Allowability of Statutory Interest, Cash Payment Limits, and Treatment of Customer Advances

Facts

The case involves a company engaged in contract works for power utilities, subjected to a scrutiny assessment for Assessment Year 2018-19. The Revenue challenged the Assessee on three distinct fronts:

Statutory Interest: The Assessing Officer (AO) disallowed interest paid on delayed remittances of PF, ESI, and Service Tax, claiming the Assessee failed to provide sufficient details or justification.
Cash Disallowance: The AO invoked Section 40A(3), disallowing various expenses on the premise that cash payments exceeded the statutory limit of ₹10,000 per person per day.
Unexplained Credits: The AO treated ₹4.80 lakhs, shown as unsecured loans, as unexplained cash credits under Section 68. The Assessee contended these were actually advances from customers for goods supplied.

Decision

The Tribunal upheld the orders of the Commissioner (Appeals), ruling in favor of the Assessee on all counts:

Compensatory Interest is Deductible: The Tribunal affirmed that interest on delayed payment of statutory dues (PF, ESI, and Service Tax) is compensatory in nature rather than penal. Since it is not a “penalty for infraction of law,” it is an allowable business expenditure under Section 37(1).
Threshold for Cash Payments: The disallowance under Section 40A(3) was deleted because the AO failed to identify even a single instance where a payment to a person in a single day exceeded the ₹10,000 limit. A general or ad-hoc disallowance without specific evidence of a breach is legally unsustainable.
Business Advances vs. Cash Credits: The addition under Section 68 was deleted because the Assessee proved the amounts were customer advances received in the normal course of business. Since the Department did not dispute the subsequent sales invoices raised against these advances, the “genuineness” and “source” of the credit were established.

Key Takeaways

Interest Characterization: For future assessments, distinguish between “Penal Interest” and “Compensatory Interest.” Interest for delay in statutory payments is generally compensatory and tax-deductible, unlike fines or penalties for illegal acts.
Burden of Proof in Section 40A(3): The Department must specifically identify which voucher or payment breached the ₹10,000 threshold. Practitioners should ensure that cash ledgers are maintained to clearly show that aggregate daily payments to a single party do not cross the limit.
Nomenclature of Credits: The misclassification of “Customer Advances” as “Unsecured Loans” in financial statements can trigger Section 68 inquiries. However, if the “nexus” between the advance and subsequent taxable sales can be proven, the addition can be successfully contested.
Precedent Reliance: The Revenue’s failure to controvert findings or present contrary decisions from higher courts (like the Deepali Design or Neel Kamal cases) remains a strong procedural ground for taxpayers to maintain favorable appellate orders.

IN THE ITAT DELHI BENCH ‘B’

ACIT

United Hitech (P.) Ltd.^*

ANUBHAV SHARMA, Judicial Member
and Manish Agarwal, Accountant Member

IT Appeal No.5334 (Del) of 2024
[Assessment year 2018-19]

APRIL 17, 2026

Pramod Jain, CA and Mukul Gupta, Adv. for the Appellant. Rajesh Kumar Dhanesta, Sr. DR for the Respondent.

ORDER

Manish Agarwal, Accountant Member.- The present appeal is filed by Revenue against the order dated 25.09.2024 by Ld. Commissioner of Income Tax (A), National Faceless Appeal Centre (“NFAC”), Delhi [“Ld. CIT(A)”] in Appeal No. NFAC/2017-18/10079633 passed u/s 250 of the Income Tax Act, 1961 [“the Act”] arising out of the assessment order dated 05.03.2021 passed u/s 143(3) read with sections 143(3A) & 143(3B) of the Act pertaining to Assessment Year 2018-19.

2. Brief facts of the case are that assessee company e-filed its return of income on 26.10.2018, declaring total Income at INR 40,24,910/ which stood processed u/s 143(1) of the Act on 17.05.2019. Subsequently, case was selected for scrutiny under CASS for the issues viz, (i) refund; (ii) unsecured loans; and (iii) Contract receipts or fees and notice u/s 143(2) of the Act was issued on 22.09.2019 which was duly served/delivered on the assessee. Thereafter notices u/s 142(1) of the Act were issued alongwith questionnaire from time to time which were duly replied by the assessee. Assessee declared income from business of contractor for M/s NTPC Limited and mainly execute Repairing & Maintenance of Boiler pressure Parts/ Non pressure Parts, Rotary Equipment, Milling Systems, Fuel Firing Systems, Structural Works, and other associated jobs related to power plant, petrochemicals, Fertilizers & Steel Plant equipment etc. The assessment was completed by making disallowance of INR 1,01,687/- out of Penalty Exp. of INR 15,000/-, Interest on TDS INR 431/-, Interest on EPF of INR 19,592/-and Interest to service tax of INR 66,664/- as the assessee has not furnished details nor justified these expenses. Apart from this disallowance, further disallowance of INR 6,16,673/- on account of rent; INR 4,35,5772/- on account of transport expenses; INR 16,85,660/- on account of bonus; INR 122,79,898/- on account of job work expense; INR 8,18,791/- on account of vehicle expense; INR 1,64,37,001/- on account of wages expense; INR 4,80,000/- on account of unexplained loans; and INR 7,39,493/- on account of PF expenses were made and accordingly total income of the assessee was assessed at INR 3,76,19,685/- vide assessment order dated 05.03.2021 passed u/s 143(3) r.w. sections 143(3A) & 143(3B) of the Act.

