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Income Tax Appellate Tribunal, MUMBAI BENCH “SMC”, MUMBAI
Before: SHRI MAHAVIR SINGH
This appeal by the Revenue is arising out of the order of Commissioner of Income Tax (Appeals)-8, Mumbai (in short ‘CIT(A)’) in Appeal No. CIT(A)- 8/11455/2015-16 dated 13.08.2019. The assessment was framed by Asstt. Commissioner of Income Tax, Circle 3(1)(1), Mumbai for Assessment Year 2013-14 vide his order dated Nil under Section 143(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’).
The first issue in this appeal of Revenue is against the order of CIT(A) deleting the disallowance made by the Assessing Officer of interest expenses paid to Hubtown Limited, which is its holding company, for non-deduction of TDS by invoking the provisions of Section 40(a)(ia) of the Act. For this, the Revenue has raised the following Ground no. 1 :-
M/s. Devkrupa Build Tech Ltd. “1. Whether on the facts and in the circumstances of the case, the Ld. CIT(A) was correct in deleting the disallowance of Rs.3,15,28,917/- made by the AO u/s. 40(a)(ia) without appreciating the fact that the assessee has not deducted & deposited TDS on the interest paid violating the provisions of sec 40(a)(ia) of the I.T. Act, 1961 ?”
I have heard the rival contentions and gone through the facts and circumstances of the case. The brief facts are that the assessee company has claimed the interest expenses paid to its holding company, Hubtown Limited, amounting to Rs.3,15,28,917/-. The Assessing Officer noted from the details filed before him that the TDS liability on the interest accrued comes to Rs.31,52,891/-, but the assessee company has not deducted the TDS as the company had incurred huge loss and was passing through a very bad liquidity crunch. The Assessing Officer did not agree with the assessee’s contention and disallowed the whole of the interest expenses of Rs.3,15,28,917/- for non- deduction of TDS by invoking the provisions of Sec. 40(a)(ia) of the Act. Aggrieved, assessee preferred appeal before the CIT(A). CIT(A), relying on the decision of the Tribunal in assessee’s group concern, M/s. Urvi Build Tech Ltd. in dated 28.12.2016 for Assessment Year 2012-13 and also other decisions, particularly of Hon'ble Delhi High Court in the case of Ansal Landmark Township Private Ltd. (377 ITR 635), deleted the disallowance vide his observations in paragraph 3.1.3 of his order. Aggrieved, Revenue is in appeal before the Tribunal.
Now, before us the learned counsel for the assessee filed copy of Tribunal’s order in assessee’s own case being dated 12.03.2020 for Assessment Year 2012-13 wherein the Tribunal on exactly same
M/s. Devkrupa Build Tech Ltd. facts dismissed the Revenue’s appeal by observing in paragraphs 2.2 and 2.3 as under :-
“2.2 The Ld. CIT(A), relying upon Tribunal’s order for AY 2012-13 in the case of assessee’s group concern namely M/s Urvi Build-tech Pvt. Ltd. in dated 28/12/2016, directed Ld. AO to delete the disallowance subject to verification of the fact that the deductee had shown the amounts in their respective tax returns and had paid the due taxes. Aggrieved, the revenue is under further appeal before us.
2.3 Upon due consideration of impugned order on this issue, we find that Ld. CIT(A) has merely followed the decision of this Tribunal for same Assessment Year rendered in the case of assessee’s group concerns. Therefore, no infirmity could be found in the same. The Ld. DR could not point out any distinguishing feature. No contrary decision has been placed on record. Therefore, we do not find any infirmity in the impugned order, on this issue. Ground No.1 stand dismissed.”
When these facts were confronted to the learned Sr. DR, he could not controvert the above said facts. Rather, he relied on the order of the Assessing Officer and stated that the TDS provisions are mandatory and in case TDS is not deducted, disallowance under Section 40(a)(ia) of the Act is to be made.
After considering the submissions and the case laws cited, I noted that the Tribunal has on exactly identical facts in assessee’s own case for Assessment Year 2012-13 in confirmed the action of the CIT(A) deleting the disallowance. I noted from the facts of the case that assessee has not deducted the TDS, but claimed that the assessee’s sister concern to whom the interest was paid has already included the interest in its returns. Hence, I confirm the order of CIT(A) deleting the disallowance subject to verification of the fact that the deductee has shown the amounts in its returns and has paid the tax due. On similar direction, I confirm the order of M/s. Devkrupa Build Tech Ltd. CIT(A), but direct the Assessing Officer to verify the facts. This issue of Revenue’s appeal is partly allowed as indicated above.
The second issue in the Revenue’s appeal is against the order of CIT(A) deleting the addition made by the Assessing Officer on account of interest on delayed payment of service tax. For this, the Revenue has raised the following Ground no. 2 :-
“2. Whether, on the facts and circumstances of the case and in law, the Ld. CIT(A) was right in deleting the addition of Rs.41,17,413/- on account interest on delayed payment of services tax without appreciating that the assessee had failed to failed to adduce justifiable reasons for such delay in not paying the service tax within the stipulated time and therefore, the same is akin to penal in nature which is not an allowable expenditure as per the provisions of section 37(1) of the Income Tax Act, 1961 ?”
