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  • u/s 143(3) of the Income Tax Act 1961, (the Act).
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Smart Summary

Structured Summary of the Opinion — ITA No. 2068/Mum/2017 (ITAT Mumbai)

Factual and Procedural Background

This is an appeal filed by the assessee (HTA Marketing Services) for the assessment year 2013-14 arising out of an assessment completed under section 143(3) of the Income Tax Act, 1961.

During assessment proceedings the Assessing Officer (AO) disallowed an amount of Rs. 10,31,303 claimed by the assessee as interest on late deduction and deposit of tax deducted at source (TDS). The Commissioner of Income Tax (Appeals) [CIT(A)] confirmed that disallowance. The assessee appealed to the Income Tax Appellate Tribunal (ITAT), Mumbai.

Legal Issues Presented

  1. Whether interest on late deduction and deposit of TDS is deductible as business expenditure or otherwise allowable for computing total income.
  2. Whether interest on late deposit of TDS is akin to interest on tax levied on profits and gains and therefore falls within the ambit of section 40(a)(ia) (i.e., whether such interest is not allowable).

Arguments of the Parties

Appellant's Arguments

  • The ground of appeal asserts that the CIT(A) erred in holding that the Deputy Commissioner was correct in disallowing interest on late deposit of TDS.
  • The appellant submitted that interest on late deposit of TDS is not akin to interest on tax levied on the profits and gains of any business or profession and therefore is not covered by section 40(a)(ia) of the Income Tax Act.
  • However, before the Tribunal the assessee's counsel expressly noted that the issue had already been decided against the assessee by various High Court decisions (as cited in the record).

Respondent's Arguments

  • The Revenue (through the Assessing Officer and CIT(A)) maintained the disallowance of Rs. 10,31,303 as interest on late deduction and deposit of TDS.
  • The Departmental Representative (Ld. DR) agreed with the assessee's counsel's submission that the cited High Court and Supreme Court authorities were adverse to the assessee's position (i.e., supported the disallowance).

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
Martin & Harris (P.) Ltd. v. CIT [(1994) 73 Taxman 555 (Cal.)] The Calcutta High Court held that interest charged under the Act (for delayed payment of tax, under-estimate of tax, default in filing return, delay in making payment of tax etc.) cannot be allowed as a deduction in computing total income because such interest is inextricably connected with the amount of income-tax; if income-tax itself is not deductible, amounts payable in addition to tax (compensation or penalty) cannot be allowed. The Tribunal treated the holding as directly applicable and noted that, on identical facts, interest connected with tax liability is not deductible; this supported upholding the disallowance.
Ferro Alloys Corporation Ltd. v. Commissioner of Income-Tax [(1992) 196 ITR 406 (Bom.)] The Bombay High Court held that claims for deduction of interest levied under sections 220(2), 215 and section 201(1A) were rightly rejected as not allowable under section 37 of the Act. The Tribunal relied on this precedent to support the position that interest payable under provisions of the Act linked to defaults/penalties is not allowable as business expenditure; it reinforced the basis for disallowance.
CIT v. Chennai Properties & Investment Ltd. [(1999) 105 Taxman 346 (Mad.)] The Madras High Court held that income-tax is not allowable as business expenditure; an amount not deducted and remitted has the character of tax and must be remitted to the State and cannot be utilised by the assessee for its business. The Tribunal applied this principle to conclude that unpaid TDS and interest on its late deposit retain the character of tax-related liabilities and therefore the interest is not allowable as a business expense.
Bharat Commerce & Industries Ltd. v. CIT [[1998] 230 ITR 733 / 98 Taxman 151 (Supreme Court) The Supreme Court rejected the argument that retention of money payable to the State as tax would augment the assessee's capital and that interest paid for the period of such retention would assume the character of business expenditure; held that an assessee cannot claim to be borrowing from the State and thus the interest paid for delay in payment of tax (including interest under section 201(1A)) could not be allowed as business deduction. The Tribunal relied on this Supreme Court authority to confirm that interest paid under provisions dealing with delay/default in tax payment is not allowable as business deduction, supporting dismissal of the appeal.

Court's Reasoning and Analysis

The Tribunal recorded that it had heard the rival submissions and perused the record. The analysis proceeded by reference to the relevant High Court and Supreme Court authorities cited on the record.

The Tribunal summarized the judicial principles from those precedents: (a) interest charged under the Income Tax Act for defaults or delays is inextricably connected with the tax and cannot be allowed as a deduction; (b) interest levied under relevant provisions (including section 201(1A), section 215 and section 220(2) references in the authorities) has been held by High Courts to be not allowable as business expenditure or under section 37; and (c) the Supreme Court has rejected the contention that retention of tax-money operates as a borrowing that converts the interest on such retained sums into business expenditure.

Having noted these authorities and their holdings, the Tribunal found the facts of the present case to be identical to those considered by the cited High Courts and the Supreme Court. On that basis the Tribunal applied those precedents and concluded that the interest on late deduction and deposit of TDS claimed by the assessee could not be allowed as a deduction.

