Late fees and interest of GST return is allowed as an Expense in Income Tax

This Article deals with the allowability of GST Late fees, interest and Penalty as deductions under Income Tax Act.

As per Section 37(1) of Income Tax, any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head “Profits and gains of business or profession”.

Further, it has been clarified that any expenditure incurred by an assessee for any purpose which is an offense or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure.

GST Late Fees

As per GST Law, Late Fees is to be levied in case of delay in Filing of GST Returns. Readers should note that Late Fees cannot be construed as a “Penalty” or “Offence.” The same is compensatory in nature and not penal.

Section 40 of Income Tax Deals with amounts not deductible. As per Section 40(a)(ii)

Notwithstanding anything to the contrary in sections 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head “Profits and gains of business or profession”,-

(ii) any sum paid on account of any rate or tax levied on the profits or gains of any business or profession or assessed at a proportion of, or otherwise on the basis of, any such profits or gains.

Explanation 1.—For the removal of doubts, it is hereby declared that for the purposes of this sub-clause, any sum paid on account of any rate or tax levied includes and shall be deemed always to have included any sum eligible for relief of tax under section 90 or, as the case may be, deduction from the Indian income-tax payable under section 91.

Explanation 2.—For the removal of doubts, it is hereby declared that for the purposes of this sub-clause, any sum paid on account of any rate or tax levied includes any sum eligible for relief of tax under section 90A.

Explanation 3.—For the removal of doubts, it is hereby clarified that for the purposes of this sub-clause, the term “tax” shall include and shall be deemed to have always included any surcharge or cess, by whatever name called, on such tax;

Readers should also note that GST Late Fees do not come in this purview as well, therefore it’s deduction should be allowed as expense as per Income Tax.

GST Interest

Again GST Interest paid for Late Payment of GST is compensatory in nature and not penal and therefore the same should be allowed as a deduction from Income Tax.

Relevant Text of Prince Holdings Madras (P) Ltd Vs DCIT (ITAT Chennai) [ITA 524/Chny/2021 dated November 2, 2022]

4. None appeared for the assessee. We have heard the Ld. DR and perused the relevant material available on record. We find that the AO has disallowed a sum of Rs. 4,03,000/- being interest on service tax relating to earlier years on the ground that the same is in the nature of penalty. We find that interest paid on belated payments of service tax is not a penalty, which can be disallowed u/s. 37(1) of the Act. Therefore, we are of the considered view that the Ld. CIT(A) has erred in sustaining addition made by the AO towards interest paid on service tax. Hence, we reverse the findings of the ld. CIT(A) and direct the AO to delete addition made towards disallowance of interest on service tax.

GST Penalty

If the Penalty has been paid by the Taxpayer as per the GST Act, the same would be disallowed as an Expense from the Income Tax Act as it is of Penal nature.