Interest on Late Payment of Direct Taxes Not Deductible under Income Tax Act: ITAT [Read Order]

The Income Tax Appellate Tribunal (ITAT), Chennai Bench, has recently, in an appeal filed before it, held that interest on late payment of direct taxes is not deductible under the Income Tax Act.

The aforesaid observation was made by the Chennai ITAT, when an appeal was preferred before it by the M/s. Enco Shoes, as against the order of the Commissioner of Income Tax (Appeals) Chennai, in ITA No.69/CIT(A)-12/2015-16, dated 14.12.2017, wherein the assessment was framed by the DCIT, Non-Corporate Circle, Chennai, for the assessment year 2012-13 u/s.143(3)  of the Income Tax Act, 1961, for a scrutiny assessment, vide order dated 28.03.2015.

The issue involved in the assessee’s appeal being as regards to the addition, by disallowance of interest on TDS of Rs.69,058/, the brief facts of the case pertaining to the issue were that the in the assessee’s case, it was so noted by the AO that one of the partners of the assessee, namely,Shri Najmul Hasan, had  introduced capital amounting to Rs.21 lakhs, by way of cash as under:-

01/04/2011 – Rs.3,00,000/-

 05/04/2011 – Rs.18,00,000/-

Subsequently, the assessee was asked by the AO to explain the same, in response to which the assessee had, vide letter dated 09.03.2015, explained that they have heaving drawing of Shri Najmul Hasan and that the income returned during the year, is Rs.28 lakhs, which explains the source of the cash introduced. Further, it was also explained by the assessee that the firm had given cash amounting to Rs.10 lakhs to Shri Najmul Hasan on 05.03.2011, and his wife having sundry debtors and other investments amounting to Rs.28,51,676/- from which, this amount of Rs.21 lakhs was invested as capital in the firm.

However, the AO noted that the partner Shri K. Najmul Hasan had returned the income for the assessment year 2012-13 at Rs.20,19,656/- and not Rs.28 lakhs as claimed, that there was drawing of Rs.6,77,130/, that the cash belongs in the partners statement of affairs were not actually cash as entries relates to share of profit, and that remuneration were not paid by the firm by way of cash. And therefore, based on all these findings, he added the assessee’s introduction of capital in the firm amounting to Rs.21 laks, as unexplained.

Aggrieved, assessee preferred appeal before CIT(A), who deleted the addition of Rs.10 lakhs, thus accepting the explanation that the cash drawing of Rs.10 lakhs on 05.03.2011 was available with him.  But, the CIT (A) restricted the addition at Rs.11 lakhs being unexplained, and also confirmed the action of AO by observing It was clear that there was a huge debit balance of Rs.1,41,78,744/- in the accounts of the partners, and that neither during the assessment proceedings nor during the appellate proceedings, has the appellant given satisfactory explanation with regard to the same.

Thus, he confirmed the interest disallowance computed at 12% of the net debit balance which worked out to Rs.17,01,453/, and it is being aggrieved of the same that the assessee has preferred the instant appeal before Chennai ITAT.

Hearing the contentions of Shri AR.V. Sreenivasan, Addl. CIT, on behalf of the Revenue , with no representation on the assessee’s behalf ,and perusing the materials available on record, the ITAT Bench consisting of G. Manjunatha, the Accountant Member, along with Mahavir Singh, the Vice- President observed:

“We have heard ld. Senior DR and gone through the case records. There is no disallowance by the AO. However, the CIT(A) has disallowed this interest paid on TDS of Rs.69,058/- and debited to the profit & loss account as interest paid.”

“We noted that this issue is covered in favour of Revenue and against assessee by the decision of ITAT, Ahmedabad in the case of ITO vs. Royal Packaging in ITA No.1363/Ahd/2010, wherein it is held that interest on late payment of direct taxes is not deductible”, the ITAT Bench further added.

Thus, partly allowing the assessee’s appeal on rest of his grounds raised, the Chennai ITAT held:

“Hence, we confirm the addition and dismiss this ground of assessee’s appeal”.

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