Interest On Delayed Customs Duty Is Compensatory In Nature And Hence Allowable Expenditure U/S 37(1): Bangalore ITAT

Finding that the interest payment is incurred wholly & exclusively for business purposes, and is neither personal nor capital in nature, the Bangalore ITAT held that interest on delayed customs duty cannot be treated at par with penalty.

The ITAT therefore clarified that such interest payment is an accretion to the main payment and not penalty, and hence, allowable as revenue expenditure u/s 37.

The Division Bench comprising Laxmi Prasad Sahu (Accountant Member) and Keshav Dubey (Judicial Member) observed that “since interest is paid on delayed payment of custom duty, which calculated at certain percentage and on time basis is nothing but compensation for delay in payment of taxes and accordingly compensatory in nature”. (Para 5.2)

Facts of the case:

Reassessment proceedings were initiated u/s 148 based on the information received from Custom & Excise Department, that the assessee had misclassified the imported consignments to evade countervailing duty. Resultantly, the Central Excise Settlement Commission directed the assessee to pay additional customs duty along with interest & penalty. Although the AO allowed additional customs duty as business expenditure, but disallowed interest u/s 37 stating that the payment was in the nature of penalty.

Observations by the Tribunal

The Bench observed that the interest & penalty are two separate and distinct levies, and interest cannot be considered as penalty at any point of time even by any stretch of imagination.

Explanation (1) of Section 37 uses the expression “expenditure incurred by assessee for any purpose, which is an offence or prohibited by law”, clarified the Bench.

The Bench emphasized that the assessee has claimed interest as an expenditure which is nothing but a compensation for delay in payment of taxes and thus, compensatory in nature.

Outlining that interest paid for delayed payment cannot be at par with the penalty paid for the infringement of law, as it is an expenditure incurred wholly or exclusively for business purposes, pointed the Bench.

Thus, the ITAT concluded that the interest paid on delayed payment of custom duty that is calculated at certain percentage and on a time-to-time basis is nothing but compensation for delay in payment of taxes.

Hence, the ITAT allowed the Assessee's appeal.

Counsel for Appellant/ Assessee: H.V. Gowthama

Counsel for Respondent/ Revenue: Neera Malhotra

Case Title: Mangalore chemicals & Fertilizers Ltd vs ACIT

Case Number: ITA No.1209/Bang/2024

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