Interest on deferred sales tax payment qualifies as business expenditure when it is a statutory accretion, not a penalty.

Interest payable on arrears of sales tax under a statutory instalment scheme was treated as an accretion to the tax liability, not as a penalty for breach of law. Applying the business expenditure test under section 37(1) of the Income-tax Act, the High Court noted that such interest arose because payment of tax was deferred by instalments and remained a statutory liability linked to business operations. It was therefore regarded as expenditure laid out wholly and exclusively for the purposes of business, and the deduction was allowed in favour of the assessee.

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Issues: Whether interest paid on arrears of sales tax, being a statutory liability under the sales tax law and payable on grant of instalments, was an allowable deduction in computing business income.

Analysis: Deduction under section 37(1) of the Income-tax Act, 1961 is available for expenditure laid out wholly and exclusively for business, subject to the statutory exclusions. Under section 22(4A) of the Madhya Pradesh General Sales Tax Act, 1958, where instalments are permitted for payment of tax, interest is payable on the deferred amount from the date the tax became due. Such interest is not in the nature of penalty for infraction of law, but is an accretion to the sales tax liability and represents expenditure incurred for the purposes of business.

Conclusion: The interest paid on arrears of sales tax was deductible, and the question was answered in favour of the assessee.

Ratio Decidendi: Interest payable under a statutory scheme for deferred payment of tax, when it operates as an accretion to the tax liability and not as a penalty, is allowable as business expenditure if incurred wholly and exclusively for business purposes.

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