Before the question of allowability or disallowability of the expenditure, one must read section 37 of the Income Tax Act -1961 which reads as under:

37. (1) Any expenditure not being expenditure of the nature described in sections 30to 36 and not being in the nature of capital expenditure or personal expenses of the assessee, laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head “Profits and gains of business or profession”.

Explanation 1.—For the removal of doubts, it is hereby declared that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure.

Explanation 2.—For the removal of doubts, it is hereby declared that for the purposes of sub-section (1), any expenditure incurred by an assessee on the activities relating to corporate social responsibility referred to in section 135 of the Companies Act, 2013 (18 of 2013) shall not be deemed to be an expenditure incurred by the assessee for the purposes of the business or profession.

 (2B) Notwithstanding anything contained in sub-section (1), no allowance shall be made in respect of expenditure incurred by an assessee on advertisement in any souvenir, brochure, tract, pamphlet or the like published by a political party.

Often the expenses towards

1. Late fee paid for delay in filing of GST returns
2. Late fee paid for delay in filing of TDS return
3. Late fee for delay in filing of Income tax return

 is disallowed voluntarily by the taxpayer while filing their income tax return.

Mostly, the amount is disallowed for the reason that the CA carrying out the tax audit mentions it in their tax audit in

clause 21(6) which requires to mentions
“Expenditure by way of penalty or fine for violation of any law for the time being in force”

or

clause 21(7) which requires to mentions

“Expenditure by way of any other penalty or fine not covered above”

First question arises whether the amount is covered by above clauses

Late filing of the return is allowed under the relevant Act itself, though with certain fee. Whether the fee is a penalty or a fine” One though is certainly yes but the second thought is that the Act itself is allowing it. If the Act itself is wording it as “Fee” how it can be treated as “Penalty” or “offence”.  If the late filing of the return is allowed under the relevant Act, how it can be treated as violation of law then.

However, Auditor can follow usual conservative approach & may disallow it. For the sake of difference of opinion, even if it is treated by CA as in the nature of penalty, Assessee is open not to admit it while filing their income tax return. Assessee can opt not to disallow it and can reply suitably whenever the income tax notices are received.

Second question, is it barred by section 37?

Explanation 1 to section 37 on the present issue reads as under:

Explanation 1.—For the removal of doubts, it is hereby declared that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure.

Late filing allowed by the Department is not an offence which is prohibited by the law.

The ratios laid down in above pronouncements are as under:

1. Late Fee u/s 234E of the Income Tax Act is nothing but a privilege or special service allowed to a deductor for late filing of the TDS statements.
2. Delay in furnishing of TDS returns/statements has a cascading effect and leads to an additional work burden upon the Department. The Hon’ble High Court held that, to compensate for the additional work burden forced upon the Department, the fee under section 234E of the Act is contemplated which is not punitive in nature. The fee is a fixed charge for the extra service which the Department has to provide due to the late filing of the TDS statement.
3. Fee charged under section 234E of the Act is nothing but a privilege and a special service to the deductor allowing him to file TDS returns / statements beyond the time prescribed by the Act and the Rules.
4. On payment of the fee under section 234E of the Act, the deductor is allowed to file the TDS returns/statements beyond the prescribed time so that it can be regularized. Thus, fee under section 234E of the Act is nothing but a privilege or special service allowed to a deductor for late filing of the TDS statements.
5. Conclusion was drawn from Rashmikant Kundalia & Anr. v/s Union of India, [2015] 373 ITR 268 (Bom) wherein it is held that Late fee is not in the guise of a tax nor is it onerous. Late filing of TDS returns by the deductor causes inconvenience to everyone and s. 234E levies a fee to regularize the said late filing: Bombay HC