Interest paid on duties treated as expenditure or not

Sec. 37(1) of the Income Tax Act, 1961 ('Act' for short) provides that any expenditure (not being expenditure of the nature described in Section 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head 'Profits and gains of business or profession'. A bare perusal of Section 37 of the Act shows that when an expenditure is laid out wholly and exclusively for the purpose of business it can be deducted in computing the income under the head of profits and gains business. However expenditure incurred by the assessee for any purpose, which is an offence or prohibited by law is not deemed to be included for the purpose of business. The general principle is that portion of interest paid on delayed payment which is compensatory in nature is allowed to be deducted and that portion which is penal cannot be deducted.

Section 37(1) of Income Tax Act, 1961 read with Apex Court judgement in Haji Aziz & Abdul Shakoor Brothers vs. CIT  41 ITR 350, An expenditure is not deductible if its a penalty imposed for a breach of Law during the course of business.

This is because of Infraction of Law is not a normal incident of business and therefore only such a disbursement can be deducted as are really incidental to the business itself.

Now, Interest paid on delayed payment of Duties & other taxes (Not Income Tax) are not in the nature of Penalty for infraction of law. They are only compensatory-in-nature, intended to compensate the Govt. for the notional interest lost as a result of such delay.

Hence you can claim the same as Expenditure since its only compensatory and not Penal.

However, interest on delayed payment of INCOME TAX cannot be claimed as expenditure because the payment of Income tax or related payments are not considered to be FOR BUSINESS PURPOSES. Hence disallowed u/s 37(1).

Hope this clarifies the issue.