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Facts
The assessee, Kankariya Automobiles Pvt Ltd, a Maruti Suzuki dealer, debited Rs.4,92,606/- as VAT tax interest for AY 2014-15. The Assessing Officer reopened the assessment under section 147 and disallowed this amount, completing the assessment ex-parte under section 144, considering it not an allowable expenditure. The CIT(A) upheld the disallowance, citing previous rulings that interest on arrears of sales tax is penal and not compensatory.
Held
The Tribunal found that the CIT(A) had misinterpreted the Supreme Court's decision in Lachmandas Mathuradas vs. CIT. Upon proper examination, the Supreme Court had held that interest on arrears of sales tax is compensatory in nature and thus an allowable expenditure. Consequently, the Tribunal set aside the CIT(A)'s order and directed the Assessing Officer to allow the amount of Rs.4,92,606/- debited as interest on VAT expenses.
Key Issues
Whether interest on delayed payment of VAT is an allowable business expenditure under the Income Tax Act.
Sections Cited
143(3), 36(1)(va), 2(24)(x), 201(1A), 147, 148, 142(1), 144, 37(1)
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Income Tax Appellate Tribunal, PUNE BENCH “A”, PUNE
Before: SHRI R. K. PANDA & SHRI VINAY BHAMORE
This appeal filed by the assessee is directed against the order dated 09.04.2025 of the Ld. CIT(A) / NFAC, Delhi relating to assessment year 2014-15.
There is a delay of 44 days in filing of the appeal before the Tribunal for which the assessee has filed a condonation application along with an affidavit explaining the reasons for such delay. After considering the contents of the condonation application filed along with the affidavit and after hearing the Ld. DR, the delay in filing of the appeal is condoned and the appeal is admitted for adjudication.
Facts of the case, in brief, are that the assessee is a private limited company engaged in the business of dealership of Maruti Suzuki India Limited and deals in purchase and sale of vehicles. It filed its return of income on 28.11.2014 declaring total income of Rs.40,18,540/-. The original assessment was completed u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) on 21.12.2016 by making disallowance of Rs.1,67,335/- u/s 36(1)(va) r.w.s. 2(24)(x) of the Act and disallowance of interest of Rs.2,554/- u/s 201(1A) of the Act. Subsequently the Assessing Officer noticed that the assessee has debited an amount of Rs.4,92,606/- being VAT tax interest. According to the Assessing Officer, the same is not an allowable expenditure and therefore, he reopened the assessment after recording reasons as per provisions of section 147 of the Act. Thereafter, he issued notice u/s 148 of the Act on 31.03.2021. However, the assessee did not file any return in response to the same. The subsequent notice issued u/s 142(1) of the Act remained un-complied with. He, therefore, proceeded to complete the assessment u/s 144 of the Act. On verification of the Profit and Loss Account he noted that the assessee has debited interest on VAT expenses to the tune of Rs.4,92,606/-. From the notes forming part of financial accounts he noted that the sales exclude VAT tax. Since the assessee, according to the Assessing Officer, has shown the sales turnover excluding VAT in Profit and Loss Account, he was of the opinion that the expenses incurred by the assessee towards interest on VAT is not an allowable expenditure. In absence of any reply from the side of the assessee for substantiating the claim of expenditure made towards interest on VAT expenses, the Assessing Officer disallowed an amount of Rs.4,92,606/- and added the same to the total income of the assessee.
In appeal, the Ld. CIT(A) / NFAC upheld the action of the Assessing Officer by observing as under:
Aggrieved with such order of the Ld. CIT(A) / NFAC, the assessee is in appeal before the Tribunal by raising the following grounds:
1. On the facts and in circumstances of the case and in law, the Ld. CIT(A)- NFAC erred in confirming the addition made by the Ld. Assessing Officer without considering the fact that the assessment order is unsinged thereby making it null and void. Hence, the addition of Rs.4,92,606/- on account of interest on VAT may please be deleted.
2. Without prejudice to the other ground and on the facts and in circumstances of the case and in law, the Ld. CIT(A)-NFAC erred in confirming the addition made by the Ld. Assessing Officer without considering the fact that interest on VAT paid is allowable expense. Hence, the addition of Rs.4,92,606/- on account of interest on VAT may please be deleted.
3. The Appellant craves the permission to add, amend, modify, alter, revise, substitute, delete any or all grounds of the appeal, if deemed necessary at the time of hearing of the appeal.
