GANPATI GEMS & JEWELLERS,JAIPUR vs. ASSTT./DY. CIT, CIRCLE 6, JAIPUR, JAIPUR

lquokbZ dh rkjh[k@Date of Hearing : 19/02/2025 mn?kks"k.kk dh rkjh[k@Date of Pronouncement : 13/05/2025 vkns'k@ORDER PER: DR. S. SEETHALAKSHMI, J.M.

This appeal is filed by the assessee aggrieved from the order of the Ld. CIT(A), National Faceless Appeal Centre, Delhi dated 25.11.2024 [hereinafter referred as “CIT(A)/NFAC”] for the assessment year 2017-18, which in turn arise from the order dated 26.12.2019 passed under section 143(3) of the Income Tax Act, [hereinafter referred as “Act” ] by the AO.

Ganpati Gems & jewellers ,Jaipur 2. The assessee has raised the following grounds:- “

1. Ld. CIT(A) has erred in law and on facts in sustaining disallowance of exemption of Rs.42,38,477/- allowable u/s 10AA of the I.T. Act which was denied for not filing Form 56F with e-filed return income, being a procedural lapse of the earlier Chartered Accountant of assessee, whereas Form 56F was submitted to the Ld.AO with letter dated 24.12.2019, i.e. during the course of assessment proceedings.

2. Without prejudice to Ground No.1 above, Ld.CIT(A) in exercise of his powers as co- terminus with the Assessing Officer, required Form 56F by letter dated 08.11.2024 and was submitted by the assessee on 11.11.2024 electronically but in vain.

3. Ld.CIT(A) was not justified in sustaining disallowance of interest of Rs.3,622/- on late payment of TDS being compensatory in nature but treated by the Ld.AO as penal in nature under the provisions of sec.37(1) of I.T. Act.”

3. The brief facts of the case as culled out from the records are that the appellant is a partnership firm engaged in manufacturing and export of handmade jewelery. Appellant is 100 per cent exporter of gold jewellery, having manufacturing activities in SEZ (special economic zone). Return of income for A.Y. 2017-18 was submitted u/s. 139(1) of Act on 15.10.2017 after claiming deduction of Rs.42,38,478/- u/s. 10AA of Act which is 50% of profit of Rs.84,76,956/-. As per the provisions of section 10AA of Income tax Act, deduction @ hundred per cent of profit and gains derived from exports is allowable for the first five consecutive year and thereafter exemption of profit is reduced to fifty percent in next five consecutive years. Under section 10AA(8) of Act, the assessee is required to file audit report in Form 56F for claim of 2 Ganpati Gems & jewellers ,Jaipur deduction u/s 10AA of I.T. Act where the unit has the manufacturing activities in SEZ for export of articles or goods or services. In Appellant’s case, initial five years for the purpose of deduction under sec. 10AA of Act @ 100% per cent of profit and gains derived from exports were A.Y. 2012-13 to A.Y. 2016-17. The year in appeal is 6th year, eligible for deduction @ 50% of profits. Audit report in Form No. 56F could not be submitted with Income tax Return for the reason of lapse on part of Appellant’s earlier Chartered Accountant. However, during the course of assessment proceedings, Form No. 56F was submitted to the Ld.AO through e-proceedings before finalization of the assessment. The AO disallowed the exemption in view of section 10A(5) for not furnishing the said certificate along with the return of income. The Ld.AO further disallowed interest of Rs.3622/- paid on late deposit of TDS holding it to be of penal nature.

4. Aggrieved from the order of AO, the assessee preferred an appeal before the ld. CIT(A). Apropos to the grounds so raised, the relevant finding of the ld. CIT(A) is reiterated here in below:-

“DECISION First issue 4.3 From the perusal of the order of the Ld.AO and the appeal filed by the appellant, it comes out that Form 56F was not filed by the appellant with the return of income. It was filed letter on 24.12.2019 almost at the end of the assessment proceedings. The ld. AO has disallowed the deduction on the ground that form 56F needed to be filed along with the original return of 3 Ganpati Gems & jewellers ,Jaipur income u/s 139(1) of the Income Tax Act. I agree with the view taken by the Ld.AO that it needed to be filed along with the return of income u/s 139(1) of the Income Tax Act. Therefore, I am not inclined to interfere with the order of the AO. Second issue 4.5 The legal question whether interest paid on late deposit of TDS is allowed as expenditure or not also stands settled by the Hon’ble Tribunal in the case of Universal Energies Ltd. vs. DCIT, decided on 26.07.2022. In this judgement, the Hon’ble Tribunal relied on various judicial pronouncements where in the issues vis-a-vis this allowance of interest on TDS payments were addressed. The Tribunal observed that, "Payment of interest takes colour from the nature of the levy with reference to which such interest is paid and the text required to be but not paid in time, which renders the assessee liable for payment of interest was in the nature of a direct tax and similar to the income tax income tax payable under the Income Tax Act. The interest paid u/s 201(1A) of the Act, therefore, would not assume the character of business expenditure and cannot be regarded as a compensatory payment. 4.6 In the light of the aforesaid decision, I am not interfering with the order of the Ld.AO on this issue.”

