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Facts
The assessee, IVTL Infoview Technologies Private Limited, filed its return for AY 2015-16. The Assessing Officer made additions for delayed deposit of employee contributions to PF & ESI and disallowed interest on delayed remittances of various statutory dues (TDS, ESI, PF, PT, Service Tax), treating them as penal. The CIT(A) upheld these disallowances, leading to the current appeal.
Held
The Tribunal confirmed the disallowance of employee contributions to PF & ESI due to delayed deposit, citing the Supreme Court's 'Checkmate Services' ruling. However, it held that interest on delayed remittances of TDS, PT, Service Tax, ESI, and PF were compensatory in nature and thus allowable as business expenditure under Section 37(1) of the Income Tax Act, based on the Supreme Court's 'Lachmandas Mathuradas' decision and other pronouncements.
Key Issues
1. Whether delayed deposit of employee contributions to PF and ESI is disallowable under Section 2(24)(x) and Section 36(1)(va). 2. Whether interest paid on delayed remittances of various statutory dues is compensatory or penal, and thus allowable as business expenditure under Section 37.
Sections Cited
2(24)(x), 36(1)(va), 143(3), 37, 201(1A)
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Income Tax Appellate Tribunal, ‘B’ BENCH, CHENNAI
Before: HON’BLE SHRI MANU KUMAR GIRI & HON’BLE SHRI JAGADISH
(िनधा�रणवष� / Assessment Year: 2015-2016) IVTL Infoview Technologies Vs. The Deputy Commissioner of Private Limited, Income Tax, No.2/319, 3F, Corporate Circle II(2) Vishranthi Melaram Towers, Chennai 600 034. Oggiam Thoraipakkam, Chennai 600 097. [PAN: AAACI 7550A] (अपीलाथ�/Appellant) (��यथ�/Respondent) अपीलाथ� क� ओर से/ Appellant by : Ms. S. Vidhya, C.A., ��यथ� क� ओर से /Respondent by : Ms. Pushpa Hemachand, JCIT. सुनवाई क� तार�ख/Date of Hearing : 22.01.2025 घोषणा क� तार�ख /Date of Pronouncement : 30.01.2025 आदेश / O R D E R PER MANU KUMAR GIRI (Judicial Member)
This appeal filed by the assessee is directed against the order of the Ld. Commissioner of Income Tax(Appeals)(NFAC) Delhi [CIT(A)] dated 10.10.2024 for Assessment Year 2015-16.
Brief facts of the case are that the assessee filed its return for AY 2015-16, declaring an income of Rs.7,96,72,910/-. Following scrutiny, the Assessing Officer Rs.8,21,08,581/-, making additions for disallowance of contributions to PF & ESI and interest on delayed remittances. The Employee's Contribution to PF & ESI to the tune of Rs.8,54,990/- was added to the income, with the AO stating that these contributions were not made within the due dates specified Interest on Delayed Remittances: An additional amount of Rs.15,80,681/- was disallowed by the AO as interest payments were classified as penal in nature, not allowable under the Act. The AO disallowed Rs. 8,54,990, citing that the contributions were made after the statutory deadlines under the PF and ESI Acts, and therefore are deemed as income under Section 2(24)(x) and disallowed under Section 36(1)(va). The Hon'ble Supreme Court in the case of Checkmate Services (P). Ltd. Vs CIT [2022] 143 txmann.com 178 / [2023] 290 Taxman 19 / [2022] 448 ITR 518 SC, has held that "the contribution by the employees to the relevant funds is the employer's income u/s 2(24)(x) of the Act and the deduction for the same can be allowed only if such amount is deposited in the employee's account in the relevant fund before the date stipulated under the respective Acts. Thus the deduction u/s 36(1)(va) of the Act can be allowed only if the employees' share in the relevant funds is deposited by the employer before the due date stipulated in respective Acts." Based on the explicit language of Section 36(1) (va) and its legislative intent, the AO's decision to disallow the deduction is consistent with the statute. As the appellant failed to comply with the statutory deadlines for payment, this ground of appeal is dismissed. The AO also disallowed a sum of Rs.15,80,681/-, concluding that interest payments on delayed remittances of statutory dues are penal in nature. Under the Income-tax Act, penalties and fines are not allowed as deductions. The appellant argued that the interest payments were compensatory rather than penal, citing the Karnataka High Court decision in CIT vs. Oriental Insurance Co. Ltd. to support this position. Considering the nature of delayed remittances and the policy intention to enforce compliance, the AO's disallowed Rs.15,80,681/-. Assessee further challenged the order of assessment u/s 143(3) of the Act before the ld.CIT(A) who dismissed the appeal of the assessee on merits. Aggrieved, assessee is in appeal before us.
