-tax and the interest payable for delayed payment is the consequence of failure to pay the tax and in the circumstances, in the nature of a penalty though not described as such in Sub-section (1A) of Section 201 of the Act. The fact that the income-tax required to be remitted was not income-tax payable by the assessee, but is ultimately for the benefit of and to the credit of the recipient of the income on whose behalf that tax is payable does not in any manner alter the character of the payment, namely, its character as income tax.


    14. As already noticed the payment of interest takes colour from the nature of the levy with reference to which such interest is paid and the tax required to be but not paid in time, which rendered the assessee liable for payment of interest was in the nature of a direct tax and similar to the income-tax payable under the Income-tax Act. The interest paid under Section 201(1A) of the Act, therefore, would not assume the character of business expenditure and cannot be regarded as a compensatory payment as contended by learned counsel for the assessee.


    In this case, also no further appeal was advanced by the assessee.


    This case has assumed the character of TDS as income tax and thus disallowed the interest on a delayed deposit of TDS. Thus the main question which remains open if TDS is in the nature of income tax then all the TDS whether deposited within the due date or after due tax is also to be characterised as income tax and as per the ruling, it should not be allowed under any circumstances. There cannot be two interpretations on the nature of TDS which is deposited within the due date or after the due date and thus the interest on a delayed deposit of TDS.


    The Bombay High Court in the case of Ferro Alloys Corporation Ltd. vs. CIT (1992) 196 ITR 406 (Bom) and Calcutta High Court judgment in the case of  Martin and Harris Pvt. Ltd. vs. CIT [1994] 73 Taxman 555 (Cal.) : Income Tax Reference No. 113 Of 1983 have also taken the similar views and held that interest u/s 201(1A) is not deductible as business expenditure under section 37. Both these decisions find a place in the case of Chennai Properties and Investment Ltd. (supra).


    In the case of Martin and Harris Pvt. Ltd. (supra), the question to be decided was whether interest paid by the company under section 201(1A) for belated payment of tax deducted at source from the employees' salary was allowable as a deduction in the computation of its total income.


    The learned counsel for the assessee has seriously contended that since payment of interest does not come within the purview of section 40(a)(i) or 40(a)(ii) of the Act, the assessee is entitled to claim the said deduction under section 37 of the Act. It is his contention that the assessee has utilised part of the salary which was deducted for the payment of tax on behalf of the employees and as such the assessee is entitled to this deduction. Had the assessee obtained a loan from outside sources, interest on such loan would have been allowed as a deduction being the interest on the capital borrowed for the purpose of business.


    Their Lordships had rejected the contention of the Ld. A/R and categorically held as under-


    4. We are unable to accept this contention of the learned counsel. It is not only illogical but also fallacious. Section 201 provides for the consequences of failure to deduct or pay tax. It provides that where a person defaults in fulfilment of the obligation to deduct tax at source and to pay it to the credit of the Central Government within the prescribed time, he will be treated as an assessee-in-default in respect of the tax. Section 201(1A) provides that such defaulter, i.e., a person who either does not deduct or after deducting fails to pay tax as required by or under the Act, shall be liable to pay simple interest at the prescribed rate on the amount of the tax from the date on which such tax was deductible to the date on which such tax is actually paid to the credit of the Central Government.


    5. Admittedly, the assessee deducted tax from the salary of the employees and thereafter failed to deposit the tax so deducted within the time prescribed by statute and the rules made thereunder. Because of this infraction of law the assessee was treated as an assessee-in-default and the procedure for recovery contemplated under the Act was invoked. Section 201 enacts a three-fold punishment for a person including a company bound to deduct tax at source and defaulting to deduct tax and defaulting to so deduct tax or after having deducted, defaulting in making payment thereof to the credit of the Central Government. Firstly, the defaulter is treated as an assessee in default and one of the consequences flowing therefrom is that the assessee-in-default is liable to pay a penalty under section 221 of the Act. Secondly, he is liable to pay interest at the prescribed rate on the amount of such tax from the date on which such tax was deductible to the date when such tax is actually paid. The third consequence is that it creates a statutory charge upon all the assets of the defaulter for the amount of tax deducted and not paid plus the amount of interest leviable under section 201(1A) : Therefore, it is not a part of the salary of the employees which was withheld. It was tax on salary of the employees which was deducted but not paid. Had it not been deducted by the employer, the employees would have paid the tax themselves. The assessee knowing fully well that it had deducted the tax payable on the salary of the employees failed to pay the tax so deducted within the prescribed period.


