Is interest payable on tds and service tax allowable for exp

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

03 August 2014 is interest on tds and service tax allowable for expenditure in profit and loss account. please mentioned the case laws.

CMA. CS. Sanjay Gupta

CMA. CS. Sanjay Gupta (Expert)
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03 August 2014 Interest is compensatory in nature and hence allowable as business expenditure. Penalty is for contravention of the provisions of an act and,therefore, not allowable as a business expenditure. The Apex Court in 'Swadeshi Cotton Mills Co. Ltd., V. Commissioner of Income Tax' 2008 - Supreme Court was dealing with the question as to whether damages paid for delayed payment of employees contribution to employees' provident fund was compensatory or penal. The court following the judgment in 'Prakash Cotton Mills Ltd.,' - 2008 - Supreme Court remitted the matter to the High Court for reconsideration in the light of the observation made therein. Also refer the following article in this regard--

http://www.taxmanagementindia.com/visitor/detail_article.asp?ArticleID=788

Rupesh Jain

Rupesh Jain (Expert)
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04 August 2014 pls read following:

Section 40(a)(ii)

Business disallowance - Taxes on profits

Applicability

Expenditure must be revenue in nature, at least partly - Section 40(a)(ii) comes into play only if a part of the expenditure is otherwise held to be revenue expenditure under section 37. Where the expenditure is itself capital in nature (like tax liability of transferor-firm), it is not allowable under section 37(1) itself, and hence the question of applying section 40(a)(ii) cannot arise - CIT v. Plasmac Machine Mfg. Co. Ltd. [1993] 201 ITR 650 (Bom.).

‘Any’ will qualify both rate and tax - The words ‘any rates or taxes levied’ in section 40(a)(ii) must be read as ‘any rate or any tax levied’, and the word ‘any’ will qualify both rate and tax. Accordingly, the taxes other than the tax under the Income-tax Act will also be covered by section 40(a)(ii) - Sundaram Industries Ltd. v. CIT [1986] 159 ITR 646 (Mad.).

Interest

Interest payable under the provisions of the Act is also covered - Payment of income-tax is not deductible as per section 40(a)(ii); hence, interest under sections 139, 215 and 217 which is to be regarded as accretion to tax, cannot also be allowed to be deducted - Assam Forest Products (P.) Ltd. v. CIT [1989] 180 ITR 478 (Gauhati).

Note : On the same principle, interest payable under sections 220(2), 234A, 234B or 234C is also not deductible.

Surtax

Surtax is not deductible - The surtax levied under the Surtax Act squarely falls within the mischief of sub-clause (ii) of clause (a) of section 40 and cannot be allowed as a deduction while computing the business income of the assessee under the provisions of the Act - Smith Kline & French (India) Ltd. v. CIT [1996] 85 Taxman 683/219 ITR 581 (SC).

Business tax paid in foreign country - Section 40(a)(ii) has no application to business tax paid by assessee in Thailand, as it is not on income but on turnover - CIT v. K.E.C International Ltd. [2003] 127 Taxman 519 (Bom.).

Income-tax dues of predecessor-firm paid by assessee cannot be allowed as deduction - Section 40(a)(ii) does not make any distinction between the income-tax paid by the assessee on its own income and the income-tax paid by the assessee on the income of its predecessor; where assessee-company was one of partners of the erstwhile firm and assessee had agreed to take-over tax liabilities of erstwhile firm at time of dissolution, income-tax dues of predecessor-firm paid by assessee could not be allowed as deduction - Himson Textile Engg. Industries (P.) Ltd. v. CIT [2004] 137 Taxman 432/267 ITR 612 (Guj.).

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