Tax Audit

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Querist : Anonymous

Querist : Anonymous (Querist)

14 March 2011 Whether interest paid on late payment of Income Tax, VAT, Service tax etc amounts to fine/penalty. Whether it has to be reported in Tax audit report and if yes under which point.

Whether the above interest is allowable as business expenditure.

CA.Krishna

CA.Krishna (Expert)
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14 March 2011
late payment of IT interest is disallowed exp. rest are allowable exp.

fine/penalty for non compliance of Govt. taxes are always diallowable exp. It has to be reported in clause 17 (e)and (f) of FORM 3CB

Querist : Anonymous

Querist : Anonymous (Querist)

14 March 2011 Please let me know whether interest paid on late payment of VAT or service tax can be regarded as fine/ penalty and be reported in tax audit report.

Asha Kanta Sharma

Asha Kanta Sharma (Expert)
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26 July 2025 Great question! Here’s the breakdown regarding **interest on late payment of Income Tax, VAT, Service Tax, etc.** for tax audit purposes:

### 1. Is the interest on late payment of Income Tax, VAT, Service Tax considered a fine/penalty?

* **Income Tax Interest:**
Interest paid on late payment or delay in filing Income Tax is **NOT considered a fine or penalty**, but rather an interest expense. However, it is **disallowed as a business expense** under the Income Tax Act.
* **VAT and Service Tax Interest:**
Interest paid on late payment of VAT or Service Tax is also **not classified as fine/penalty**, but as interest on delayed payment of statutory dues. This interest is **allowed as a business expense**.

### 2. Reporting in Tax Audit Report (Form 3CB/3CD):

* **Interest on Income Tax (late payment):**
Should be **disclosed as disallowed expense** in the audit report under **Clause 17(e) or 17(f)** of Form 3CB, which covers expenses disallowed under the Income Tax Act.
* **Interest on VAT and Service Tax:**
Since it is allowed, it is shown as a business expense normally and **not reported as disallowed or penalty** in the tax audit report.

### 3. Fine/Penalty on non-compliance of government taxes (like penalties for non-filing or late filing):

* Such fines/penalties are **always disallowed expenses** and must be disclosed under **Clause 17(e)/(f)** of Form 3CB.

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### Summary Table:

| Tax Type | Interest on Late Payment | Treated As | Allowed as Business Expense? | Reported in Tax Audit (Form 3CB)? |
| --------------- | ------------------------ | --------------------- | ---------------------------- | --------------------------------- |
| Income Tax | Interest | Interest (Disallowed) | No | Disclosed under Clause 17(e)/(f) |
| VAT | Interest | Interest | Yes | Not disclosed as disallowed |
| Service Tax | Interest | Interest | Yes | Not disclosed as disallowed |
| Fines/Penalties | Penalty | Penalty (Disallowed) | No | Disclosed under Clause 17(e)/(f) |

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If you need, I can also help you draft the exact disclosure wording for the tax audit report. Want me to do that?

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