Interest on delayed payment of Services tax, Provident Fund, VAT etc are allowable expenditure u/s 37

The issue in this appeal of the assessee is regard to the disallowance u/s 37(1) of the Income Tax Act, 1961 (the Act) in respect of interest on service tax, provident fund and VAT.

In this matter, During previous year assessee paid interest on delayed payment of service tax amounting to ₹1590/-, Interest on delayed payment of provident fund of ₹15,934/- and interest on VAT of ₹27,127/-. The assessing officer disallowed the interest of Rs. 44651/- on the grounds that this intetest was penal in nature. The assessee explained that this interest was compensatory in nature and therefore the same was allowable as expenditure.

Aggrieved by the order of assessing officer, assessee filed appeal before CIT(A). The learned CIT (A) confirmed the disallowance by affirming the reasons given by the learned Assessing Officer.

Aggrieved by the above order, assessee filed appeal before the tribunal. ITAT in its order relied on judgment passed by the co-ordinate bench in the case of Emdee Digitronics Pvt. Ltd Vs. PCIT in ITA No. 361/Kol/2019 dated 28th June, 2019, wherein the co-ordinate Bench in Para No.12 relying on the decision of M/s Naaraayani Sons Pvt. Limited, in ITA No. 1796-1798/Kol/2017, order dated 21.08.2018 held that interest expense on late deposit of VAT, service tax, TDS etc are allowable expenditure under section 37(1) of the Act. Further, VAT laws, provident laws and service tax laws clearly provide for payment of interest if there is a delay in payment of fees. Therefore, it is apparent that those respective laws allowed the belated payment along with interest. Therefore, those are not affected by explanation–1 to section 37(1) of the Act. Therefore, in view of the above fact ITAT allowed interest expense.

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