Facts of the Case

The assessee company is engaged in running an educational institution and organizing coaching classes for competitive examinations and higher education programmes. The assessee filed its return of income declaring total income of ₹1,67,91,650. The case was selected for complete scrutiny under CASS on account of higher turnover reported in service tax returns compared to the ITR and abnormal increase in cash deposits during the demonetization period.

During assessment, the Assessing Officer noted that cash deposits made during the demonetization period were not reflected in the return of income. The assessee explained that the deposits were made out of cash in hand available as on 08.11.2016. The Assessing Officer further observed that the assessee had claimed expenses towards interest and penalties relating to service tax, income tax, and TDS. The assessment was completed under section 143(3) determining total income at ₹2,04,35,613 after making disallowances aggregating to ₹36,43,963.

Aggrieved, the assessee preferred an appeal before the CIT(A), who dismissed the appeal. The assessee thereafter filed an appeal before the Tribunal.

Issues Involved

1. Whether interest paid for delayed payment of service tax and TDS is allowable as business expenditure.

2. Whether penalties and additional fees paid for statutory defaults can be claimed as deductible expenses.

3. Whether such expenses are covered under Section 37(1) of the Income-tax Act, 1961.

Petitioner’s (Assessee’s) Arguments

The assessee submitted that the interest and related payments were incurred during the course of business and were necessitated due to business exigencies. It was contended that the expenses were incidental to the business operations and therefore allowable as business expenditure.

Respondent’s (Revenue’s) Arguments

The Revenue supported the orders of the Assessing Officer and the CIT(A) and relied heavily on judicial precedents, including:

• Bharat Commerce & Industries Ltd. v. CIT (SC)

• Aruna Mills Ltd. v. CIT (Bom HC)

• Orient General Industries Ltd. v. CIT (Cal HC)

• Assam Forest Products (P.) Ltd. v. CIT

It was argued that interest and penalties paid due to statutory defaults have no nexus with business activities and are not allowable deductions.

Court Order / Findings

The Tribunal observed that the assessee had conceded disallowance of a portion of the penalty amount. Relying on the decision of the Hon’ble Supreme Court in Bharat Commerce & Industries Ltd., the Tribunal held that interest paid for delay in payment of taxes or filing of returns is not deductible as business expenditure.

The Tribunal further held that penalties and interest arising from failure to comply with statutory obligations are consequences of default and cannot be considered expenses incurred wholly and exclusively for the purposes of business. Accordingly, the Tribunal upheld the disallowance of ₹36,43,963 as confirmed by the CIT(A).

Important Clarification

The Tribunal clarified that expenses arising out of violation or delay in complying with statutory tax obligations do not qualify as allowable business expenditure under the Income-tax Act, irrespective of the fact that the business operations continued during the relevant period.

Link to download the order -  https://mytaxexpert.co.in/uploads/1770717275_CAREERCOACHINGALLDPRIVATELIMITEDALLAHABADVS.FQy4HArVdBbZ87AHrbfdhSXRgyE5NUbrh6GaL8enMUeh.pdf

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