Introduction :-

• There has been a certain debate on whether Interest Paid on Late deposit/ late deduction/ non deduction of TDS/TCS u/s 201 of the Income Tax Act, 1961 (“the Act”) and Late Fees for delayed filing of TDS/TCS Returns leviable u/s 234E of the Act should be allowed as normal business expenditure or not ? 

• Although there is no specific provision relating to disallowance of such Interest and Late fees as described supra under the provisions of the Act. However, allowance of all business expenditures (except those specifically allowed) is governed by the provisions of Section 37 of the Act. 

Probabilities on such disallowance and their interpretation:-

• Firstly, there has been a considerate confusion among tax professionals/ layman about whether provisions of Section 40(a)(ii) are attracted in such cases as described above. A detailed explanation is as under : 

• As per Section 40(a)(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” is disallowable. 

• Hence, Section 40(a)(ii) covers only Income tax paid by the Assessee on its own Income from Business or Profession. Also, Interest or any other fees or penalty paid on such Income Tax is also disallowable keeping in conscience the judgment of Hon’ble Gujarat High Court in the case of CIT vs. Ashoka Mills Ltd. [1996] 88 Taxman 184/218 ITR 526 (Guj.). 

• Since TDS/TCS is not a tax levied on Assessee’s Income from Business or Profession and rather a tax paid/collected from the counterparty to the transaction, Section 40(a)(ii) has no applicability in the instant case. 

• Secondly, many of us have a thought on invoking provisions of Section 37 of the Act, a detailed explanation of which is as under : 

• As per Section 37(1), “Any expenditure (not being expenditure of the nature described in sections 30to 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"” and as per Explanation 1 to said sub-section, “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.” 

• Here, it has often been observed that some tax professionals/ layman consider such Interest on TDS/TCS u/s 201 and Late Fees u/s 234E as an “offence” that should be disallowed as per Explanation 1 to Section 37(1). 

• Clearly the word “offence” has great importance in judging the allowance of any expenditure u/s 37(1). The word has nowhere been defined and hence partakes its meaning from a layman’s dictionary. As per Oxford Dictionary, offence is “a breach of a law or rule; an illegal act”. Hence, for any act to be an offence, it should be considered illegal and for any act to be considered illegal, there must be some penalty attached to it. Hence, only penalties are disallowed as per Explanation 1 to Section 37(1). Interest on TDS/TCS u/s 201 and late fees u/s 234E, since not being penalties, therefore could not be considered for disallowance.

Now What ?

• Clearly, since the provisions for disallowance, whether be it Section 40(a)(ii) or Explanation 1 to Section 37(1) fail to come in action, the general provision of Section 37(1) is now to be judged. 

• Since such TDS/TCS is a compliance under normal business routines, any relative expenditures incurred have clear nexus with Business and could be called as Business expenditures. 

• Neither of the said Interest u/s 201 and Late Fees u/s 234E are capital or personal in nature. Hence provisions of Section 37(1) come into play and hence such Interest and late fees is allowable.

Decision on similar cases under the court of Law :-

• The Income Tax Appellate Tribunal, Kolkata Bench ‘A’ in the case of M/s. Emdee Digitronics Pvt. Ltd vs. Pr. CIT-4, Kolkata vide its order dated 28-06-2019 has held that, “we conclude that the interest expenses claimed by the assessee on account of delayed deposit of service tax as well as TDS liability are allowable expenses u/s 37(1) of the Act. In this view of the matter, we find no reason to interfere in the order of Ld. C1T(A) and we uphold the same. Hence, this ground of Revenue is dismissed. Respectfully following the aforesaid decision, we confirm the order of Ld. CIT(A) and dismiss the ground no. 5 of revenue’s appeal for AY 2012-13 and thus the appeal of Revenue for AY 2012-13 also stands dismissed.” 

• The ITAT, in the above case, treated Interest on delayed deposit of TDS as an allowable expense u/s 37(1) of the Act. A similar understanding can be construed for late fees u/s 234E.

Conclusion :-

• As evident from the above paragraphs and the judgment of the Hon’ble ITAT, Kolkata Bench, Interest Paid on Late deposit/ late deduction/ non deduction of TDS/TCS u/s 201 and Late Fees for delayed filing of TDS/TCS Returns leviable u/s 234E of the Act are “Allowable” under Section 37(1) of the Act.

The Verdict :-

• It is pertinent to note that such Interest and Late Fees often constitute a very small proportion of expenditure. It has also been observed that many Assessing Officers disallow such expenditures during Assessment Proceedings. Due to lack of supporting judgments (ITAT and even High Court judgments are not binding on other Benches/States), and considering the above fact that these construe only small fractions of expenditure, none is challenged at higher Appellate Authorities. This has led to a conclusion for many tax professionals to suo-moto disallow such petty expenditures to avoid dispute and maintain peace of mind during future anticipated Assessment Proceedings.