Compensatory interest on delayed electricity payments was treated as deductible business expenditure, not a penal levy.

Interest charged for delayed payment of electricity charges was treated as compensatory, not penal, because the liability arose automatically under the supply agreement or applicable regulations on default in payment. The existence of a separate penalty provision for disconnection did not alter the character of the levy, and the label used for the charge was not decisive. On that basis, the amount was regarded as an allowable deduction under section 37(1) of the Income-tax Act, 1961, in favour of the assessee.

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Issues: Whether interest payable for delayed payment of electricity charges was penal in nature or compensatory in nature, and therefore allowable as a deduction under section 37(1) of the Income-tax Act, 1961.

Analysis: The liability for the relevant years arose either from the agreement between the assessee and the Electricity Board or from the supply regulations issued under section 79(j) of the Electricity (Supply) Act, 1948. The levy was triggered automatically on default in payment of electricity charges and was not a separate penal consequence requiring an independent order. The presence of a penalty provision for disconnection of supply did not change the character of the interest levy. Applying the principle that the nomenclature of interest, penalty, or damages is not decisive, the Court treated the amount as compensatory in character and distinguished it from a statutory default payment imposed as a true penalty.

Conclusion: The interest was not penal in nature and was deductible under section 37(1) of the Income-tax Act, 1961, in favour of the assessee.

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