Penal levy for delayed sales tax payment, not interest, was held non-deductible under income tax law.

Under the unamended section 36(3) of the Bombay Sales Tax Act, 1959, the levy for delayed payment of sales tax was treated as penal rather than compensatory interest. The analysis notes that the provision required proof of default without reasonable cause, notice, a written order, and allowed remission, while the statutory scheme distinguished this levy from a separate interest provision for delayed refunds. Earlier binding Bombay High Court decisions were relied on to confirm that calculation by reference to delay did not change its character. On that basis, the amount was not allowable as a deduction under the Income-tax Act, 1961, and the claim was disallowed.

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Issues: Whether the amount levied under section 36(3) of the Bombay Sales Tax Act, 1959, for delayed payment of sales tax was a penalty in nature or a compensatory interest payment, and consequently whether it was an allowable deduction in computing business income under the Income-tax Act, 1961.

Analysis: The provision as it stood before amendment required proof of default without reasonable cause, notice to the dealer, an order in writing, and permitted remission by the Commissioner or appellate authority. The surrounding scheme of section 36 treated the levy as one among several penal provisions, and the existence of a separate provision for interest on delayed refunds showed that the legislature distinguished interest from penalty. Earlier binding decisions of the same High Court had held that the levy under section 36(3) was penal in character and not interest, and that the method of calculation by reference to the period of delay did not alter its essential nature. The later amendment substituting simple interest was noticed only to show a deliberate legislative change and did not govern the assessment year in question.

Conclusion: The levy under section 36(3) in its unamended form was held to be penal, not compensatory interest, and the deduction claimed under the Income-tax Act, 1961 was disallowed.

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