    6. Further, under section 203 of the Act every person deducting tax in accordance with the provisions of the relevant section of the Act is required to furnish a certificate, inter alia, to the effect to the concerned person that tax has been deducted and specifying the amount so deducted, and the rate at which tax has been deducted at source. Therefore what has been deducted is tax and it does not retain the character of salary although such deduction has been made from the salary.


    7. In our view the character and quality of interest payable for non- compliance with the provisions of the Act would be the same, whether it is levied for non-submission of return in time or non-payment of tax within the prescribed time or for any other reason. In National Engg. Industries Ltd. 's case (supra) this Court held that interest paid under section 220(2) of the Act for delayed payment of taxes was not allowable as deduction in computation of the total income.


    10. In our view whenever interest is charged under the Act, whether for delayed payment of tax or filing under estimate of tax or for non- submission of the estimate or return or for default in filing return within the time or delay in making payment of tax, it cannot be allowed as deduction in computing total income as essentially interest in such a case for non-compliance with the provisions of the Act is inextricably connected with the amount of income-tax. Where income-tax itself is not a deductible amount, be it compensation or be it penalty, payable in addition to the tax cannot be allowed as a deduction in computing total income.


    Following the decisions of Madras High Court, Bombay High Court and the Calcutta High Court in the above cases, the ITAT Mumbai in the case of HTA Marketing Services Pvt. Ltd. vs. DCIT in ITA No. 2068/Mum/2017 decided on 12.09.2018 held that the Assessing Officer was right in disallowing interest on late deposit of TDS. The Tribunal has dismissed the appeal of the assessee and confirmed the decision of the CIT(A) in the following words-


    “Facts being identical, we uphold the order of the Ld. CIT(A) and dismiss the appeal.”


    Again ITAT Ahmedabad in the case of Shree Saras Spices & Food P. Ltd. vs. DCIT in ITA No. 2527/Ahd/2010 decided on 09.11.2012 has decided the issue in favour of the revenue and disallowed the interest paid on belated deposit of TDS u/s 201(1A) following the Supreme Court decision in the case of East India Pharmaceutical Works Ltd. v. CIT (1997) 224 ITR 627 (SC). The question before the Supreme Court was whether the payment of interest on money borrowed for payment of income-tax was an expenditure laid out wholly and exclusively for the purpose of business as contemplated by sub- section (1) of Section 37 of the Income-tax Act, 1961. The Supreme Court had decided the issue in favour of the revenue and against the assessee.


    From the analysis of the above cases it can be seen that there is a consensus among the Courts and it has been consistently held that interest paid u/s 201(1A) for delay in deposit of TDS is not allowed as business expenditure.


    Interestingly, Kolkata ITAT in the case of DCIT vs. Narayani Ispat Pvt. Ltd. in ITA No. 2127/Kol/2014 decided on 30.08.2017 has taken a contrary decision to make a departure from the above decisions which at one point of time resembling that the issue of disallowance of interest paid on delayed deposit of TDS is making the way of becoming a settled principle.


    In this case, the Tribunal has distinguished the case of Bharat Commerce Industries Ltd. (supra) and held that the TDS amount does not represent the tax of the assessee but it is the tax of the party which has been paid by the assessee. Thus any delay in the payment of TDS by the assessee cannot be linked to the income tax of the assessee and consequently the principles laid down by the Hon’ble Apex Court in the case of Bharat Commerce Industries Ltd. Vs. CIT (1998) reported in 230 ITR 733 cannot be applied to the case on hand.


    It further held that the Assessing Officer in the instant case has wrongly applied the principle laid down by the Hon'ble Supreme Court in the case of Bharat Commerce Industries Ltd.(supra).


    The Tribunal has distinguished the TDS liability as different from the income-tax liability. Thus interest u/s 201(1A) cannot be compared with the interest paid u/s 220(2) which is linked to the income tax liability of the assessee. The said interest can be compared to the interest paid on delay payment of service tax/sales tax or other indirect taxes or other taxes which does not come within the purview of direct tax laws. Such interests were consistently allowed by the Supreme Court in many cases as business expenditure.


    The relevant para7 of the decision of the Tribunal is reproduced below-


    7. We have heard the rival contentions of both the parties and perused the material available on record. In the instant case, AO has disallowed the interest expenses incurred by the assessee on account of late deposit of service tax and TDS after having reliance on the judgment of Hon'ble Supreme Court in the case of Bharat Commerce Industries Ltd. Vs. CIT (1998) (Supra). The relevant extract of the judgment reads as under :


    FACTS


    During the year under consideration, the assessee failed to pay advance tax equivalent to 75 per cent of estimated tax. The Assessing Officer levied interest under section 215 as well as under section 139. The assessee claimed that since taxes which were payable were delayed, the assessee's financial resources increased which were available for business purposes. Hence, the interest which was paid to the Government was interest on capital that would be borrowed by the assessee otherwise. Hence, the amounts should be allowed as deduction. The revenue did not allow such deduction. The High Court affirmed the view.