The Gujarat High Court in the case of CIT v. Gujarat Oil and Allied Industries Ltd. [1993] 201 ITR 325 (Guj.), took the view that the benefit of exemption should not be denied merely on account of delay in furnishing the same and it is permissible for the assessee to produce the audit report at a later stage either before the Income-tax Officer or before the appellate authority by assigning sufficient cause. In the case of CIT vs. G.M. Knitting Industries Pvt. Ltd.(2015) 376 ITR 456(SC) the Hon’ble Court observed that where the audit report in Form 10CCB is submitted before completion of assessment, it is sufficient compliance.

In the case of CIT vs. Godha Chemicals Pvt, Ltd., the Hon’ble Rajasthan High Court admitted a substantial question of law as to whether the expression "along with the return of income" can be interpreted to be permitting filing of such report even during assessment proceedings? After analysing various decisions and following the principles enunciated in two decisions viz. Hon'ble Punjab & Haryana High Court in CIT Vs. Gupta Fabs (2005) 274 ITR 620 and that of the Hon'ble Kerala High Court in CIT Vs. G. Krishnan Nair (2003) 259 ITR 727 and particularly for the view as taken in Dr.L.M.Singhvi's case by a Division Bench of Rajasthan High Court, the Couurt held thus - We have no hesitation in coming to 6 Ganpati Gems & jewellers ,Jaipur the conclusion that the expression "along with return of income" as occurring in sub- section (4) of Section 80HHC could always be interpreted as directory so far it relates to the time of filing of the report and hence, even if the report is filed during assessment proceedings, the assessee cannot be denied the claim of deduction. In other words, while filing of the accountant's report in sub-section (4) of Section 80HHC, could be considered to be a mandatory requirement for the purpose of the assessee being entitled to claim deduction but the time of filing of the same could only be considered directory in nature and such report cannot be removed out of consideration only because of having not been filed at the time of filing of the return.

We further find that the Coordinate Ahmedabad Bench, in DCIT vs. Croygas Equipments Pvt. Ltd.(2023) 224 TTJ 597 allowed the appeal of the assessee on exactly identical issue. In view of various authorities cited above and in particular the decision of the jurisdictional High Court, we are of the considered view that Ld. CIT(A) did not consider the facts and attending circumstances of the case while upholding the action of the AO in denying the exemption u/s 10A. Taking a judicious view of the matter, we allow these ground of appeal.

Ganpati Gems & jewellers ,Jaipur 9. We now take Ground No.3, challenging the order of ld CIT(A) in confirming the addition of Rs 3622/- by way of disallowance of interest on late payment of TDS. We find that the assessee is a partnership firm engaged in the business of manufacturing and export of ornaments. We further find that the assessee had claimed the interest paid on late payment of TDS of Rs 3,622/- as deduction u/s 37(1) of the Act on the plea that the delay in remittance of TDS had suffered interest which is compensatory in nature. The ld AO, however held it to be penal in nature and disallowed the said sum of Rs 3,622/- in the assessment, which was also confirmed by the ld CIT(A) relying on the decision of Hon’ble Delhi ITAT in the case of Universal Energies Ltd. vs. DCIT.

We would like to refer to the decision of this Bench in CIT vs. Chambal Fertilizers & Chemicals Ltd. (ITA No. 249/JP/2007) wherein the hon’ble Bench held - Whether claim of payment of interest u/s 201(1A) of the Act to the Income Tax department be disallowed? Held No, since it can not be equated with tax. This issue also arose before the Kolkata bench the case of DCIT vs. Narayani Ispat Pvt. Ltd. for assessment year 2010-11. In this case, interest on late payment of service tax and TDS was claimed by the assessee as a part of its interest and finance expenses. However, the A.O., relying on the Supreme Court Ganpati Gems & jewellers ,Jaipur decision in the case of Bharat Commerce & Industries Ltd. vs. CIT (supra), disallowed the claim of interest. The assessee preferred an appeal against the addition before the CIT(A), wherein it was pointed out that in the case of Bharat Commerce & Industries Ltd. vs. CIT (supra), the disallowance was made in respect of interest u/s. 215 of the Act due to delay in the payment of income tax on the income disclosed under Voluntary Disclosure of Income and Wealth Act, 1976, which was different from the interest u/s. 201(1A) on late deposit of service tax and TDS. The assessee relied on the decision of the Karnataka High Court in the case of CIT vs. Mysore Electrical Industries Ltd. 196 ITR 884 (Kar), where interest for failure to pay PF contribution was held deductible, and also on the Supreme Court decision in the case of Lachmandas Mathura Das vs. CIT 254 ITR 799 (SC), where interest on sales tax arrears was held deductible. Accepting the arguments of the assessee, the CIT(A) held that the impugned interest expense was incurred wholly and exclusively for the purpose of business and was thus, allowable.

