SUBSEA PRO ENGINEERING PRIVATE LIMITED ,MUMBAI vs. ACIT CIRCLE-16 (3) , MUMBAI

This is an appeal by the assessee against the order dated 11.07.2019 of learned Commissioner of Income Tax (Appeals)-7, Mumbai for the assessment year 2015-16.

The dispute in the present appeal is confined to disallowance of deduction claimed towards interest on delayed payment of tax deducted at source (TDS). Assessment Year: 2015-16 3. Briefly the facts are, the assessee is a resident company. For the assessment year under dispute, the assessee filed its return of income on 30.09.2015 declaring total income of Rs. 2,96,43,520/-. In course of assessment proceedings, the Assessing Officer (AO) while verifying the financial statement of the assessee noticed that the assessee has debited an amount of Rs. 12,40,902/- to the profit and loss account towards interest on TDS. On further verification, he found that the interest has been charged for delayed payment of TDS amount to the Government account. When called upon to justify the deduction claimed, the assessee relied upon the decision of the Tribunal in case of DCIT vs. M/s Narayani Ispat Pvt. Ltd., dated 30.08.2017. The Assessing Officer, however, was not convinced with submissions of the assessee. Relying upon certain judicial precedents, the AO disallowed assessee’s claim. Assessee unsuccessfully contested the disallowance before learned Commissioner (Appeals). 4. The learned Authorised Representative of the assessee submitted, interest paid on delayed payment of TDS is eligible for deduction as business expenditure under section 37(1) of the Act. In support of such contention he relied upon the following decisions:-

The learned Departmental Representative submitted, the assessee has not remitted the TDS amount within the stipulated time. Therefore, assessee was liable to pay interest for delayed payment of TDS amount. He submitted, Assessment Year: 2015-16 the interest paid for delayed payment of TDS is not eligible as deduction under section 37 of the Act. In support of such contention, in addition to the decisions relied upon by the departmental authorities, he relied upon the following decisions:

In rejoinder, learned Authorized Representative of the assessee submitted, the decisions relied upon by the learned Departmental Representative would not be applicable to assessee’s case. Elaborating further, he submitted, the decision of the ITAT Bangalore Bench in case of Velankani Information Systems vs. DCIT (supra) would not be applicable as the nature and character of interest has not been properly appreciated. He submitted, in case of TDS, it is deducted from the gross expenditure paid/payable to the third parties. Whereas, the gross expenditure is eligible for deduction. He submitted, in that scenario, the interest amount would partake the character of principal amount, hence, will be a deductible expenditure. Therefore, he submitted, interest charged under section 201(1A) cannot be equated with interest charged under sections 215, 220, 234A, 234B and 234C, which are levied on personal tax. Further, he submitted, the ratio laid down in case of Bharat Commerce and Industries Ltd. vs. CIT, 230 ITR 733 (SC) would not be applicable to assessee’s case as the decision was rendered in the context of interest charged under section 139, 215 of the Act. He submitted, on the Assessment Year: 2015-16 contrary there are decisions, wherein interest paid in respect of sales tax, service tax, ESI and Provident Fund have been allowed. In this context, he relied upon the following decisions:

As regards the decisions of the Hon’ble Bombay High Court in case of Ferrous Alloys Corporation Ltd. vs. CIT (supra). Learned Authorised Representative submitted that the concerned assessee’s counsel neither argued the specific point nor the Hon’ble High Court has made any discussion on the issue. He also distinguished the other decisions relied upon by the learned Departmental Representative.

We have considered rival submissions in the light of the decisions relied upon and perused the materials on record. The short issue arising for consideration is, whether the interest paid for delayed remittance of TDS amount to the Government account can be allowed as deduction under section 37(1) of the Act. There is no dispute that interest of Rs. 12,40,902/- was charged for delay in remitting the TDS collected to the Government account. Assessee has debited such interest to the profit and loss account as expenditure. It is the case of the assessee that since such interest payment is not of penal nature and was paid in course of regular business, it is allowable deduction. 9. Aforesaid claim of the assessee has to be tested keeping in perspective the ratio laid down in certain judicial precedents cited before us. In case of Assessment Year: 2015-16 Bharat Commerce & Industries Ltd. vs. CIT (supra) relied upon by the departmental authorities, the Hon’ble Apex Court while considering the allowability of interest paid for non-payment of advance tax as deduction under section 37(1) of the Act held that such interest paid is for committing a default in respect of a statutory liability. Hence, in no way connected with preserving or promoting the business of the assessee. Thus, the Hon’ble Apex Court held that the interest paid would not be allowable as deduction under section 37(1) of the Act. In case of Aruna Mills Ltd. vs. CIT, 1957 31 ITR 153 relied upon by the departmental authorities, the Hon’ble jurisdictional High Court held that interest for default to pay advance tax cannot be allowed as deduction. In case of CIT vs. Chennai Properties & Investment Ltd. (supra), the Hon’ble Madras High Court while considering identical issue of deduction claimed for interest paid for delayed remittance of TDS held that it couldn’t be allowed as deduction under section 37(1) of the Act. The observations of the Hon’ble Madras High Court are as under:- “14. As already noticed, the payment of interest which takes colour from the nature of the levy with reference to which such interest is paid and the tax required to be paid but not paid in time, which rendered (sic) the assessee liable for payment of interest, was in the nature of a direct tax and in settlement of the income-tax payable under the Income-tax Act. The interest paid under section 201(1A), therefore, would not assume the character of business expenditure and cannot be regarded as a compensatory payment as contended by the learned counsel for the assessee.

