Issue for Consideration
Chapter XVII of the
Income-tax Act, 1961 contains several provisions for collection and recovery of
tax, by way of Tax Deduction at Source (‘TDS’) and Tax Collection at Source
(‘TCS’), by the payer and the receiver respectively. The payer and receiver are
also tasked with remitting the TDS and TCS to the government, filing periodic
statements and issuing certificates in respect of the same. Interest is levied
u/s. 201(1A), on the payer/receiver, for the period of delay in case of
non-deduction or collection of tax, or for failure to pay the same as required
by the Act.
Section 37(1) of the Act
provides for allowance of a deduction in respect of any expenditure, which is
not dealt with in sections 30 to 36 and is not in the nature of capital
expenditure or personal expenses of the assessee, but is laid out or expended
wholly and exclusively for the purposes of the business or profession.
Further, Explanation 1 to
section 37(1) declares that, for the removal of doubts, any expenditure
incurred by an assessee for any purpose which is an offence 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.
Four attributes emerge from
the provisions of section 37 as being essential for claiming deduction in respect
of any expenditure in computing the income under the head “Profits and gains of
business or profession” –
1) It
must not be capital in nature;
2) It
must not be personal in nature;
3) It
must be laid out or expended wholly and exclusively for the purposes of
business or profession; and
4) It
must not be incurred for a purpose which is an offence or which is prohibited
by law.
In
claiming the deduction u/s. 37(1) for interest u/s. 201(1A), an issue arises as
to whether such interest can be considered to be incurred wholly and exclusively for the
purpose of business or profession.
Conflicting decisions of
the different benches of the Tribunal, delivered in recent times, have
reignited the controversy. The Ahmedabad bench has, in two separate decisions,
taken a view that no deduction can be allowed in respect of such interest and
the Kolkata bench, on the other hand, has upheld the allowability of deduction
of interest in a recent decision.
Shree Saras Spices & Food P.
Limited’s case
The issue came up before
the Ahmedabad bench of the Tribunal in the case of Shree Saras Spices &
Food P. Limited vs. DCIT ITA Nos. 2527/Ahd/2010 and 1220/Ahd/2012 for
assessment years 2007-08 and 2009-10.
In the said case, the
assessee had claimed deduction in respect of interest on TDS. The A.O.
disallowed the same. The assessee challenged the addition before the CIT(A),
who dismissed the appeal and confirmed the action of the A.O., relying on the
Supreme Court decisions in the case of East India Pharmaceutical Works Ltd.
vs. CIT (1997) 224 ITR 627 (SC) and Bharat Commerce & Industries
Ltd. vs. CIT (198) 230 ITR 733 (SC). The CIT(A) observed that interest was
paid on TDS only upon late payment to the Government treasury, which implied that
the assessee had utilised Government funds and paid interest as a compensation
for enjoyment of the amount due to the Government.
On second appeal by the
assessee, the Tribunal also noted that the assessee had used the Government
money for its own purposes and interest on late payment of TDS was not
allowable as was held in East India Pharmaceutical Works Ltd. vs. CIT
(supra) and accordingly, dismissed the appeal.
The issue of allowability
of interest on late payment of TDS was also examined by the Ahmedabad bench in
an earlier decision in the case of ITO vs. Royal Packaging ITA No.
1363/Ahd/2010 for assessment year 2005-06.
In that case, interest on
TDS was disallowed by the A.O. on the ground that since TDS was not allowable,
interest on same was also not allowable. On appeal before the CIT(A), it was
argued by the assessee that since interest received on tax refund was taxable,
in the same manner, interest on late payment of TDS was an allowable expense.
The CIT(A) accepted the contention of the assessee and deleted the addition
made by the A.O.
On further appeal, the
Tribunal relying on the Supreme Court decision in the case of Bharat
Commerce & Industries Ltd. vs. CIT (supra), held that interest on late
payment of TDS is also not allowable and restored the disallowance made by the
A.O.
Narayani Ispat Pvt. Ltd.’s case
Recently, the issue had
once again arisen before the Kolkata bench in the case of DCIT vs. Narayani
Ispat Pvt. Ltd. ITA No. 2127/Kol/2014 for assessment year 2010-11.
In that case, interest on
late payment of service tax and TDS was claimed by the assessee as a part of
its interest and finance expenses. However, the A.O., relying on the Supreme
Court decision in the case of Bharat Commerce & Industries Ltd. vs. CIT
(supra), disallowed the claim of interest.
