Law:

Section:

Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of - Assessment year 1996-97 - Assessee-Corporation was an undertaking of State Government - Its main business was to extract timber and resin and to sell same - Forest department of State handed over trees to be fell by assessee for which assessee was liable to pay royalty to State Government at certain rates - Assessee was also liable to pay interest on belated payment of royalty and other amounts payable by it to forest department - It was also liable to pay sales tax on royalty on behalf of State Government - During relevant assessment year, it made payment of interest on belated payment of sales-tax and royalty and also paid interest on interest on belated payment of royalty - It claimed deduction of said payments as business expenditures - Whether interest on belated payment of sales tax was not payable by way of penalty but by way of compensation to compensate State for interest which it would have been liable to pay under provisions of State Sales-tax Act and, therefore, interest payment by assessee for delayed payment of sales-tax was deductible under section 37(1) - Held, yes Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Year in which deductible - Assessment year 1996-97 - Whether, on facts stated under heading 'Business expenditure - Allowability of', since dispute relating to assessee's liability to pay interest on belated payment of royalty was finally settled by High Court on 10-1-1996 directing assessee to make payment of interest, interest would be allowed as deduction in relevant assessment year - Held, yes - Whether interest payable by assessee on interest on belated payment of royalty was not penal in nature but was charging of compound interest and since same was paid by assessee only during relevant assessment year 1996-97 when dispute got finally settled, it was allowable as deduction in relevant assessment year - Held, yes FACTS The assessee-Corporation was an undertaking of the State Government. Its main business was to extract timber and resin and sell the same. The trees to be fell were handed over by the Forest Department of the State…

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