3. Before the ld. Counsel for assessee reiterated the submissions which were made before the ld.CIT(A). The ld.DR vehemently supported the order of the ld. CIT(A).
4. We find that disallowance of the Employee’s contribution to PF and ESI to the tune of Rs.8,54,990/- is justified in the light of the authoritative pronouncement of the Hon’ble Supreme Court in the case of Checkmate Services (P.) Ltd. v. CIT, 143 taxmann.com 178 SC.
Next issue regarding interest on delayed remittances/payment to the tune of Rs.15,80,681/- which includes the following:
‘’Rs.13,26,287/- delayed remittances of TDS (which includes Rs.1,47,258/- being interest on delayed remittance of TDS) Rs.996/- Interest on delayed payment of ESI Rs.1,85,618/- Interest on delayed payment of PF Rs.62,978/- Interest on delayed payment of PT Rs.4802/- Interest on delayed payment of Service Tax’’ 6. We have gone through the various judgments of the Hon’ble Court on these issues and find that the Hon’ble Supreme Court in the case of Lachmandas Mathuradas vs. CIT (2002) 254 ITR 799 (SC) held that interest on arrears or on outstanding balance of sales tax is compensatory in nature and would be allowable as deduction in computing profits of a business. Referring to the same decision, ITAT in the case of Narayani Ispat (P) Ltd in for AY 2010-11 vide order dated 20.08.2017 has held that interest expenses on account of delayed payment of service tax as well as TDS is an allowable expenditure. On the similar lines, it was held by the Delhi Tribunal in the case of Universal Energies Ltd Vs DCIT, in dated 05.01.2023 that Interest on delayed payment of TDS is allowable as a deduction.
7. Similarly, Bangalore Bench of the Tribunal in the case of Vyoma Technologies Private Limited V The DCIT held as under: ‘’6. We have heard the rival contentions of both the parties and perused the materials available on record. In the present case, the learned CIT-A disallowed the expenses as discussed aforesaid amounting to Rs. 14,13,154/- by invoking the explanation 1 to section 37(1) of the Act. As per the learned CIT-A, the impugned expenses were incurred by the assessee in violation of law and therefore the same was not allowed as deduction.
However, as regards the first category of expenses of Rs. 14,00771/- and Rs. 8,644/- representing the interest and late fee on account of delay in filing GST return, we find that it was levied for noncompliance of the provisions of GST Act. As such, the assessee is required to comply the provisions of GST Act by filing the return within the stipulated time. Since the returns have not been filed within the stipulated time, the interest and fee were charged under the GST Act. As such the interest in dispute was not charged by the revenue for committing any offence which was prohibited under the provisions of GST Act. Thus, we are of the view that the interest and late fees paid by the assessee in the given facts and circumstances is compensatory in nature which is allowable as deduction under the provisions of section 37(1) of the Act. The Delhi Tribunal in the case of ITO vs. Virtue Financial Services (P) Ltd reported 33 taxmann.com 395 regarding the payment made on account of delay in submitting statutory requirement/returns held that the same are compensatory in nature and allowable as business expenditure under section 37 of the Act. The relevant finding of the Tribunal is extracted as under: Held that that payments made by the assessee on account of delay in submitting certain statutory returns were compensatory in nature and not on account of fraction of any law. These were not penal in nature. Therefore, the Commissioner (Appeals) rightly deleted the addition.