The assessee preferred an
appeal against the addition before the CIT(A), wherein it was pointed out that
in the case of Bharat Commerce & Industries Ltd. vs. CIT (supra),
the disallowance was made in respect of interest u/s. 215 of the Act due to
delay in the payment of income tax on the income disclosed under Voluntary
Disclosure of Income and Wealth Act, 1976, which was different from the
interest u/s. 201(1A) on late deposit of service tax and TDS. The assessee
relied on the decision of the Karnataka High Court in the case of CIT vs.
Mysore Electrical Industries Ltd. 196 ITR 884 (Kar), where interest for
failure to pay PF contribution was held deductible, and also on the Supreme
Court decision in the case of Lachmandas Mathura Das vs. CIT 254 ITR 799 (SC),
where interest on sales tax arrears was held deductible. Accepting the
arguments of the assessee, the CIT(A) held that the impugned interest expense
was incurred wholly and exclusively for the purpose of business and was thus,
allowable.
The Tribunal, in further
appeal by the Revenue discussed the judgement in the case of Bharat Commerce
& Industries Ltd. vs. CIT (supra) in detail and distinguished its facts
since it dealt with interest on delayed payment of income tax, whereas in the
appeal before the tribunal, interest was paid for delayed payment of service
tax and TDS. The Tribunal observed that interest for delay in making payment of
service tax and TDS was compensatory in nature and not in the nature of
penalty. It also delved upon the decision of the Supreme Court in the case of Lachmandas
Mathura Das vs. CIT (supra), and held that its principles can be applied to
interest on delayed payment of TDS, noting that interest on late payment of TDS
related to expenses claimed by the assessee which were subjected to the TDS
provisions and that TDS did not represent tax of the assessee, but rather the
tax of the payee. The deduction allowed by the CIT(A) in respect of interest on
TDS was thus upheld by the Tribunal.
Observations
The issue under
consideration is relevant for a large number of assessees.
Section 40(a)(ii) of the
Act expressly provides for disallowance of any sum paid on account of any rate
or tax levied on the profits or gains of any business or profession under the
head ‘Profits and Gains of Business Profession’. The case for disallowance of
income tax levied on the profits and gains of the business or profession is
thus specifically settled by the express provisions of the Act. Similarly
settled by the decisions of the Supreme Court, is the proposition of the law
that any interest paid for delay in payment of income tax on profits and gains
of business or profession is also not deductible in computing the profits and
gains of business. It is also settled that any interest paid on borrowings made
for payment of such income tax is also not deductible in computing such profits
and gains of business.
In the case of Bharat
Commerce & Industries Ltd. vs. CIT (supra), the assessee, a
manufacturing company, had claimed deduction in respect of interest on delay in
payment of advance tax u/s. 37(1) of the Act on the ground that delayed payment
of taxes resulted in increase in the assessee’s financial resources, which
became available for its business. The assessee also contended that the
interest paid to the Government represented in effect, the interest on capital
that would have been borrowed by it otherwise and thus, it was an expense
incurred wholly and exclusively for the purpose of its business.
The Apex Court observed as under –
“When interest is paid
for committing a default in respect of a statutory liability to pay advance
tax, the amount paid and the expenditure incurred in that connection is in no
way connected with preserving or promoting the business of the assessee. This is
not expenditure which is incurred and which has to be taken into account before
the profits of the business are calculated. The liability in the case of
payment of income- tax and interest for delayed payment of income-tax of
advance tax arises on the computation of the profits and gains of business. The
tax which is payable is on the assessee’s income after the income is
determined. This cannot, therefore, be considered as an expenditure for the
purpose of earning any income or profits.”
The Supreme Court, in the
said case, in conclusion, held that the interest levied u/s. 139 and section
215 of the Income-tax Act was not deductible as a business expenditure u/s.
37(1) of the Act. The court in that case held that the income tax was a tax on
profit of the business and was therefore not allowable as a deduction.
Similarly, interest also was not deductible as the same was inextricably
connected with the assessee’s tax liability; if the income tax was not a
permissible deduction u/s. 37, any interest payable for default in payment of
such income tax could not be allowed as a deduction. In arriving at the
conclusion, the court followed its own decision in the cases of East India
Pharmaceutical Works Ltd, 224 ITR 627 and Smt. Padmavati Jaikrishna, 166
ITR 176, where decisions dealt with the issue of deductibility of interest
paid on moneys borrowed for payment of income tax.
The principles that emerge
from the observations of the Apex Court in the above decision as well as in the
various decisions cited therein, are that interest on delayed payment of income
tax would take its colour from the principal amount of income tax and thus, it
could not be considered to be incurred wholly and exclusively for the purpose
of business and consequently, such interest cannot be claimed as a deduction.