I have heard the rival contentions and gone through the facts and circumstances of the case. I noted from the facts noted by the Assessing Officer that the assessee has claimed expenses on account of interest paid on delayed payment of service tax and VAT amounting to Rs.41,17,413/-. It was claimed that the VAT and service tax are expenses and are allowable in the Profit & Loss account. It was claimed that the payment of interest is compensatory in nature and it would not partake the character of penalty. It was contended that it is an allowable expenditure, but the Assessing Officer treated the payment as penal in nature and disallowed the interest. Aggrieved, assessee preferred appeal before the CIT(A). The CIT(A) deleted the addition made by the Assessing Officer of expenses claimed on account of payment of delayed payment of service tax/VAT. Aggrieved, Revenue is in appeal before the Tribunal.
M/s. Devkrupa Build Tech Ltd. 9. Before us, the learned Sr. DR heavily relied on the assessment order and stated that the interest paid, i.e. delayed interest on service tax and VAT is nothing but penalty in nature. On the other hand, the learned counsel for the assessee relied on the order of the CIT(A).
I have considered the arguments of both the sides and noted that the CIT(A) has considered the judgment of Hon'ble Supreme Court in the case of Prakash Cotton Mills P. Ltd., 201 ITR 684 (SC) wherein the context was of allowability of interest on delayed payment of Provident Fund dues. The Hon'ble Supreme Court after examining the relevant statutory provisions affirmed the view that the said interest involved a component of both interest as well as penalty. The Hon'ble Supreme Court considered the issue and laid down certain guidelines which are useful for determining the character of the impost, i.e. compensatory or penal in nature. The Hon'ble Supreme Court stated as under :-
“(i) the character should be determined based on the entire scheme of the statute under which it is levied. (ii) the mere nomenclature as interest or penalty or damages under the statute cannot be conclusive of its purpose. (iii) circumstances that a fixed rate of interest is paid is also not conclusive. (iv) whether the recovery of such amount requires any determination by the appropriate authority.”
I noted that the Hon'ble Supreme Court held that wherever an impost is found to be compensatory in nature, i.e. partly of compensatory nature and partly of penal nature, the Income tax Department for allowing expenses has to bifurcate the two components and then give deduction to the component
M/s. Devkrupa Build Tech Ltd. which is compensatory in nature and disallow the claim of deduction to the component which is penal in nature. The CIT(A) after examining the law, held that the impost, i.e. delayed payment of service tax/VAT is compensatory in nature and not penal in nature. The CIT(A) has given his findings in paragraphs 3.2.4 and 3.2.5 of his order, which reads as under :
“3.2.4 The Service Tax Law imposes interest u/s. 75 for delayed payment of Service Tax. The Hon'ble High Court in the case of C.C.E., Salem v. Subramania Siva Co-op. Sugar Mills Ltd. 2014 (35) S.T.R. 500 (Mad.) has held, by following the Hon'ble Apex Court’s decision in Commissioner of Trade Tax, Lucknow v. Kanhai Ram Thekedar 2005 (185) E.L.T. 3 (SC) delivered in the context of Sales Tax, that the liability of interest is automatic and does not require a separate notice. 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. Section 80 (until its deletion in Finance Act, 2015) provided penalty cannot be imposed u/s. 76 or 78 where there existed reasonable cause for such failure. The Hon'ble Karnataka High Court in CST, Bangalore v. Motor World 2012 (27) S.T.R. 225 (Kar.) held that the imposts u/s. 76 and 78 are not automatic and the same can be waived where a reasonable cause for non-payment of Service Tax is established. The authorities would have to still establish that the assessee has acted deliberately in defiance of law, or is guilty of contumacious or dishonest conduct, or acts in conscious disregard of its obligation; and cannot impose penalty, in cases where there is a technical or venial breach of the provisions of the Act or where the breach flows from a bona fide belief.
3.2.5 On an examination of the above scheme of the Service Tax law, it can be seen that the law has provided for a distinct provisions for compensating the loss on default in payment of tax and imposition of penalty for breach of the statutory provisions. While section 75 is a section for compensating the Government of delayed payment of the Service Tax, there are separate provisions for penalising the assessee for non-payment or delayed payment of Service Tax. Moreover, as held by the Courts, the recovery of interest u/s. 75 of the Service Tax law is automatic and does not require a separate
M/s. Devkrupa Build Tech Ltd. proceeding by way of issuance of notice. Where there are separate sections governing the imposition of penalty under the Service Tax law, it cannot be the intent of the legislature to levy a penalty for u/s. 75 as well. The above analysis thus leads to a conclusion that the imposition interest u/s. 75 is not a penalty on account of breach of law and hence not disallowable under the provisions of section 37 of the Act. The interest being imposed at the exorbitant rates should not alter the character of the levy.”
From the above, it is clear that the interest on delayed payment of service tax and VAT is compensatory in nature to compensate the loss on default of deduction of tax. I agree with the views of the CIT(A) that the interest paid on service tax and VAT is not penal in nature and is incurred in relation to assessee’s business and therefore allowable under Section 37(1) of the Act. Hence, I confirm the order of CIT(A) on this issue.
In the result, appeal of the Revenue is dismissed.
Order pronounced in the open court on 25th October, 2021.