APEX URBAN INFRASTRUCTURE PRIVATE LIMITED,HYDERABAD vs. DCIT, CENTRAL CIRCLE-2(3), HYDERABAD

ORDER PER. RAVISH SOOD, J.M: The present appeal filed by the assessee company is directed against the order passed by the Commissioner of Income Tax (Appeals)- 12, Hyderabad, which in turn arises from the order passed by the Assessing Officer (for short, “AO”) under section 143(3) of the Income Tax Act, 1961 (for short, “the Act”), dated 31/10/2019 for the Assessment Year (AY) 2017-18. The assessee company has assailed the impugned order of the CIT(A) on the following grounds of appeal before us:

2. The Ld. CIT(A) erred in upholding the disallowance made by AO, wrongly characterizing the interest paid for delayed payment of service tax as penal in nature.

3. The Ld. CIT(A) erred in law and on facts, by upholding the disallowance of Rs. 13,200 in respect of interest on late payment of service tax by treating the same as penal in nature and disallowed u/s 37 of the Act.

4. The Ld. CIT(A) ought to have appreciated the fact that, as per Explanation 1 to section 37(1) of the Act, interest on late payment of service tax is an extension of tax liability and accordingly, such interest is allowable as a deduction u/s 37(1) of the Act.

5. The Ld. CIT(A) had grossly erred in confirming the disallowance u/s 14A r.w. Rule 8D of Rs. 30,05,833/- without appreciating the fundamental precondition (existence of exempt income during the year) for invoking section 14A of the Act.

6. The Ld. CIT(A) erred in upholding the AO's action of applying Rule 8D without recording mandatory satisfaction as required u/s 14A(2) & (3) of the Act.

7. The Ld. CIT(A) ought to have appreciated the fact that mere existence of investments and interest-bearing loans is not sufficient to invoke Rule 8D, without establishing a direct nexus, which the AO failed to do.

9. The Ld. CIT(A) ought to have appreciated the fact that such investment made in the group company was for strategic business purpose and not for earning dividend income or any other exempt income.

10. Appellant may, add or alter or amend or modify or substitute or delete and/or rescind all or any of the grounds of appeal at any time before or at the time of hearing of the appeal.”

8. Apropos the disallowance under section 14A r.w. Rule 8D(2)(i) of Rs. 30,05,833/- made by the AO, which, thereafter, had been sustained by the CIT(A), the Ld. AR submitted that the said disallowance in the absence of any exempt income earned by the assessee company cannot be sustained and is liable to be struck down on the said count

Apex Urban Infrastructure Private Ltd vs. DCIT itself. Elaborating on his contention, the Ld. AR submitted that the assessee company during the subject year had, though made an investment of Rs. 35 crores in Compulsorily Convertible Preference Shares of M/s. Phoenix Infocity Private Limited, i.e., a group entity, but based on the fact that it had not received any dividend income on the said investments during the subject year, no disallowance under section 14A of the Act was called for in its case. Elaborating on his contention, the Ld. AR submitted that as the assessee company during the subject year had not received any exempt income, therefore, there was no justification for the authorities below to have worked out the disallowance under section 14A of the Act. The Ld. AR in support of his aforesaid contention had relied upon the judgment of the Hon’ble Supreme Court in the case of CIT Vs. Chettinad Logistics (P.) Ltd (2018) 95 taxmann.com 250 (SC). The Ld. AR submitted that the Hon’ble Apex Court in its aforesaid judgment has held that section 14A cannot be invoked where no exempt income was earned by the assessee in the relevant assessment year.

Apex Urban Infrastructure Private Ltd vs. DCIT contained in the Act, the provisions of Section 14A shall apply in a case where the income, not forming part of the total income under the Act, has not accrued or arisen or has not been received during the subject year and the expenditure has been incurred during the said previous year in relation to such exempt income, but the same is effective from April 1, 2022 and cannot be presumed to have retrospective effect. Our aforesaid view is fortified by the judgment of Hon'ble High Court of Delhi in the case of Pr. CIT Vs. Era Infrastructure (India) Ltd. (2022) 114 CCH 219 (Delhi) and that of the Hon’ble High Court of Madhya Pradesh in Pr. CIT Vs. Keti Constructions (2024) 162 taxmann.com278 (MP), wherein it has been held that the amendment made available in the statute vide the Finance Act, 2022 in Section 14A is effective from 01.04.2022 and cannot be permitted with retrospective effect. The Grounds of appeal Nos. 5 to 9 are allowed in terms of our aforesaid observations.

13. We shall now deal with the Ld. AR’s claim that both the authorities below had grossly erred in law and facts of the case in disallowing the claim of the assessee company for the deduction of interest on late payment of service tax of Rs. 13,200/-.

Apex Urban Infrastructure Private Ltd vs. DCIT 14. We have given thoughtful consideration to the aforesaid issue and find that the Hon’ble Supreme Court in the case of Lachmandas Mathuradas vs. CIT (2002) 254 ITR 799 (SC) has held that interest on arrears or outstanding balance of sales tax is compensatory in nature and would be allowable as a deduction in computing profits of a business. The Hon’ble Apex Court, while so concluding, had relied upon its earlier order passed in the case of Saraya Sugar Mills (P.) Ltd vs. CIT (Civil Appeal No.830 of 1979, dated 29/02/1996), wherein it was held that interest on arrears of tax is compensatory in nature and not penal. Also, we find that the ITAT, Hyderabad “B” Bench in DCIT vs. PLR Projects Private Limited (ITA No.615/Hyd/2019, dated 21/09/2021) by relying upon the aforesaid judgment of the Hon’ble Apex Court in the case of Lachmandas Mathuradas vs. CIT (2002) 254 ITR 799 (SC) had concluded that the interest on delayed payment of service tax being compensatory in nature is allowable as a deduction under section 37 of the Act. Apart from that, the ITAT, “C” Bench, Chennai in Price Holdings Madras (P) Ltd vs. DCIT, dated 02/11/2022 had taken a similar view and observed that as interest paid on belated payment of service tax is not a penalty, thus, the same cannot be disallowed under section 37(1) of the Act. We, thus, respectfully following the aforesaid judicial pronouncements/orders herein conclude

Apex Urban Infrastructure Private Ltd vs. DCIT that as the interest paid by the assessee company on the delayed payment of service tax is compensatory in nature, therefore, the same could not have been disallowed by the AO under section 37(1) of the Act. Accordingly, we herein direct the AO to vacate the disallowance of Rs. 13,200/- made by him. The Grounds of appeal Nos. 2 and 3 are allowed in terms of our aforesaid observations.

Order pronounced in the open court on 13th January, 2026.