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Issues: Whether interest paid under section 35A of the Assam Sales Tax Act, 1947, for delay in payment of sales tax is allowable as deduction under section 37 of the Income-tax Act, 1961, on the ground that it is compensatory and not penal in nature.
Analysis: Interest levied for delayed payment of tax is compensatory where it is imposed for deprivation of the use of tax money during the period of default and not as a punishment for infraction of law. The liability under section 35A of the Assam Sales Tax Act, 1947, increases automatically on default in payment, and the Act separately provides for penalty under section 38 for distinct defaults. On that basis, the interest is treated as part of the sales tax liability and not as a penalty. Since sales tax itself is deductible under section 37 of the Income-tax Act, 1961, the interest paid on such tax is also deductible.
Conclusion: The question is answered in the affirmative and in favour of the assessee; the interest paid under section 35A is allowable as a deduction under section 37.
Ratio Decidendi: Interest levied solely for delayed payment of tax, where it operates as compensation and forms part of the tax liability rather than as a penalty for breach of law, is deductible as revenue expenditure under section 37 of the Income-tax Act, 1961.
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