Statutory penalty capped by tax amount remains a penalty, not interest, where default period does not determine its quantum.

A statutory levy described as a penalty under Section 207A of the Bombay Municipal Corporation Act remained a penalty for tax purposes, because its quantum was fixed by the Commissioner, it was subject to possible remission under Section 208, and it was not linked to the length of default. The fact that the levy was capped at 20% of the tax, or quantified by reference to tax, did not convert it into interest. The absence of express notice and the reference in Section 471 did not alter its statutory character. The amount was therefore not deductible as interest or as a revenue outgo, and the issue was answered in favour of the Revenue.

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Issues: Whether the amount paid to the municipal corporation for default in payment of municipal taxes, described as penalty under Section 207A of the Bombay Municipal Corporation Act, 1888, was deductible in computation of income as interest or damages.

Analysis: The levy under Section 207A was not linked to the length of the default and the fact that the statute prescribed only a maximum limit of 20 per cent. of the tax did not alter the nature of the levy. The provision contemplated determination of the penalty by the Commissioner, service of the order on the assessee, and discretion to remit the penalty under Section 208. These features showed that the levy retained the character of a penalty and could not be treated as interest merely because it was quantified with reference to tax. The absence of express notice did not change its statutory character. The reference to the table in Section 471 also did not alter the nature of the levy under Section 207A.

Conclusion: The amount was a penalty and not interest or deductible revenue outgo; the question was answered in the negative and in favour of the Revenue.

Ratio Decidendi: A statutory levy described as penalty does not become interest for tax purposes merely because it is capped as a percentage of tax, unless its quantum is linked to the period of default or its legal character is otherwise altered by the statutory scheme.

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