    On appeal to the Supreme Court :


    HELD


    When interest is paid for committing a default in respect of a statutory liability to pay advance tax, the amount paid and the expenditure incurred in that connection is in no way connected with preserving or promoting the business of the assessee. This is not expenditure which is incurred and which has to be taken into account before the profits of the business are calculated. The liability in the case of payment of incometax and interest for delayed payment of income-tax or advance tax arises on the computation of the profits and gains of business. The tax which is payable is on the assessee's income after the income is determined. This cannot, therefore, be considered as an expenditure for the purpose of earning any income or profits. Interest which is paid for delayed payment of advance tax on such income cannot be considered as expenditure wholly and exclusively for the purpose of business. Under the Act, the payment of such interest is inextricably connected with the assessee's tax liability. If income-tax itself is not permissible deduction under section 37, any interest payable for default committed by the assessee in discharging his statutory objection under the Act, which is calculated with reference to the tax on income, cannot be allowed as a deduction.


    Therefore, it was to be held that deduction of interest levied under sections 139 and 215 would not be allowable under section 37. 


    In the above judgment, the claim of the assessee for interest expenses was denied as it defaulted to make the payment of advance tax as per the provisions of the Act. The advance tax is nothing but income tax only which the assessee has to pay on his income. In the instant case the default relates to the delay in the payment of advance tax and consequently interest was charged on the delayed payment of advance tax. In the above judgment the Hon’ble Apex Court held that as Income Tax paid by the assessee is not allowable deduction and therefore interest emanating from the delayed payment of income tax (advance tax) is also not allowable deduction


    However the facts of the instant case before us are distinguishable as in the case before us the interest was paid for delayed payment of service tax & TDS. The interest for the delay in making the payment of service tax & TDS is compensatory in nature. As such the interest on delayed payment is not in the nature of penalty in the instant case on hand. 


    The issue of delay in the payment of service tax is directly covered by the judgment of Hon’ble Apex Court in the case of Lachmandas Mathura Vs. CIT reported in 254 ITR 799 in favour of assessee. The relevant extract of the judgment is reproduced below :


    “The High Court has proceeded on the basis that the interest on arrears of sales tax is penal in nature and has rejected the contention of the assessee that it is compensatory in nature. In taking the said view the High Court has placed reliance on its Full Bench's decision in Saraya Sugar Mills (P.) Ltd. v. CIT [1979] 116 ITR 387 (All.) The learned counsel appearing for the appellant-assessee states that the said judgment of the Full Bench has been reversed by the larger Bench of the High Court in Triveni Engg. Works Ltd. v. CIT [1983] 144 ITR 732 (All.) (FB), wherein it has been held that interest on arrears of tax is compensatory in nature and not penal. This question has also been considered by this Court in Civil Appeal No. 830 of 1979 titled Saraya Sugar Mills (P.) Ltd. v. CIT decided on 29-2-1996. In that view of the matter, the appeal is allowed and question Nos. 1 and 2 are answered in favour of the assessee and against the revenue.”


    In view of the above judgment, there remains no doubt that the interest expense on the delayed payment of service tax is allowable deduction.


    The above principles can be applied to the interest expenses levied on account of delayed payment of TDS as it relates to the expenses claimed by the assessee which are subject to the TDS provisions. The assessee claims the specified expenses of certain amount in its profit & loss account and thereafter the assessee from the payment to the party deducts certain percentage as specified under the Act as TDS and pays to the Government Exchequer. The amount of TDS represents the amount of income tax of the party on whose behalf the payment was deducted & paid to the Government Exchequer. Thus the TDS amount does not represent the tax of the assessee but it is the tax of the party which has been paid by the assessee. Thus any delay in the payment of TDS by the assessee cannot be linked to the income tax of the assessee and consequently the principles laid down by the Hon’ble Apex Court in the case of Bharat Commerce Industries Ltd. Vs. CIT (1998) reported in 230 ITR 733 cannot be applied to the case on hand


