Expenditure by way of penalty and fine

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

13 September 2014 Does Interest on late payment of taxes (Income tax, Service Tax, TDS) comes under Expenditure by way of Penalty and Fines for violation of any law at the time in force and have to be reported in 3CD point no. 21(a).

Also kindly confirm that these expenditures are disallowed under Income Tax Act,1961?

CA VISHWAKEERTHI.P.S.

CA VISHWAKEERTHI.P.S. (Expert)
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13 September 2014 Interest on income tax not allowed because its owner liability .(Income tax it self not allowed in income tax act then interest definitely not)

Then Interest paid (other than income tax) are not for violation of provision its in the nature of compensation in nature so allowable under the Income tax ACt.

But penalty levied due to violation of provision of the Act . So not allowed as expenses.

Querist : Anonymous

Querist : Anonymous (Querist)

18 September 2014 My doubt is not cleared?

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Asha Kanta Sharma

Asha Kanta Sharma

(Expert)
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24 July 2024 Interest paid on late payment of taxes (such as Income Tax, Service Tax, and TDS) does not typically fall under the category of "Expenditure by way of Penalty and Fines" for reporting purposes under point no. 21(a) of Form 3CD. Here’s a breakdown of how these expenses are treated:

### 3CD Reporting (Point No. 21(a)):

1. **Expenditure by way of Penalty and Fines**: This category primarily includes amounts paid as penalties or fines for violations of any law. It covers penalties imposed by authorities for non-compliance or infractions of legal requirements.

2. **Interest on Late Payment**: Interest paid on late payment of taxes is considered a financial charge rather than a penalty or fine. It relates to the delayed payment of taxes and is calculated as compensation for the delayed remittance of tax dues.

### Income Tax Act Treatment:

1. **Disallowance**: As per the Income Tax Act, 1961, expenses incurred for the payment of penalties and fines are generally not allowed as deductible expenses for income tax purposes. These expenses are considered non-business expenses and are disallowed under Section 37(1) of the Income Tax Act.

2. **Interest on Late Payment**: Interest paid on late payment of taxes is treated separately. While it is disallowed as a deduction under Section 40(a)(ii) if it relates to certain expenses, it is allowable as a deduction under Section 36(1)(iii) for certain specified categories of business expenses.

### Conclusion:

- **Reporting in 3CD**: Interest on late payment of taxes should not be reported under point no. 21(a) of Form 3CD as "Expenditure by way of Penalty and Fines." It should be separately disclosed in the appropriate section of the tax audit report, usually under financial charges or interest expenses.

- **Disallowance under Income Tax**: Interest on late payment of taxes is not disallowed under Section 37(1) as a penalty or fine. Instead, its deductibility depends on specific provisions relating to interest expenses under the Income Tax Act.

For accurate reporting and compliance, it is advisable to consult with a qualified chartered accountant or tax advisor. They can provide guidance tailored to your specific situation and ensure proper treatment of these expenses in accordance with tax laws and regulations.