The Tribunal, in further appeal by the Revenue discussed the judgement in the case of Bharat Commerce & Industries Ltd. vs. CIT (supra) in detail and distinguished its facts since it dealt with interest on delayed payment of income tax, whereas in the appeal before the tribunal, interest was paid for delayed 9 Ganpati Gems & jewellers ,Jaipur payment of service tax and TDS. The Tribunal observed that interest for delay in making payment of service tax and TDS was compensatory in nature and not in the nature of penalty. It also delved upon the decision of the Supreme Court in the case of Lachmandas Mathura Das vs. CIT (supra), and held that its principles can be applied to interest on delayed payment of TDS, noting that interest on late payment of TDS related to expenses claimed by the assessee which were subjected to the TDS provisions and that TDS did not represent tax of the assessee, but rather the tax of the payee. The deduction allowed by the CIT(A) in respect of interest on TDS was thus upheld by the Tribunal.

We find that the genuineness of the expenditure incurred is not in dispute. Admittedly, the TDS was duly deducted and remitted with delay by the assessee and for the said delay, the assessee had suffered interest. The expenditure incurred by the assessee for the purpose of business is not doubted by the revenue. The only dispute involved is whether the said payment of interest on late payment of TDS could be construed as compensatory in nature or penal in nature. We find that the payment of interest is provided separately in the statute which is a permissible payment and accordingly compensatory in nature. Apart from this, the statute also provides for payment of penalty which is penal in nature. Hence, the legislature in its wisdom had enacted separate provisions for payment of interest and penalty Ganpati Gems & jewellers ,Jaipur separately. Hence, payment of interest on delayed remittance of TDS could not be construed as penal in nature.

It is significant to note that usually a tax is deducted at source on payments made by a businessman in his character as a trader and, in most of the cases, such payments are expressly or otherwise deductible under the Act, in computing the Profits and Gains of Business or Profession. In the absence of any specific provisions such as section 40(a), for expressly disallowing the payments, the tax deducted and withheld is a part of the expenditure of the payer and in no manner can be construed as a tax on his profits or gains of business or profession. Therefore, provisions of section 40(a)(ii) have no application to such payments or interest thereon. In fact, the entire expenditure representing the payment, including tax deducted and withheld, is deductible in law, without reservation.

The term “tax” is defined u/s. 2(43) to mean income tax chargeable under the provisions of Income-tax Act and includes the fringe benefit tax. On a bare reading of this provision, it is clear that the term “tax” in no manner includes the tax deducted at source which is tax on somebody else’s income and not on the income of the assessee payer; in any case, the tax deducted at source is not an income tax ‘chargeable’ under the provisions of the Act. 11 Ganpati Gems & jewellers ,Jaipur The view of the Kolkata Tribunal in the case of Narayani Ispat Pvt. Ltd. (supra), thus, appears reasonable that TDS, by itself, does not represent income tax of the assessee, but is a deduction from the payment made to a party in respect of expenses claimed by the assessee, at a certain percentage prescribed in the Act. So long as the expenses from which tax is deducted, relate to the business of the assessee, the TDS thereon would also be considered to be relating to the business of the assessee and therefore, interest on delayed payment of such TDS would be considered to be incurred wholly and exclusively for the purpose of business.

We note that it may be true that the interest for delay in payment of the tax deducted at source would not be considered to be interest on capital borrowed for the purposes of business and therefore, may not be eligible for deduction u/s. 36(1)(iii) of the Act. The same however, would be eligible for deduction u/s 37(1) of the Act, being an expenditure wholly and exclusively incurred for the purposes of business.

Respectfully following the decision of this Bench in CIT vs. Chambal Fertilizers Ltd.(supra) the better view therefore, is that interest on delayed payment of the tax deducted at source, payable u/s. 201(1A) or any other similar provision, is deductible in law in computing the Profits and Gains of Business or Profession of the payer. 12 Ganpati Gems & jewellers ,Jaipur The appellate order confirming the action of the AO in disallowing payment of interest on TDS u/s 37(1) of the Income Tax Act 1961, is set aside and the appeal of the assessee on this ground is also allowed. In the result, the appeal filed by the assessee is allowed.

Order pronounced in the open Court on 13/05/2025.