Interest On Delayed Agricultural Income Tax Not Deductible U/S 37 Income Tax Act: Kerala High Court

Section 37 of the Income Tax Act provides deductions on expenses which are directly related to a business's operations.

Justices A. Muhamed Mustaque and Harisankar V. Menon examined whether the interest paid on account of the delayed payment of Agricultural Income Tax is eligible for deduction under Section 37 of the Income Tax Act, 1961.

The delayed payment of AIT cannot be considered in the business interest of the assessee, and therefore, the interest paid for the delay cannot be considered as expended for the purposes of the business of the assessee. True, the liability to AIT has arisen on account of the business of the assessee. But this cannot be extended to the interest payable on account of the delayed payment of AIT, opined the bench.

In this case, while processing the return of income filed by the assessee under Section 143(3) of the Income Tax Act, 1961, the Assessing Officer (AO) noticed that interest was paid by the assessee on Agricultural Income Tax (AIT) dues at Rs.94,00,179/-/

The AO disallowed the claim made by the assessee invoking the provisions of Section 40(a)(ii) of the Act, read with Rule 7A of the Income Tax Rules, 1962, adding back 35% of the interest paid as above, amounting to Rs.32,90,063/-.

The assessee filed an appeal against the order passed by the Assessing Officer. The first appellate authority took the view that disallowance ought not to have been with reference to Section 40(a)(ii) and it ought to have been with reference to Section 37 of the Act.

The AO was, therefore, directed to verify whether the amount of Rs.94,00,179/- was towards the delayed payment of AIT and if so, to disallow the said amount in its entirety.

The assessee filed a further appeal to the Tribunal, and by the impugned order, the Tribunal concurred with the findings of the first appellate authority and dismissed the appeal.

The assessee argued that the scheme of the Kerala Agricultural Income Tax Act,1991, was not noticed while passing the impugned order. According to him, on a perusal of the scheme under the AIT Act, the fact that only simple interest is being levied would show that the interest levied is “compensatory in nature” and hence eligible for the deduction under Section 37 of the Act.

The department submitted that the question as to whether the interest satisfied is “compensatory”, or not, need not be considered at all, since what was disallowed was the interest on AIT dues satisfied, which was not an eligible deduction under the provisions of the Act. Therefore, when the AIT itself was not taxable under the Act, interest paid on AIT also is not deductible.

The bench opined that with reference to the provisions of Section 10(1) of the Act, the agricultural income of an assessee is not includable in his total income. Such being the position, it cannot be disputed that even the very AIT paid was not an allowable deduction under the Act. The interest paid takes its colour from the tax that was defaulted on account of which interest was demanded. When the tax itself was not an admissible deduction under the provisions of the Statute, it goes without saying that the interest paid on such delayed payment was also not deductible.

The bench, after referring to Section 37 of the Act, observed that it is the expenditure incurred “for the purpose of the business or profession” that is prescribed as an eligible deduction. Here, the assessee admittedly has delayed the payment of AIT on account of which interest was sought to be demanded.

The bench held that the assessee will not be entitled to the benefits flowing out of Section 37 of the Act.

In view of the above, the bench dismissed the appeal.

Case Title: Aspinwall and Company Limited v. The Commissioner of Income Tax

Case Number: ITA NO.5 OF 2021

Citation: 2025 LiveLaw (Ker) 807

Counsel for Appellant/Assessee: M. Gopikrishnan Nambiar

Counsel for Respondent/Department: Jose Joseph

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