Penalty

Yes ITC Can be allowed as there is no restriction in Sec 17 for block itc or no Itc related to Input Tax Paid on Interest or Penaly charged by Supplier for Late payment ( Invoice on Late Payment) 

Sec 15 states that under such a sale transaction wherein both the parties - seller and buyer are not related persons and price is the sole consideration for the supply than the TRANSACTION Value needs to be adopted. As per Sec 15 (2) d, Interest or late fees or penalty for delayed payment of any consideration for any supply will be included in the value of supply.

ITC is allowed being not covered under Blocked List of ITC u/sec 17 (5) and it is in course of and furtherance of Business. Moreover, all other conditions for availing ITC should be fulfilled. Conclusion: So, hereby it is evident that interest if received from customers on account of late payment, then GST is leviable on the same and it needs to be accounted and disclosed in GST Returns accordingly and also ITC Is available on GST paid on Late payemnt and delayed payment