Sales tax default levy treated as penalty for infraction of law and denied business deduction

The amount payable under section 45(5) of the Gujarat Sales Tax Act, 1969 was a penalty for default in payment of tax, not a compensatory interest charge, because the provision repeatedly used the term "penalty," made liability depend on failure to pay without reasonable cause, and allowed the Commissioner to remit it. Its computation by reference to arrears and delay did not change that character. As payment for infraction of law is not a normal business incident, the amount was not deductible as business expenditure under the Income-tax Act, 1961.

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Issues: Whether the amount payable under section 45(5) of the Gujarat Sales Tax Act, 1969 for delayed payment of sales tax was compensatory interest or penalty for infraction of law, and whether it was allowable as business expenditure under the Income-tax Act, 1961.

Analysis: Section 45 of the Gujarat Sales Tax Act, 1969 used the expression "penalty" throughout and, in sub-section (5), made liability contingent on failure to pay tax without reasonable cause. The provision also empowered the Commissioner to remit the whole or part of the amount payable. These features, read with the scheme of the Act, indicated that the levy was intended as a penalty for default and not as a mere compensatory charge for use of money. The measure of the levy by reference to the amount and duration of tax arrears did not alter its essential character. Payment for infraction of law is not a normal incident of business and cannot be treated as a deductible commercial loss.

Conclusion: The amount paid under section 45(5) was penalty for infraction of law and was not an allowable deduction.

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