3. Against the said order, assessee filed an appeal before Ld. CIT(A) who vide order dated 25.09.2024, partly allowed the appeal of the assessee.

4. Aggrieved by the order of Ld. CIT(A), Revenue is in appeal before the Tribunal by taking various Grounds of appeal mentioned in the appeal memo.

5. Ld. Sr. DR for the Revenue placed reliance on the order of AO and in terms of its submissions, has filed the copy of the Central Scrutiny Report submitted by the AO to Ld. Pr. CIT for proposing to file the appeal before the Tribunal and as such no further submission was made by Ld. Sr. DR in support of the Grounds of appeal taken by the revenue which is considered and placed on record.

6. Per contra, with respect to Ground of appeal No.1, Ld. AR for the assessee submits that the AO has made disallowance u/s 37(1) on account of penalty of INR 15,000/-; interest on TDS of INR 431/-; interest on payment of PF & ESI of INR 19,592/- and interest on service tax of INR 66,664/-. Ld.AR submits that Ld. CIT(A) has confirmed the disallowance of INR 15,000/- on account of penalty and further confirmed interest on late payment of TDS of INR 431/-and deleted the disallowance of the remaining expenses by placing reliance on the orders of Co-ordinate Benches of Tribunal. Ld. AR therefore, requested for the confirmation of the order of ld. CIT(A).

7. With respect to Ground of appeal No.2 taken by the Revenue relating to the deletion of addition of INR 3,14,54,850/- made u/s 40A(3) of the Act. ld.AR submits that assessee has claimed repair and maintenance and other expenses on various power plants sites located at remote areas. The payments made were as made in contravention to section 40A(3) of the Act by ignoring the fact that these expenses were like wages, bonus, transport expenses and job work charges which were paid to multiple persons and none of the payment made to a single person was exceeding the threshold limit of INR 10,000/- as prescribed u/s 40A(3) of the Act, therefore, the provision of section 40A(3) of the Act are not applicable.

8. Ld.AR further submits that Ld. CIT(A) after considering these facts, has deleted this addition and requested for the confirmation of the same.

9. With respect to Ground of appeal No.4 raised by the Revenue on account of deletion of addition of IRN 4,80,000/- made u/s 68 of the Act, it is submitted by Ld.AR that this amount was inadvertently shown under the head “unsecured loans” whereas it was genuine business transaction of sale of goods against advance and necessary sale invoices were raised to the parties against these advances in subsequent year. Since the assessee has declared sales against these advances which has not been doubted therefore, he requested that Ld. CIT(A) has rightly deleted the same. He prayed accordingly.

10. Heard the contentions of both parties at length and perused the material available on record. Regarding Ground of appeal No.1, it is observed that Ld. CIT(A) while deleting the disallowance made u/s 37(1) of the Act has followed the judgment of Co-ordinate Mumbai Bench of Tribunal in the case of Neel Kamal Realtors Suburban (P.) Ltd. v. ACIT [ITAppeal No.86(Mum) of 2021, dated 28-4-2022] wherein it is held that “interest on delayed payments of statutory dues like PF and ESI is compensatory in nature and thus, allowable under section 37(1).Therefore, this interest is allowed as a deduction.” As observed above, before us ld. Sr. DR for the Revenue filed the CSR wherein AO observed that assessee has not filed any supporting evidences with respect to such expenses therefore, the disallowance was made. However, on perusal of the assessment order, it is observed that AO has made the disallowance by holding that these expenses were allowable expenditure u/s 37(1) of the Act. Before us, Revenue has failed to controvert the findings of Ld. CIT(A) which are based on the judgement of coordinate Mumbai Bench of Tribunal, therefore, the order of ld. CIT(A) deleting the addition of INR 19,592/- on account of interest on delayed payment of PF & ESI is hereby, confirmed. With respect to interest on delayed payment of service tax of INR 66,664/-, ld. CIT(A) has placed reliance on the order of Delhi Bench of Tribunal in the case of ACIT v. Deepali Design & Exhibits (P.) Ltd. [IT Appeal No.1710(Del) of 2015, dated 14-3-2019] and before us, revenue has failed to controvert these observations by placing any contrary decision on record. Therefore, order of ld. CIT(A) in deleting the disallowances, is hereby upheld. Ground of appeal No.1 raised by the Revenue is dismissed.