The Ld. Counsel for the assessee at the outset filed a copy of the decision of Hon’ble Supreme Court in the case of Lachmandas Mathuradas vs. CIT reported in (2002) 254 ITR 799 (SC) and submitted that Hon’ble Supreme Court in the said decision has reversed the decision of Hon’ble Allahabad High Court and decided the issue in favour of the assessee by holding that interest on arrears of tax is compensatory in nature and therefore is an allowable expenditure. Referring to para 6.4 of the order of the Ld. CIT(A) / NFAC he submitted that the Ld. CIT(A) / NFAC has only quoted one sentence of the said order without considering the decision of Hon’ble Supreme Court in its entirety. So far as various other decisions relied on by the Ld. CIT(A) / NFAC are concerned, he submitted that those were all relating to interest on delayed payment of TDS u/s 201(1A) of the Act and not on account of interest on VAT expenses. He submitted that since the issue stands decided in favour of the assessee by the decision of Hon’ble Supreme Court, the order of the Ld. CIT(A) / NFAC is liable to be set aside.
The Ld. DR on the other hand heavily relied on the orders of the Assessing Officer and the Ld. CIT(A) / NFAC. He submitted that the assessee has debited interest on VAT expenses, however, in the audited financial accounts it has been mentioned that the sales exclude VAT tax. Since the assessee has shown the sales turnover excluding VAT in Profit and Loss Account, therefore, the expenses incurred by the assessee towards interest on VAT is not an allowable expenditure. He accordingly submitted that the order of the Ld. CIT(A) / NFAC be upheld and the grounds raised by the assessee be dismissed.
We have heard the rival arguments made by both the sides, perused the orders of the Assessing Officer and the Ld. CIT(A) / NFAC and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find the Assessing Officer in the instant case disallowed interest on VAT expenses of Rs.4,92,606/- paid by the assessee on the ground that the same is not an allowable expenditure. We find the Ld. CIT(A) / NFAC, following the decision of Hon’ble Supreme Court in the case of Lachmandas Mathuradas vs. CIT (supra) held that Hon’ble Supreme Court following the decision of Full Bench of Hon’ble Allahabad High Court in the case of Saraya Sugar Mills (P.) Ltd. vs. CIT reported in (1979) 116 ITR 387 (All), has decided the issue against the assessee. However, a perusal of the order of Hon’ble Supreme Court shows that the Hon’ble Supreme Court in fact has decided the issue in favour of the assessee by observing as under:
“1. This appeal arises out of the Income-tax Reference No. 54 of 1978 , wherein the Income-tax Appellate Tribunal, Delhi Bench, had referred the following questions to the Allahabad High Court for opinion (page 413) : "1. Whether, the Tribunal was in law justified in allowing the assessee's claim in respect of interest on the arrears of sales tax in computing the asses-see'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 ?"
The Allahabad High Court by its impugned judgment dated January 28, 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 questions 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 decision in Saraya Sugar Mills P. Ltd. v. CIT [1979] 116 ITR 387 (All). 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 Engineering Works Ltd. v. CIT , 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 Pvt. Ltd. v. CIT, decided on February 29, 1996. In that view of the matter, the appeal is allowed and questions Nos. 1 and 2 are answered in favour of the assessee and against the Revenue.”
Since the issue stands decided in favour of the assessee by the decision of Hon’ble Supreme Court in the case of Lachmandas Mathuradas vs. CIT (supra), therefore, we set aside the order of the Ld. CIT(A) / NFAC and direct the Assessing Officer to allow the amount of Rs.4,92,606/- debited to the Profit and Loss Account being interest on VAT expenses. The grounds raised by the assessee are accordingly allowed.
In the result, the appeal filed by the assessee is allowed.
Order pronounced in the open Court on 13th February, 2026.
Sd/- Sd/- (VINAY BHAMORE) (R. K. PANDA) JUDICIAL MEMBER VICE PRESIDENT पुणे Pune; दिन ांक Dated : 13th February, 2026 GCVSR
आदेश की प्रतितिति अग्रेतिि/Copy of the Order is forwarded to: 1. अपील र्थी / The Appellant; 2. प्रत्यर्थी / The Respondent 3. The concerned Pr.CIT, Pune 4. DR, ITAT, ‘A’ Bench, Pune 5. ग र्ड फ ईल / Guard file. आदेशानुसार/ BY ORDER, // True Copy // Assistant Registrar आयकर अपीलीय अदिकरण ,पुणे / ITAT, Pune
S.No. Details Date Initials Designation 1 Draft dictated on 12.02.2026 Sr. PS/PS 2 Draft placed before author 12.02.2026 Sr. PS/PS Draft proposed & placed before the 3 JM/AM Second Member Draft discussed/approved by Second 4 AM/AM Member 5 Approved Draft comes to the Sr. PS/PS Sr. PS/PS 6 Kept for pronouncement on Sr. PS/PS 7 Date of uploading of Order Sr. PS/PS 8 File sent to Bench Clerk Sr. PS/PS Date on which the file goes to the Office 9 Superintendent 10 Date on which file goes to the A.R. 11 Date of Dispatch of order