Holding and Implications

Holding: The appeal is dismissed and the order of the Commissioner of Income Tax (Appeals) confirming the Assessing Officer's disallowance is upheld. (Appeal dismissed)

Direct consequences: The disallowance of Rs. 10,31,303 as interest on late deduction and deposit of TDS stands; the assessee's claim for deduction of that interest is rejected.

Broader implications: The Tribunal's decision was based on existing High Court and Supreme Court authorities treating interest connected with delayed payment/default in tax as non-deductible. The opinion does not purport to lay down any new legal principle; it applies previously stated authorities to the facts and upholds the disallowance.

Order pronounced in open court on 12/09/2018. Members: Sandeep Gosain (Judicial Member) and N.K. Pradhan (Accountant Member). Copies were directed to the appellant, the respondent, CIT(A), CIT, DR ITAT Mumbai and the guard file as per the order text.

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    HTA MARKETING SERVICES P. LTD, MUMBAI v. DCIT 2(1)(2), MUMBAI

    PER N.K. PRADHAN, AM This is an appeal filed by the assessee. The relevant assessment year is 2013-14. The appeal is directed against the order of the Commissioner of Income Tax (Appeals)-6 [in short CIT(A)], Mumbai and arises out of the assessment completed u/s 143(3) of the Income Tax Act 1961, (the Act).

    2. The ground of appeal reads as under: The CIT(A) erred in holding that the Deputy Commissioner of Income Tax-2(1)(2), Mumbai was right in disallowing interest on late deposit of TDS. The Appellants submit that interest on late deposit of TDS is not HTA Marketing Services ITA No. 2068/Mum/2017 akin to interest on tax levied on the profits and gains of any business or profession and therefore is not covered u/s 40(a)(ia) of the Act.

    3. During the course of assessment proceedings, the AO noticed that the assessee had claimed an additional sum of Rs.10,31,303/- being interest on late deduction and deposit of TDS. The issue here relates to the disallowance of Rs.10,31,303/- made by the AO in respect of interest on late deposit of TDS. In appeal, the Ld. CIT(A) confirmed the above disallowance made by the AO.

    4. Before us, the Ld. counsel of the assessee submits that the issue in the instant case has been decided against the assessee by the High Court in Martin & Harris (P.) Ltd. v. CIT (1994) 73 Taxman 555 (Cal), Ferro Alloys Corporation Ltd. v. Commissioner Of Income-Tax (1992) 196 ITR 406 (Bom) and CIT v. Chennai Properties & Investment Ltd. (1999) 105 Taxman 346 (Mad). The Ld. DR agrees with the above submission of the Ld. counsel.

    5. We have heard the rival submissions and perused the relevant materials on record. In the case of Martin & Harris (P.) Ltd. (supra), the Honble Calcutta High Court has held that whenever interest is charged under the Act, whether for delayed payment of tax or filing under- estimate of tax or for non-submission of the estimate or return or for default in filing return within the time or delay in making payment of tax, it cannot be allowed as deduction in computing total income as essentially interest in such a case for non-compliance with the provisions of the Act is inextricably connected with the amount of income tax. Where Income- HTA Marketing Services ITA No. 2068/Mum/2017 tax itself is not a deductable amount, be it compensation or be it penalty, payable in addition to the tax cannot be allowed as a deduction in computing total income. In Ferro Alloys Corpn. Ltd. (supra), the Honble Bombay High Court has held that the claim for deduction of interest levied u/s 220(2) u/s 215 and u/s 201(1A) was rightly rejected as not allowable u/s 37 of the Act. In Chennai Properties & Investment Ltd. (supra), the Honble Madras High Court has held : Income-tax is not allowable as business expenditure. The amount deducted as tax is not an item of expenditure. The amount not deducted and remitted has the character of tax and has to be remitted to the State and cannot be utilised by the assessee for its own business. The Supreme Court in the case of Bharat Commerce & Industries Ltd. v. CIT [1998] 230 ITR 733/98 Taxman 151 rejected the argument that retention of money payable to the State as tax or income-tax would augment the capital of the assessee and the expenditure incurred, namely, interest paid for the period of such retention, would assume the character of business expenditure. It held that an assessee could not possibly claim that it was borrowing from the State the amounts payable by it as income-tax, and utilising the same as capitalisation in its business, to contend that the interest paid for the period of delay in payment of tax amounted to a business expenditure. Therefore, the interest paid under section 201(1A) could not be allowed as business deduction. HTA Marketing Services ITA No. 2068/Mum/2017

    6. Facts being identical, we uphold the order of the Ld. CIT(A) and dismiss the appeal. Order pronounced in the open Court on 12/09/2018. Sd/- Sd/- (SANDEEP GOSAIN) (N.K. PRADHAN) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai; Dated: 12/09/2018 Rahul Sharma, Sr. P.S. Copy of the Order forwarded to :

    1. The Appellant

    2. The Respondent.

    3. The CIT(A)-

    4. CIT

    5. DR, ITAT, Mumbai

    6. Guard file. BY ORDER, //True Copy// (Sr. Private Secretary) ITAT, Mumbai

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    Comments

    HTA MARKETING SERVICES P. LTD, MUMBAI v. DCIT 2(1)(2), MUMBAI
    (Sep 12, 2018)