Interest on delayed sugarcane purchase price is deductible when it is commercial liability, not penal exaction.

Interest paid for delayed payment of sugarcane purchase price under section 17(3) of the Sugarcane (Regulation of Supply and Purchase) Act, 1958 was held to arise from a default in payment of a business liability on credit, not from a penalty for breach of law. The charge was therefore treated as akin to ordinary commercial interest on delayed purchase payments and remained deductible under the Income-tax Act, 1961. Interest on arrears of sugarcane purchase tax was noted to stand on a different footing and did not alter this character. The deduction was allowed in favour of the assessee.

---

---

Issues: Whether interest paid under section 17(3) of the Sugarcane (Regulation of Supply and Purchase) Act, 1958, for delayed payment of the price of sugarcane was penal in nature and therefore inadmissible as a deduction, or whether it was allowable as expenditure under the Income-tax Act, 1961.

Analysis: The statutory scheme required speedy payment of cane price and, on default beyond the prescribed period, imposed interest on the unpaid purchase price. The liability arose from delayed payment of the price of raw material bought on credit and not from any penalty for breach of law. Such interest was treated as akin to interest paid in ordinary business transactions on credit purchases. The Court also noted that interest on arrears of sugarcane purchase tax stands on a different footing and does not alter the character of interest payable for delayed payment of purchase price in the present case.

Conclusion: The interest was not penal in nature and was allowable as a deduction under section 37 of the Income-tax Act, 1961, in favour of the assessee.

---