    Thus, in our considered view, the principle laid down by the Hon'ble Supreme Court in the case of Bharat Commerce Industries Ltd. (supra) is not applicable in the instant facts of the case. Thus, we hold that the Assessing Officer in the instant case has wrongly applied the principle laid down by the Hon'ble Supreme Court in the case of Bharat Commerce Industries Ltd.(supra). We also find that the Hon'ble Supreme Court in the case of Lachmandas Mathura (Supra) has allowed the deduction on account of interest on late deposit of sales tax u/s 37(1) of the Act. In view of the above, we conclude that the interest expenses claimed by the assessee on account of delayed deposit of service tax as well as TDS liability are allowable expenses u/s 37(1) of the Act. In this view of the matter, we find no reason to interfere in the order of Ld. CIT(A) and we uphold the same. Hence, this ground of Revenue is dismissed. 


    In a subsequent decision, the Kolkata Tribunal in another case of Sai Food Products Pvt. Ltd vs. DCIT in ITA No. 1887/Kol/2016 decided on 06-04-2018 following the decision of the coordinate bench in Narayani Ispat Pvt. Ltd. (supra) held that interest expenses claimed by assessee on account of delayed deposit of TDS liability is allowable under section 37(1) since the TDS amount did not represent the tax of the assessee but it is the tax of the deductee which has been paid by assessee.


    Similarly, in the case of DCIT vs. Rungta Mines Ltd. in ITA No. 1531/Kol/2017 decided on 05/10/2018 the Kolkata Tribunal came to the same conclusion and deleted the addition made by the AO on account of interest on late deposit of TDS. In this decision, the Bench followed the decisions of Narayani Ispat Pvt. Ltd. (supra) and Sai Food Products Pvt. Ltd (supra).


    Similar decisions were given by the ITAT Kolkata on the identical issue in the cases of DCIT vs. Bonai Industrial Company Ltd. in ITA No. 1533/Kol/2017 decided on 10-10-2018 and DCIT vs. V2 Retail Ltd. in ITA No. 1794/Kol/2018 decided on 28-06-2019.


    Recently, in the case of DCIT vs. Maa Annapurna Transport Agency Ltd. in ITA No. 822/Kol/2018 decided on 15-01-2020 the Kolkata Tribunal again following the decision in the case of Narayani Ispat Pvt. Ltd. (supra) allowed the interest paid on late payment of TDS. The Bench further went to conclude that this issue is no longer res integra (a case or a question that has not been examined or passed upon; something which has not yet been determined or resolved).


    Apart from the Kolkata Tribunal, the ITAT Mumbai in the case of STUP Consultants Pvt. Ltd. vs. ACIT in ITA No. 5827/Mum/2012 decided on 11.12.2018 has distinguished the interest paid on income-tax/fringe benefits tax with the interest paid on late payment of TDS and held that the amount of tax deduction at source (TDS) represents the amount of income tax of the third parties party on whose behalf the payment was deducted by the assessee & paid to the Government Exchequer. Therefore, TDS amount do not represent the tax of the assessee but it is the tax of the party which has been paid by the assessee. This being the case, any interest paid on account of late payment of TDS could not be linked to the Income Tax of the assessee and therefore, the deduction thereof was available to the assessee. Hence, the deduction of Rs.9,128/- as claimed by the assessee would be an allowable expenditure.


    Also ITAT Bangalore in the case of IDS Next Business Solutions Pvt Ltd vs. ACIT in ITA No. 510/Bang/2018 decided on 15.06.2018 following the decision of ITAT Kolkata in the case of Narayani Ispat Pvt. Ltd. (supra) held the identical issue on allowability of interest paid u/s 201(1A) for delay in deposit of TDS in favour of the assessee.


    Interestingly, the same Tribunal in the case of Velankani Information Systems Ltd. vs. DCIT in ITA No. 218/Bang/2017 : (2018) 172 DTR 356 (Bang.-Trib.) decided on 12.09.2018 disallowed the interest paid u/s 201(1A) for delay in deposit of TDS and decided the issue against the assessee. The Tribunal, following the decision of Hon'ble Madras High Court in the case of Chennai Properties & Investment Ltd (supra) held that interest paid under section 201(1A) for delay in depositing tax deducted at source,  is in the nature of tax and same cannot be allowed as a deduction. While following the Chennai Properties & Investment Ltd (supra), the Tribunal has also distinguished the decision of Kolkata Tribunal in the case of Narayani Ispat Pvt. Ltd. in the following words-


    Though the decision of the Tribunal is later in point of time, judicial discipline demands that the decision of the Hon'ble Madras High Court is to be followed. It is also worthwhile to mention that the Kolkata Bench of Tribunal in the case of Narayani Ispat Pvt. Ltd. (supra), which was cited by the ld. counsel for the assessee, did not consider or did not have an occasion to consider the decision of the Hon'ble Madras High Court in the case of Chennai Properties and Investment Ltd. (supra). In these circumstances, we follow the decision of the Hon'ble Madras High Court and uphold the order of the CIT(A) insofar as it relates to disallowance of interest on delayed remittance of tax deducted at source u/s. 201(1A) of the Act. 


