Interest on delayed payment of TDS is not an allowable deduction: ITAT

The assessee company was engaged in the business of construction services in respect of commercial/industrial buildings and civil structures. It filed the return of income u/s. 139(1) of the Income-tax Act, 1961 [the Act] on 21.3.2018 declaring income of Rs.3,21,57,430. The AO made certain disallowances in the assessment order u/s. 143(3) of the Act which was confirmed by the CIT(Appeals). Aggrieved, the assessee is in appeal before the Tribunal.

The tribunal relied on the decision given in the case of M/s. Shakuntala Agarbathi Company v. DCIT that the employee’s contribution of PF and ESI was paid before the due date of filing of return of income u/s. 139(1) of the Income-tax Act, 1961 and was thus allowable u/s 43B of the Act. The Bangalore Tribunal has adjudicated the issue that amendment to provisions of section 43B r.w.s. 36(1)(va) by the Finance Act, 2021 is prospective in nature and applicable from 1.4.2021.

The further question is whether the amendment to sections 36[1][va] and 43B of the Act by Finance Act, 2021 is clarificatory and declaratory in nature. The Hon’ble Supreme Court in the recent judgment in the case of M.M.Aqua Technologies Limited v. CIT, ITR 582 (SC) held that retrospective provision in a taxing Act which is “for the removal of doubts” cannot be presumed to be retrospective if it alters or changes the law as it earlier stood.

Following the decision of the Co-ordinate Bench in the case of M/s. Shakuntala Agarbathy Company and also the binding decision of the Hon’ble jurisdictional High Court in the case of Essae Teraoka Pvt. Ltd. v. DCIT, the tribunal held that the employee’s contribution paid by the assessee before the due date of filing the return of income u/s.139(1) of the Act is allowable as a deduction and the addition is deleted. The issue under consideration is the allowability of interest u/s.201(1A) as deduction u/s.37(1) of the Act and therefore the decision of the Hon’ble Supreme Court can be applied in the given case.

The important question to be decided by the Tribunal is whether interest paid u/s.201(1A) of the Act is an allowable business expenditure has to be examined within the parameters of Sec.37(1) of the Act and not on the basis of the prohibition contained in Sec.40a(ii) of the Act. Sec.37(1) of the Act provides that expenditure which is not capital or personal in nature laid out or expended wholly and exclusively for the purpose of business shall be allowed in computing the income chargeable under the head “profits and gains of business or profession”. Sec.40(ii) provides that any sum paid on account of any rate or tax levied on the profits and gains of any business or profession or assessed at a proportion of, or otherwise on the basis of any such profits or gains, shall not be deducted in computing the income chargeable under the head “profits and gains of business or profession”. Both these sections operate in different fields, the former being an enabling provision while the latter is a disabling provision.

Moreover, the levy of interest on delayed payment of TDS u/s.201(1A) though held to be compensatory in nature by the Tribunal, allowability of the same cannot be decided simply based on that. The levy of 201(1A) is a levy for the delay in the remittance of tax that is deducted and not paid into the government account and is levied towards the use of funds belonging to the exchequer. The interest u/s.201(1A) can be equated to the levy of interest u/s.234. Interest u/s.234 is a levy on delay in the payment of income tax and the TDS is nothing but the income tax paid on behalf of the payee therefore the interest on the same u/s.201(1A) is also in the nature of interest levied on the income tax. On that count also interest on delayed payment of TDS cannot be claimed as a deduction. Hence, the Appeal of the assessee is partly allowed.

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