Interest on Delayed Service Tax Payment Is Compensatory in Nature and Allowable as Deduction Under Section 37(1): ITAT Mumbai

Case Overview

Case Name: Saltwater Studio LLP Vs ACIT-30(2) (ITAT Mumbai)
Appeal Number: I.T.A. No. 10/Mum/2023
Assessment Year: 2017-18
Date of Order: 31/03/2023

Background and Context

The Mumbai Bench of the Income Tax Appellate Tribunal delivered a notable ruling in the matter of Saltwater Studio LLP Vs ACIT-30(2), addressing two significant issues — condonation of delay in filing an appeal before the CIT(A), and the deductibility of interest paid on delayed service tax under Section 37(1) of the Income Tax Act, 1961.

Although the assessee had raised ten grounds of appeal before the Tribunal, only two grounds — Ground No. 3 (condonation of delay) and Ground No. 6 (allowability of interest on late service tax payment) — were pressed by the learned Authorised Representative. The remaining grounds stood dismissed as not pressed.

Issue 1: Condonation of Delay in Filing the Appeal

Facts Leading to Delay

The Assessing Officer had completed the assessment for AY 2017-18 and passed the assessment order on 10.12.2019. Upon receiving the order, the assessee had instructed its representative to file an appeal before the CIT(A)/NFAC. However, owing to a combination of unfortunate circumstances, the appeal could not be filed within the stipulated period.

The principal reasons offered for the delay were:

  • Misplacement of the file by the representative, resulting in the initial failure to file the appeal in January 2020 as directed
  • The outbreak of the Covid-19 pandemic, which had begun spreading from China by end of December 2019
  • Nationwide lockdowns imposed from the last week of March 2020, which effectively brought legal and administrative proceedings across the country to a standstill
  • Restrictions and limitations continued well into 2021, and the appeal was ultimately filed on 28.08.2021

Tribunal's Analysis

The CIT(A)/NFAC had declined to admit the appeal on the ground that the assessee had failed to file a formal application for condonation of delay. However, the Tribunal took a more holistic view of the matter.

The Tribunal noted that:

  • When the pandemic period is excluded from the computation of limitation, in line with the Hon'ble Supreme Court's suo motu order dated 28 February 2022, which granted an additional three-month extension of limitation across all proceedings, the net delay amounted to approximately ninety (90) days
  • This residual delay of around 90 days was itself attributable to miscommunication and misplacement of the file between the assessee and its representative
  • The doctrine of Force Majeure — referring to an irresistible or superior force representing unforeseen events beyond one's control — was applicable to the facts of this case

The Tribunal observed that penalising the assessee for an omission that arose from a combination of a national health emergency and administrative miscommunication would be unjust and contrary to the principles of natural justice.

Decision on Ground No. 3

The Tribunal condoned the delay in filing the appeal before the CIT(A) and allowed Ground No. 3 in favour of the assessee. It held that the assessee should not be penalised for the failure to file the appeal within time, given the extraordinary circumstances that had prevailed during the relevant period.