Income Tax, Issue Update

Interest paid delayed payment of customs duty: Deduction under section 37

Case: Gem Electro Mechanicals Pvt Ltd vs Addl. CIT, Jaipur ITAT

The issue is whether interest paid on delayed payment of customs duty is allowed as a deduction?

Jaipur ITAT placed reliance on the decision of Hon’ble Jurisdictional High Court in Udaipur Distillery, wherein it was concluded that, the liability of interest on delayed payment of sales tax was a statutory obligation of the dealer and was automatic as no specific order was required. Thus, it was a part of sales tax and as the sales tax was paid by a dealer for the purpose of carrying on business, the amount of interest for all purposes was to be considered as an amount spent wholly and exclusively for the purpose of business. See Facts & Key Points.

Facts

  • The Assessing Officer had disallowed the amount of interest paid on account of delay in deposit of customs duty.

Key points

  • Reliance was placed on the decision of Hon’ble Jurisdictional High Court in Udaipur Distillery, wherein it was concluded that, the liability of interest on delayed payment of sales tax was a statutory obligation of the dealer and was automatic as no specific order was required. Thus, it was a part of sales tax and as the sales tax was paid by a dealer for the purpose of carrying on business, the amount of interest for all purposes was to be considered as an amount spent wholly and exclusively for the purpose of business. It is well settled that neither necessity nor motive nor reasonableness was the test for allowing deduction of expenditure spent wholly and exclusively for the purpose of business under section 37. Therefore, the amount of interest paid by the Assessee on the sales tax was an allowable deduction under section 37.
  • Similarly interest deposited on account of interest due to delay in deposition of customs duty and service tax was held to be an allowable expenditure under section 37(1).

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