Where, however, the principal amount is an expenditure for the purpose of
earning any income or profits and is incidental to the business, whether
interest on delayed payment thereof would be allowed as a deduction u/s. 37(1)
is a question that was not addressed by the court.
The Bombay High Court had
the occasion to examine the issue of deductibility u/s. 37(1) of the interest
u/s 201(1A) of the Act. The court, in a brief order, upheld the disallowance of
the deduction u/s. 37 by simply following the decisions in the cases of Aruna
Mills Ltd, 31 ITR 153 (Bom.), Ghatkopar Estate and Finance Corporation Pvt.
Ltd, 177 ITR 222 (Bom.), Bharat Commerce Industries Ltd, 153 ITR 275 (Del.) and
Federal Bank Ltd, 180 ITR 37 (Kerela) after noting that the high courts in
the above referred decisions had taken a similar view.
Subsequently, the Madras
High Court in the case of Chennai Properties and Investments (P) Ltd., 239
ITR 435 (Mad) examined the deductibility u/s. 37(1) of the interest u/s.
201(1A) of the Act. The court noted that the interest paid took it’s colour
from the nature of the principal amount remaining unpaid.The principal amount
being income tax, interest thereon was in the nature of a direct tax, and could
not be regarded as a compensatory payment, and was therefore not allowable as
business expenditure. In deciding against the assessee, the court followed the
decision of the Supreme Court in the case of Bharat Commerce and Industries
Ltd, 230 ITR 733 (SC).
In spite of the issue of
the deductibility and allowance of interest paid for delay in payment of the
tax deducted at source levied u/s 201(1A) being decided against the assessee by
the high courts, in our considered opinion, it remains open and debatable.
While the Bombay and the Madras High Courts have examined the issue and have
held against the allowability of such interest, the said decisions, in our very
respectful opinion, cannot be taken to have been delivered on due examination
of the law, in as much as the courts, in those cases, have simply relied on the
precedents to arrive at a conclusion without appreciating that the decisions,
referred to as precedents, were concerned with the payment of interest under
sections 139, 215 and 270, levied for delay in payment of income tax on gains
of business. None of them were concerned with the payment of interest on
delayed payment of the tax deducted at source. Neither was this distinction
highlighted before the courts nor did the courts on their own examine the vital
difference between the tax on income and the tax deducted at source. It is
possible that the decisions in question may be reviewed or reconsidered or
dissented or distinguished. The law shall remain debatable till such time as
the same is examined by the highest court of the land.
It is significant to note
that usually a tax is deducted at source on payments made by a businessman in
his character as a trader and, in most of the cases, such payments are
expressly or otherwise deductible under the Act, in computing the Profits and
Gains of Business or Profession. In the absence of any specific provisions such
as section 40(a), for expressly disallowing the payments, the tax deducted and
withheld is a part of the expenditure of the payer and in no manner can be construed
as a tax on his profits or gains of business or profession. Therefore,
provisions of section 40(a)(ii) have no application to such payments or
interest thereon. In fact, the entire expenditure representing the payment,
including tax deducted and withheld, is deductible in law without reservation.
The
term “tax” is defined u/s. 2(43) to mean income tax chargeable under the
provisions of Income-tax Act and includes the fringe benefit tax. On a bare
reading of this provision, it is clear that the term “tax” in no manner
includes the tax deducted at source which is tax on somebody else’s income and
not on the income of the assessee payer; in any case, the tax deducted at
source is not an income tax ‘chargeable’ under the provisions of the Act.
The view of the Kolkata
Tribunal in the case of Narayani Ispat Pvt. Ltd. (supra), thus,
appears reasonable that TDS, by itself, does not represent income tax of the
assessee, but is a deduction from the payment made to a party in respect of
expenses claimed by the assessee, at a certain percentage prescribed in the
Act. So long as the expenses from which tax is deducted, relate to the business
of the assessee, the TDS thereon would also be considered to be relating to the
business of the assessee and therefore, interest on delayed payment of such TDS
would be considered to be incurred wholly and exclusively for the purpose of
business.
It may be true that the
interest for delay in payment of the tax deducted at source would not be
considered to be interest on capital borrowed for the purposes of business and
therefore, may not be eligible for deduction u/s. 36(1)(iii) of the Act. The same however, would be eligible for deduction
u/s.37(1) of the Act, being an expenditure wholly and exclusively incurred for
the purposes of business.
The better view therefore, is that
interest on delayed payment of the tax deducted at source, payable u/s. 201(1A)
or any other similar provision, is deductible in law in computing the Profits
and Gains of Business or Profession of the payer. _