    Similarly, ITAT Ahmedabad in the case of MMR Infra vs. DCIT in ITA No. 1609/Ahd/2018 decided on 01-06-2020 contradicted the decision of ITAT Kolkata in the case of Narayani Ispat Pvt. Ltd. (supra) and held that the issue is covered against assessee by the Hon’ble Madras High Court in case of Chennai Properties & Investment Ltd. (supra).


    Note: Both the decisions in the case of Narayani Ispat Pvt. Ltd. and MMR Infra were authored by Hon'ble Accountant Member Waseem Ahmed. Before deciding the issue against the assessee in the case of MMR Infra, the Hon’ble Member clarified that they had decided the identical issue in favour of the assessee in the case of M/s Narayani Ispat Pvt. Ltd. (supra). However, they were changing their decision in the present case for the simple reason that the judgment of Hon’ble Madras High Court in case of CIT vs. Chennai Properties & Investment Ltd reported in 105 taxmann 346 was not brought to their notice while hearing the case of M/s Narayani Ispat Pvt. Ltd.


    The case of Narayani Ispat Pvt. Ltd. was also distinguished by the ITAT Delhi in the case of DLF Limited vs. Addl. CIT in ITA Nos. 2126/Del/2013 and 2749/Del/2013 decided on 27.05.2019 and followed the decision of Hon'ble Madras High Court in the case of Chennai Properties & Investment Ltd (supra). Hence, the claim of the assessee being the interest paid on late payment of TDS as expenditure u/s 37 is rejected by the Tribunal. However, ITAT, in this case, had observed that even though it is persuaded by the reasoning of the ITAT Kolkata, however, as a matter of judicial precedent, it relied on the decision of Hon'ble Madras High Court in the case of Chennai Properties and Investment Ltd. observing that this being the only decision of High Court on the issue. Thus even though the Tribunal was in agreement with the reasons and rationale advanced for allowance of interest paid u/s 201(1A) as a deduction u/s 37(1), yet because of the principle of judicial precedence, the decision of Hon’ble Madras High Court in the case of Chennai Properties and Investment Ltd. (supra.) was followed. Consequently, this issue was decided against the assessee. 


    Conclusion


    From the above judicial rulings on the issue of whether interest paid by deductor u/s 201(1A) for the delay in deposit of TDS one can conclude that such interest is not allowed as business expenditure either u/s 36(1)(iii) or under section 37(1). Courts have categorically held the unpaid TDS amount does not amount to borrowings and thus interest paid for delay in deposit of TDS cannot be allowed as deduction u/s 36(1)(iii).


    On the other hand, Courts have held that unpaid TDS amounts to ‘tax’ as per section 40(a)(ii) and when the tax itself is disallowed the interest paid thereon is also disallowed.


    In these cases, Courts are reluctant to accept the contention that the unpaid TDS amounts to trade liability of the deductor. Albeit, it is consistently held that such interest is payable as a consequence of failure to pay the ‘tax’. The expenditure incurred for the purpose of interest payment does not relate to the business of the assessee. Being the assessee in default in paying the tax, the interest is levied. Thus, it is clear that the payment of interest has nothing to do with the business of the assessee and accordingly, payment of interest cannot be allowed as a deduction under section 37 of the Act. The expenditure incurred consequent to failure to deduct or pay the TDS, as prescribed under the provisions of the Act, cannot be allowed as deduction.


    Even though contrary decisions were given by Tribunals in some cases, however, the same have been again distinguished and since High Courts have decided the issue against the assessee, the decision of the High Courts prevailed in judicial precedent.


    At the end, it may be concluded that though there is no consensus among the Courts regarding the allowability of interest paid on late deposit of TDS as business expenditure however as a matter of judicial precedent, the issue is settled against the assessee. In the absence of any specific relief under the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 regarding the allowability of such interest as business expenditure, the normal provisions of the Act shall prevail. Hence, the interest paid u/s 201(1A) for delayed deposit of TDS even during the lockdown period is covered against the assessee until any High Court decides the issue in favour of the assessee.


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