Compensatory interest on delayed statutory dues was treated as deductible business expenditure, not a penal outlay.

Interest paid on delayed statutory dues was treated as compensatory, not penal, because it accrued automatically on default and was distinct from any discretionary penalty under the Assam Finance (Sales Tax) Act, 1956. Applying the same reasoning to delayed forest dues, the court noted that interest formed part of the amount due and was therefore part of the underlying liability. On that basis, the payments were held to be laid out wholly and exclusively for business and not barred by the exclusion for penal expenditure, making them deductible under section 37(1) of the Income-tax Act, 1961.

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Issues: Whether interest paid on delayed payment of sales tax under the Assam Finance (Sales Tax) Act, 1956, and interest paid on delayed forest dues was penal in nature or constituted deductible business expenditure under section 37(1) of the Income-tax Act, 1961.

Analysis: The interest on unpaid statutory dues was treated as part and parcel of the underlying liability and not as a separate penalty. Under the Assam Finance (Sales Tax) Act, 1956, tax payment, interest for delay, and discretionary penalty were dealt with separately, showing that interest accrued automatically on default while penalty depended on the authority's discretion. The same principle applied to forest dues, where interest was payable on delayed payment and formed part of the amount due. Interest of this character was held to be compensatory, laid out wholly and exclusively for the purposes of business, and not hit by the exclusion applicable to penal payments.

Conclusion: The interest payments were not penal in nature and were allowable as deductions under section 37(1) of the Income-tax Act, 1961, in favour of the assessee.

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