11. With respect to Ground of appeal No. 3 raised by the Revenue, it is observed that assessee has not challenged the disallowance made out of vehicle expenses of INR 8,18,791/- before Ld. CIT(A) nor this issue was decided by Ld. CIT(A) therefore, this ground of appeal taken by the Revenue is not borne out from the orders of Ld. CIT(A) accordingly, the same is hereby, dismissed.

12. Regarding Ground of appeal No. 2 regarding deletion of disallowance of INR 3,14,54,850/- u/s 40A(3) of the Act, it was the claim of assessee that none of the payment was made to any of the party in contravention to section 40A(3) of the Act as none of the payment was made in excess of threshold limit of INR 10,000/-. The assessee has filed relevant details before AO as well before Ld. CIT(A) and Ld. CIT(A) after appreciating the same, has deleted the disallowance by making following observation in para 6.4 of the order:-

6.4. “Ground No.3 and 7: Disallowance of expenses u/s 40A(3): The issues before me relates to the disallowance of expenses made by the Assessing Officer (AO) under section 40A(3) of the Income Tax Act, 1961, on the ground that the assessee allegedly made cash payments exceeding Rs.10,000 to a single person/ entity in a day. Upon careful consideration of the facts, submissions made by the assessee, and the evidence placed on record, I find that the disallowance is not justified for the reasons mentioned below.

The appellant has conclusively demonstrated that it maintained and submitted proper vouchers, labor registers, and attendance records to substantiate the genuineness of the expenses incurred by the appellant. The payments made by the appellant were duly recorded, and proper documentation was maintained, which complies with the statutory requirements under Section 40A(3).

The AO’s disallowance was based on an incorrect interpretation. The AO presumed that the bulk transfer of cash was made in a single day, but the appellant has provided sufficient evidence to show that these bulk transfers were administrative in nature, and the actual disbursement to the individuals was made over multiple days. No single payment exceeded the prescribed limit of Rs. 10,000 in a single day.

The AO has reproduced the same pages from the labor register three times in the assessment order at Page Nos. 7 and 8. This led to confusion, as it does not provide a comprehensive view of the wage payments. It is noted that the reproduced tables only reflect net wages post-deduction of EPF and ESIC, and they fail to capture the actual payment dates or disbursement patterns, Section 40A(3) disallows cash payments exceeding Rs. 10,000 to a single person in a single day. The appellant has convincingly shown that no such payments were made. Payments were made to over 400 laborers across different project sites on different days, and each payment was well within the prescribed limit of Rs. 10,000. The AO’s presumption that these were bulk payments is not substantiated by any evidence, and the appellant has provided enough documentation to confirm that individual payments complied with the provisions of Section 40A(3).

While the AO claims that the assessee failed to provide supporting documents, it is observed that the assessee furnished copies of cash books, project details, labor registers, ledgers of the expenses and attendance sheets. Moreover, the AO has not pointed out any specific discrepancies in these records. Instead, the disallowance appears to be based on a misunderstanding of the entries rather than on any substantial evidence.

The assessee’s submission that bulk transfers were made for administrative purposes and that the actual disbursement took place over several days and supported by the evidence provided. The AO’s failure to differentiate between the administrative transfer of funds and the actual payment to individuals is a critical flaw in the assessment order.

The AO has not pointed out any specific instances where payments were made to a single person exceeding Rs. 10,000 on a single day. The sample data provided by the AO only highlights net wage payments without taking into account the actual disbursement dates or amounts paid to individual laborers. This omission weakens the basis of the disallowance.

In view of the above findings, it is clear that the disallowance made by the AO under Section 40A(3) is based on incorrect presumptions and misinterpretation. The assessee has complied with the provisions of the Income Tax Act, and no violation of Section 40A(3) has occurred. Therefore, the disallowance u/s 40A(3) is deleted, and the appeal is allowed in favor of the assessee.”

13. Before us, except filing copy of CSR, revenue has failed to controvert the findings of Ld. CIT(A) who had given categorical finding that none of the payments was made in excess of INR 10,000/- as provided in section 40A(3) of the Act. Accordingly, we uphold the order of Ld. CIT(A) in deleting the disallowance made u/s 40A(3) of the Act. Thus, Ground of appeal No.3 raised by the Revenue is dismissed.

14. Ground of appeal No.4 raised by the Revenue is with respect to the deletion of addition of INR 4,80,000/- made u/s 68 of the Act.

15. It is observed that Ld. CIT(A) has appreciated the fact that these amounts were in the nature of advance received from the customers against the supply of goods and thus observed that, these are advances received in normal course of business and were the loan transactions. These facts have not been controverted by the Revenue before us and therefore, we find no infirmity in the order of Ld. CIT(A) in deleting the addition made. Accordingly, Ground of appeal No. 4 raised by the Revenue is dismissed.

16. In the result, appeal of the Revenue is dismissed.