M/S. FOOT PRINTS COLLATERAL SERVICES PVT LTD,BANGALORE vs. ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE-3(1)(1), BANGALORE

O R D E R

Per George George K, JM :

M/s.Foot Prints Collateral Services Private Limited 3. The assessee has raised eight grounds. All the grounds relate to two issues, namely, (i) CIT erred in sustaining the disallowance of Rs.2,77,635 u/s 36(1)(iii) of the I.T.Act, and (ii) CIT(A) erred in confirming the A.O.’s action in disallowing a sum of Rs.13,08,004 being interest for delayed deposit of service tax. We shall adjudicate the issues as under.

Disallowance of Rs.2,77,635 u/s 36(1)(iii) of the I.T.Act.

4.1 Aggrieved, the assessee filed an appeal before the first appellate authority. The CIT(A) by relying on the judgment of the Hon’ble Delhi High Court in the case of Pr.CIT v. IL & FS Energy Development Company Ltd. reported in (2017) 84 taxmann.com 186 (Delhi), deleted the addition made u/s 14A of the I.T.Act, for the reason that the assessee has not earned any exempt income during the relevant assessment year. However, the CIT(A) sustained the alternate disallowance u/s 36(1)(iii) of the I.T.Act. According to the CIT(A), the assessee

M/s.Foot Prints Collateral Services Private Limited has not challenged the alternative addition in appeal before him.

4.2 Aggrieved, the assessee has raised this issue before the Tribunal. None was present on behalf of the assessee. However, we proceed to dispose of the matter after hearing the learned Departmental Representative. The learned DR strongly supported the orders of the Income Tax Authorities.

4.3 We have heard the learned DR and perused the material on record. The CIT(A) deleted the addition u/s 14A of the I.T.Act for the reason that the assessee has not earned any exempt income for the relevant assessment year. However, he sustained the addition u/s 36(1)(iii) of the I.T.Act for the reason that the assessee has not challenged the alternate addition u/s 36(1)(iii) before the first appellate authority. We find that the assessee has raised ground before the CIT(A) that investments are made in subsidiary and are out of commercial expediency. The assessee has also placed judicial pronouncements in support of its claim. Therefore, the CIT(A) is not justified in sustaining the addition of Rs.2,77,635 u/s 36(1)(iii) of the I.T.Act without disposing of the assessee’s grounds on merits. Hence, we deem it appropriate to restore this issue to the files of the CIT(A) in the interest of justice and equity. The CIT(A) is directed to afford a reasonable opportunity of hearing to the assessee before he dispose of this issue. It is ordered accordingly.

M/s.Foot Prints Collateral Services Private Limited 4.4 In the result, grounds 2 to 5 are allowed for statistical purposes.

Disallowance of Rs.13,08,004 5. The assessee had paid interest for delayed remittance of service tax and claimed the same as an expenditure. The Assessing Officer held the same is not an allowable expenditure u/s 36 nor 37 of the I.T.Act. The A.O. held that interest payable is not permissible for deduction u/s 37 of the I.T.Act since it is a default committed by the assessee in discharge of its statutory obligation.

5.1 Aggrieved, the assessee filed an appeal before the first appellate authority. The CIT(A) confirmed the view taken by the Assessing Officer.

5.2 Aggrieved, the assessee has raised this issue before the Tribunal.

5.3 We have heard learned DR and perused the material on record. During the relevant assessment year, the assessee had made payment of interest in respect of delay in payment of service tax. Section 75 of the Service Tax Laws imposes interest for delayed payment of service tax. Section 76 provides for imposition of a proportionate penalty for failure to pay the tax within the due date. Section 78 provides for levy of a penalty where the service tax has not been paid on account of fraud, collusion, mis-statement, etc. with an intention of evasion of service tax. As can be discerned from M/s.Foot Prints Collateral Services Private Limited the above, separate sections govern the penal and interest consequences on delay in payment of service tax. This being the case, interest on delay in payment of service tax cannot be held to be penal in nature. The payment of interest is automatic when there is a delay in payment of taxes. Unlike penalty provisions, interest on delayed payment is not the discretion of the Officer. It has to be paid by the assessee and there is no option of waiver of the same by the Tax Officer. Therefore, the payment of interest is compensatory in nature and not in the nature of penalty or fine, disallowable u/s 37 of the I.T.Act. The Hon’ble Apex Court in the case of Mahalakshmi Sugar Mills Co v. CIT reported in (1980) 123 ITR 429 (SC) had examined the issue of disallowance of statutory interest on the ground that the same was penal in nature. The Hon’ble Apex Court reversing the judgment of the Hon’ble Delhi High Court held that interest payable on arrears of cess is in reality part and parcel of the liability to pay cess. On the point of the impost being compensatory or penal in nature, the Hon’ble Supreme Court examined the provisions of the relevant statute and observed the following :-

(i) The liability of interest under the statute is automatic, as no specific proceeding or order is required for its accrual; (ii) It is not in the nature of penalty as separate provisions for penalty are provided in the statute;

M/s.Foot Prints Collateral Services Private Limited (iii) Unlike penalty, there is no discretion with the assessing authorities for determination of the liability of interest. (iv) A separate recovery mechanism is not required for recovery of the interest on arrears of cess.

5.4 On the above basis, the Hon’ble Court held that interest for arrears of a statutory levy should be treated with the same yardstick as that of the levy itself and hence in the facts of that case, the interest was eligible for deduction u/s 37 of the Act. The above view is supported by the following judicial pronouncements:-

(i) Prakash Cotton Mills Pvt. Ltd. v. CIT (1993) 201 TTS 684 (SC). (ii) CIT v. Messee Dusseldorf India (P) Ltd. (2010) 129 TTJ 81 (Del) (iii) Remfry & Sagar Consultants Pvt. Ltd. v. ACIT ts-540- itat-2012 (HYD) (iv) CIT v. Luxmi Devi Sugar Mills (P.) Ltd. (1991) (v) C.C.E., Salem v. Subramania Siva Co-op Sugar Mills Ltd. 2014 (35) S.T.R 500 (Mad.) (vi) Commissioner of Trade Tax, Lucknow v. Kanhai Ram Thekedar 2005 (185) E.L.T. 3 (SC).

5.5 The Hon’ble Gujarat High Court in the case of CIT v. Kaypee Mechanical India (P.) Ltd. reported in (2014) 45 taxmann.com 363 (Guj) was considering a case of deductibility of interest on service tax. The Hon’ble Gujarat High Court held that the interest payment is an expenditure deductible u/s 37 of the I.T.Act. The relevant finding of the Hon’ble Gujarat High Court, reads as follows:-

M/s.Foot Prints Collateral Services Private Limited

“The amount was expended by the assessee during the course of business, wholly and exclusively for the purpose of business. If the assessee had taken proper steps and charged service tax to the service recipients and deposited with the Government, there was no question of assessee expending such sum. It is only because the assessee failed to do so, that he had to expend the said amount, though it was not his primary liability. Be that as it may, this cannot be stated to be a penalty for infraction of law.”

5.6 The Delhi Tribunal in the case of CIT v. Messee Dusseldorf India (P) Ltd. reported in 129 TTJ 81 (Del.) had held that interest paid for delayed payment of service tax is compensatory in nature and has the same character as service tax and therefore allowable as a deduction.

5.7 In view of the above judicial pronouncements, we hold that the interest on delayed payment of service tax is compensatory in nature and not penal in nature. Therefore, we direct the A.O. to allow deduction for a sum of Rs.13,08,004. It is ordered accordingly.

5.8 In the result, ground 6 and 7 are allowed.