Allowability of Interest on delayed payment of TDS

CA VIVEK JALAN | Last updated: 12 March 2024

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This article examines whether interest paid on delayed Tax Deducted at Source (TDS) payments can be claimed as a deductible business expense. While some argue it's compensatory and business-related, others contend it takes on the character of a direct tax, making it non-deductible. A recent court case favoured the disallowance, but the issue may not be definitively settled.

For claiming an expenditure while determining the taxable income, an assessee should satisfy the twin conditions of allowance of expenditure pursuant to the provisions of Sec. 30 to 37 of the Act. And that the said expenditure is not subject to disallowance under sections 40, 43B, etc. These need to be complied with even for claiming the interest paid on late payments or remittances of TDS.

Interest on late payment of TDS is not penal in nature since it is compensatory in nature and should be eligible for deduction under § 37 of the Act as it is expended wholly and exclusively for business purposes, and payment of interest on late remittance of TDS is neither an offense nor prohibited by law.

Interest on Delayed TDS Payments: Deductible

However, a divergent view is that payment of interest takes color from the nature of the levy with reference to which such interest is paid and the tax required to be but not paid in time, which renders the assessee liable for payment of interest and may be construed as being in the nature of a direct tax and similar to the income tax payable under the Income Tax Act.

Hence, the interest paid under Section 201(1A) of the Act may be considered to not assume the character of business expenditure and may not be regarded as a compensatory payment.

While divergent views are possible, the matter was held against the taxpayer in the case of India Flysafe Aviation Ltd. v. DCIT, CIRCLE 12(1), New Delhi [2024-VIL-255-ITAT-DEL]. This matter, however, seems not to be settled as of now.

FAQ :

There are differing views. One perspective is that it's compensatory and thus deductible as a business expense. Another view is that it's akin to a direct tax and not deductible.

No, it is generally considered compensatory in nature, not penal.

The argument is that the interest payment takes on the nature of the levy it relates to (the tax), making it similar to a direct tax and therefore not a deductible business expenditure.

Yes, in the case of India Flysafe Aviation Ltd. v. DCIT, the ruling was against the taxpayer, disallowing the deduction.

No, the article suggests that the matter may not be definitively settled despite the recent ruling.