The counsel for the assessee in support of his submission that the interest paid by the assessee was merely compensatory in character besides relying on the case of Mahalakshmi Sugar Mills Co. (supra) also relied on the decisions of the Apex Court in the cases of Prakash Cotton Mills (P.) Ltd. v. CIT[1993] 201 ITR 684/67 Taxman 546 ; Assessment Year: 2015-16 Malwa Vanaspati & Chemical Co. v. CI 1997 225 ITR 383 and CIT vs Ahmedabad Cotton Mfg. Co. Ltd. v.CI 1994 205 ITR 163. In all those cases, the Court was concerned with an indirect tax payable by the assessee in the course of its business and admissible as business expenditure. Further, liability for interest which had been incurred by the assessee therein was regarded as compensatory in nature and allowable as business expenditure.

The ratio of those cases is not applicable here. Income-tax is not allowable as business expenditure. The amount deducted as tax is not an item of expenditure. The amount not deducted and remitted has the character of tax and has to be remitted to the State and cannot be utilised by the assessee for its own business. The Supreme Court in the case of Bharat Commerce & Industries Ltd. (supra) rejected the would 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 capitalization in its business, to contend that the interest paid for the period of delay in payment of tax amounted to a business expenditure.

The question referred to us, therefore, is required to be and is answered in the negative, in favour of the “revenue and against the a assessee. The revenue shall be entitled to costs in the sum of Rs, 1,000.”

In case of Ferro Alloys Corporation Ltd. vs. CIT (supra) while considering identical issue of deduction claimed under section 37(1) of the Act in respect of interest paid under sections 201(1A), 215 and 220 of the Income Tax Act, 1961, the Hon’ble Jurisdictional High Court held that such deduction is not allowable. At this stage, we must observe that in the following cases the Coordinate Benches have taken a view favoring to the assessee by holding that Assessment Year: 2015-16 interest paid on delayed remittance of TDS is eligible for deduction under section 37(1) of the Act. 1. DCIT vs. M/s Narayani Ispat Pvt. Ltd. (supra) 2. M/s Essar Projects India Ltd. vs. ACIT (supra) 3. Mukand Ltd. vs. ITO (supra)

However, in none of these cases either the decision of the Hon’ble Supreme Court in case of Bharat Commerce and Industries Ltd. vs. CIT (supra) was considered, or the decisions of the Hon’ble jurisdictional High Court in case of Ferro Alloys Corporation Ltd. vs. CIT and the decision of Hon’ble Madras High Court in case of CIT vs. Chennai Properties & Investments Ltd. (supra) were considered. In fact, the decision of the Hon’ble jurisdictional in case of Ferro Alloys Corporation Ltd. vs. CIT and that of the Hon’ble Madras High Court in case of CIT vs. Chennai Properties Investment Ltd. are the only two decisions of the higher courts available, which are directly on the issue involved in the present appeal.

Pertinently, following the decision of the Hon’ble Madras High Court in case of CIT vs. Chennai Properties Investment Ltd. (supra), the ITAT Bangalore Bench in case of Velankani Information Systems Ltd. vs. DCIT (supra) did not accept the view expressed by the co-ordinate Bench in case of DCIT vs. M/s Narayani Ispat Pvt. Ltd. (supra). 13. For the sake of completeness, at this stage, we consider it our duty to deal with some other decisions cited before us by learned Authorized Representative of the assessee. In case of Lachmandas Mathuradas vs. CIT (supra), the issue was relating to claim of deduction under section 37(1) of the Assessment Year: 2015-16 Act in respect of interest charged on arrears of sales tax. In that context, the Hon’ble Supreme Court allowed the deduction holding that the nature of such interest is compensatory. Similarly, in case of Harshad Shantilal Mehta vs. Custodian (1998) 231 ITR 871 (SC), the Hon’ble Supreme Court was dealing with an issue concerning whether tax due under the Special Court (Trial Offences relating to transactions in securities) Act, 1992 would include interest and penalty. Thus, in the context of specific provisions contained under the said Act, the Hon’ble Supreme Court held that tax due would not include interest and penalty. 14. Thus, as could be seen, the issue before the Hon’ble Supreme Court in case of Harshad Shantilal Mehta vs. Custodian (supra) is different from the issue involved in the present appeal. In any case of the matter, the decision of the Hon’ble jurisdictional High Court in case of Ferro Alloys Corporation Ltd. vs. CIT (supra) and the decision of the Hon’ble Madras High Court in case of CIT vs. Chennai Properties & Investment Ltd. (supra) are not only directly on the issue but are in favour of the revenue. Therefore, respectfully following the aforesaid two decisions of the Hon’ble jurisdictional and Hon’ble Madras High Court, we hold that assessee’s claim of deduction under section 37(1) of the Act in respect of interest charged on delayed payment of TDS is not allowable. 15. The issue can also be looked into from another angle. Admittedly, the assessee is collecting TDS on behalf of the Government. The TDS collected does not belong to the assessee and has to be remitted to the Government account within the prescribed time. By not depositing the TDS in time, the assessee is not only depriving the Government from utilizing the money for public purpose Assessment Year: 2015-16 but also creating problem for the payee in getting timely credit of TDS. On the other hand, the assessee is utilizing the TDS amount for his own benefit. Thus, for the default in depositing the TDS amount in time, interest is levied. Therefore, allowing deduction of such interest under section 37 of the Act would amount to rewarding the assessee for a default committed. This, in our view, is unconscionable. 16. In the result, appeal is dismissed. Order pronounced in the open court on 31st August, 2021. (S. RIFAUR RAHMAN) JUDICIAL MEMBER