[Opinion] Late GST Payment? Claim Income Tax Exemption

Meenakshi Subramaniam – [2023] 155 taxmann.com 486 (Article)

One person was running into the forest, while relatives and friends tried to stop him. I am fed up filling GST returns, he shouted. So, I am doing my own Ghar Sansar Tyaag (GST), he expounded.

A big relief has been given to taxpayers, in Manglam Arts v. Pr. CIT [2023] 155 taxmann.com 373, by Income Tax Appellate Tribunal (ITAT), Jaipur, by upholding that late GST payments would be allowable in income tax law under Section 37 as a deduction.

Manglam Arts
v.
Principal Commissioner of Income Tax

The taxpayer involved in this case is engaged in the business of manufacturing and exporting wooden handicrafts, durries, rugs, textile items, and more. They had initially declared a total income of Rs. 31,43,91,380.

However, the Principal Commissioner of Income Tax (PCIT) proposed disallowing an amount of Rs. 46,666/- on account of fines and penalties.

The assessee argued that the Ld. PCIT has erred on facts and in law in holding that amount of Rs.46,666/- debited to P&L A/c under the head penalty & fine is not allowable even when such amount is not in the nature of penalty & fine.

This issue has already been considered by AO in the original assessment and in earlier year it was allowed by CIT(A), too.

The return was selected for complete scrutiny proceedings. by issue of notice under section 143(2) of the Act dated 22 September 2019. Thereafter, a detailed questionnaire dated 2 December 2020 was issued under section 142(1) of the Act, inter-alia, requiring the assessee to furnish details of deductions, exemptions and rebate claimed during the year along with supporting documents.

The Authorized Representative argued that during the assessment proceedings, the taxpayer had submitted audited financial statements, tax audit reports, and a computation of income. Notably, in the profit and loss account, the taxpayer had already accounted for an amount of Rs. 2,66,946/- under the category of ‘fine & penalty.’

The tax auditor, using Form 3CD, reported a disallowance of Rs. 2,22,280/-, which was then included in the computation of the taxable income. This demonstrates that all the necessary information and documents were provided to the Assessing Officer during the assessment process, and the Assessing Officer accepted the disallowance as made by the taxpayer.

It was further argued that during the course of proceedings under section 263, the taxpayer explained that the remaining amount of Rs. 46,666/- comprised Rs. 3,167/- as late fees for TCS return, Rs. 4,690/- for late fees of GST return, and Rs. 38,809/- as interest on late deposit of provident fund/contribution.

The Authorized Representative of the taxpayer also cited a decision from the Karnataka High Court in the case of CIT v. Mysore Electrical Industries Ltd. [1992] 196 ITR 884, where it was established that interest paid on delayed contributions under the Employees Provident Fund Act does not qualify as a penalty and is thus admissible as a deduction.

In conclusion, it was held that the Rs. 46,666/- in question does not constitute a penalty. The Principal Commissioner of Income Tax (PCIT) incorrectly asserted that it should be disallowed under Section 37 of the Income Tax Act, as it represents an expense incurred for a purpose that is illegal or prohibited by law, despite the fact that late fees and interest on late deposits are not expenses incurred for illegal purposes. Consequently, the proposed disallowance by the PCIT is in violation of the law.

A two-member bench, comprising Sandeep Gosain (Judicial member) and Rathod Kamlesh Jayantbhai (Accountant member), in the case relied on the precedent cited by the authorized representative and determined that payments related to late fees for filing TCS/GST Returns do not constitute offences prohibited by law. Consequently, the appeal of the taxpayer was permitted.

The Rescue Act

One taxpayer said to another:

“When God shuts one door, He opens another.”

The friend asked:

“How ?”

The taxpayer replied:

“When the GST official got angry with my late payment, the income tax officer, after Manglam Arts case, allowed it as business expenditure.”

In a trail-blazer decision, the Jaipur Tribunal has given the green signal for claiming belated GST returns payment as a Section 37 deduction, under income tax law. For all those struggling with GST returns, this is a major breakthrough.

Click Here To Read The Full Article