Law: Income Tax Act, 1961

Section: 37

Income-tax----Business expenditure---Interest paid for delay in payment of Sales-Tax is not a penalty and is deductible as business expenditure. Where interest is levied on account of deprivation of the benefit of the tax for the period during which it has remained unpaid, the same is compensatory in nature, and is not imposed by way of penalty: Held accordingly, that interest payable under section 35-A of the Assam Sales Tax Act, 1947, cannot be regarded as penalty but has to be treated as part and parcel of the Sales Tax payable by the assessee. As Sales Tax is deductible under section 37 of the Indian Income-tax Act, 1961, interest paid on it under section 35 of the Assam Sales Tax Act, would also be deductible under section 37. Mahalakshmi Sugar Mills Co. v. CIT (1980) 123 ITR 429 (SC) applied. Central Provinces Manganese Ore Co. Ltd. v. CIT (1986) 160 ITR 961 (SC) and CIT v. Western Indian State Motors (1987) 163 ITR 194 (Raj.) ref. JUDGMENT HANSARIA, J.--The Income-tax Appellate Tribunal, Gauhati Bench, Gauhati, has referred the following question of law for our decision: "Whether, on the facts and in the circumstances of the case, interest paid under section 35-A of the Asam Sales Tax Act, 1947, for delay in payment of sales tax was allowable as deduction under section 37 of the Income-tax Act, on the ground that it was not penal in nature?" We have heard Shri Choudhury for the petitioner and Shri Saraf for the respondent. After the decision of the apex Court in Central Provinces Manganese Ore Co. Ltd v. CIT (1986) 160 ITR 961, the law has been settled that where interest is levied on account of deprivation of the benefit of the tax for the period during which it has remained unpaid, the same is compensatory in nature, and is not imposed by way of penalty. It was observed in this decision that the expression "penal interest" which has a clear usage is in fact an inaccurate description of the levy. As the interest levied on the above account in not penal in nature, some of the old decisions which have held that penalty for infraction of law is not deductible under section 37 of the income-tax Act, 1961, for short "the Act", have ceased to be good law. We…

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