7.1 Moving further, we note that the interest on delayed payment of Professional tax, PT, and licence fee for Rs. 217, Rs. 522 and Rs. 3000 respectively for which the assessee was under the statutory obligation to deposit/pay within the stipulated time but there was a delay and therefore the interest was charged under the relevant Act which is nothing but compensatory in nature and therefore the same cannot be hit by the explanation 1 to section 37(1) of the Act. Accordingly, we hold that such interest on account of delayed payments is eligible for deduction as business expenses under section 37(1) of the Act. Hence, the grounds of appeal of the assessee are allowed.
8. In the result, the appeal of the assessee is allowed. Order pronounced in court virtually on 21st day of August, 2024
8. Interest expenses with regard to late payment of taxes, which are compensatory in nature, are eligible for deduction u/s 37 of the Act. The Hon’ble Supreme Court observations in this regard in the case of Lachmandas Mathura Vs. CIT reported in 254 ITR 799 are as follows:
‘’1. This appeal arises out of the IT Reference No. 54 of 1978 - CIT v. Lachhman Das Mathura Das [1980] 124 ITR 411 (All.), wherein the Tribunal, Delhi Bench, had referred the following questions to the Allahabad High Court for opinion : "1. Whether the Tribunal was justified in law in allowing the assessee's claim in respect of interest on the arrears of sales tax in computing the assessee's income for the year under consideration ? 2. Whether the interest on the outstanding balance of sales tax was an allowable deduction under the Income-tax Act ? 3. Whether there was material on record justifying the Tribunal's finding that the liability of Rs. 69,383 for damages had crystallised in the accounting period relevant to the assessment year under consideration ? 4. Whether the claim of the assessee for damages could be held to be an allowable deduction computing the assessee's income liable to assessment for the year under consideration ?" (p. 413) 2. The Allahabad High Court by its impugned judgment dated 28-1-1980, has answered the said questions against the assessee and in favour of the revenue. Hence, this appeal.
While granting special leave to appeal, the appeal has been confined to question Nos. 1 and 2 only. 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. No order as to costs’.
The Hon’ble Karnataka High Court judgment in the case of CIT vs. Oriental Insurance Co. Ltd. [315 ITR 102], wherein the Hon’ble High Court held that interest for late payment of TDS is not in penal nature by observing as under:
7. In the Mittal Steel case (supra), the proviso to s. 201 was under consideration. The said proviso empowers levy of penalty if the TDS deduction is not effected for any valid reason. However, s.201(1A) is a distinct provision to levy interest for delayed remittance. It is in the practice of Revenue that for belated payment of tax for any reasonable cause, the assessee is liable to pay interest @ 12 per cent per annum. Similarly, for refunds, Revenue pays interest to the assessee. Therefore, the levy of interest under s. 201(1A) cannot at any rate be construed as a penalty.
Therefore, the Judgment of the Hon’ble Supreme Court in the case of Lachmandas Mathura (supra), Hon’ble Karnataka High Court decision in the case of CIT vs. Oriental Insurance Co. Ltd. [315 ITR 102] and other Tribunal orders explicitly opined that interest incurred on late payment of TDS is allowable business expenditure because it is compensatory in nature. Hence, interest on late payment of TDS is eligible for deduction u/s 37 of the Act.
Therefore, in the light of above judicial pronouncement, we held that the expenditure relating to interest on the delayed remittances of TDS (which includes Rs.1,47,258/- being interest on delayed remittance of TDS), Interest on delayed payment of PT and Interest on delayed payment of Service Tax are compensatory in nature hence allowable u/s 37 of the Act. Regarding Interest on delayed payment of ESI and Interest on delayed payment of PF the relevant rules of the Acts are important. The relevant provision in both the Acts separately deals with interest and penalty for the default. Hence, interest provision cannot be termed as penalty provision again in the light of specific penalty provisions therein. Hence, we treat the Interest on delayed payment of ESI and Interest on delayed payment of PF as compensatory in nature and allowable as expenditure.
In the result, appeal filed by the assessee stands allowed.
Order pronounced in the open court on 30th day of January, 2025 at Chennai.