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Interest on Service tax

Have a lot to achieve (C.A. B.Com(H)) (101 Points)

23 September 2009

Whether Interest paid for delayed payment of service tax is allowed as deduction?

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12 Replies

CA Trinath Galla (student) (3130 Points)
Replied 23 September 2009

no, fines and penalties for not complying any statutory provisions are nto allowable deductions

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Ratan Deep Saxena (Asstt Manager (Accounts & Finance)) (2998 Points)
Replied 23 September 2009

Late interest on taxes are of the nature of penalty and hence disallowable expenditure.

CA Hemant Kumar (CA, LLB (p), B.Com) (204 Points)
Replied 23 September 2009

no all fines and penalties due to violation of law are dissalowed under the Income Tax Act, 1961

Shyam Lal Naik (Service) (6156 Points)
Replied 23 September 2009

Payment of interest is not violation of any law. It is compliance of law.

Allowable expenditure.

Max Payne (employed) (2574 Points)
Replied 23 September 2009

Interest on service tax is compensatory. It is not penal. U cannot disallow the expenses U/s 37 saying that the expenditure is in contravention of law. Rather it is ensuring the statutory compliance.

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Himanshu (Article) (52 Points)
Replied 23 September 2009

Originally posted by :Hemant Kumar
"	no all fines and penalties due to violation of law are dissalowed under the Income Tax Act, 1961	"

interest on service tax is diffrent from fine and penalties...it is incidental to business..and therefore allow.... if not agree yet thn tell me interest on sale tax is allowed or not...

it is allowed, there is a case law in ths regard lachmandas mathurada v CIT [2002]...and some more...

therefore if interest on sale tax is allowed thn interest on service tax is also allowed both are indirect taxes...

Juzer Sadikot (CA - innovative solutions for Imports and Exports) (1309 Points)
Replied 23 September 2009

Dear All,

Please to state below;

Interest for failure to pay provident fund contributions is deductible - Where the assessee failed to pay the contribution under the provisions of the Employees’ Provident Funds Act to the concerned trust and consequently, it had to pay interest thereon, interest so paid by the assessee was not penalty and, therefore, was allowable as deduction - CIT v. Mysore Electrical Industries Ltd. [1992] 196 ITR 884 (Kar.)

General principles - Whenever any statutory impost paid by an assessee by way of damages or penalty or interest is claimed as an allowable expenditure under section 37(1), the Assessing Officer is required to examine the scheme of the provisions of the relevant statute providing for payment of such impost notwithstanding the nomenclature of the impost as given by the statute, to find out whether it is compensatory or penal in nature. The authority has to allow deduction under section 37(1) wherever such examination reveals the concerned impost to be purely compensatory in nature. Wherever such impost is found to be of a composite nature, i.e., partly of compensatory nature and partly of penal nature, the authorities are obliged to bifurcate the two components of the impost and give deduction to that component which is compensatory in nature and refuse to give deduction to that component which is penal in nature - CIT v. Catholic Syrian Bank Ltd. [2003] 130 Taxman 447/[2004] 265 ITR 177 (Ker.)

Whenever certain damages are to be paid by an assessee for the breach of a contract, such damages are treated to be normal incidences of business. For allowability as a deduction, a claim for damages is to be tested on the touchstone of the provisions of section 37(1) of the Act. Where an assessee has to pay damages to the other party for the failure to fulfil the contract entered into by him in the ordinary course of his business, the amount of damages so paid is an allowable deduction if it is in the ordinary course of the business, and is not opposed to the public policy - Jamna Auto Industries v. CIT [2008] 167 Taxman 192 (Punj. & Har.)(FB)

Thanks and Regards

DR GAURAV GUPTA FCA, FCS, LL.B (COMPANY SECRETARY) (1046 Points)
Replied 28 September 2009

IT IS AN ALLOWABLE EXP. IF ANY DELAY INTEREST IS PAID THEN IT IS CONSIDERED AS A PART OF THE EXP. AND IF ORIGINAL EXP IS ALLOWAED THEN DEP WILL ALSO BE ALLOWABLE

Sakeer (Article) (22 Points)
Replied 29 December 2009

Whether penal interest paid to Bank by an assessing company can be dissallowed by an assessing officer? if no pls let me know the case laws?

CA Anand (Partner) (72 Points)
Replied 11 October 2010

I think the Interest on Delayed payment of the service Tax is not disallowed under the Act.

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Mukesh Kumar Sharma (Owner ) (181 Points)
Replied 08 December 2015

yes agreed

Shivali Khandelwal (Assistnant) (22 Points)
Replied 23 December 2017

plz suggest in this regard " Assessee company has paid electricity bill of his employees residence for which Board resolution is also passed in the company authorising the company to pay electricity bills of employees residence, whether this expense is allowable to assessee company in income tax ?"