Penalty for delayed tax payment remains nondeductible where the levy is penal in substance, not interest in form.

A statutory levy for delayed payment of sales tax was treated as a penalty where the scheme, marginal note, hearing requirement, reference to reasonable cause, and remission power showed a penal character. Section 38(2) did not convert the charge into interest merely because the amount was initially deposited; it only fixed the payable amount subject to reduction or waiver. The levy remained default-based and penal in substance, with wilfulness relevant. It was therefore not an allowable deduction in computing business income.

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Issues: Whether the penalty paid for delayed payment of sales tax under section 36(3) of the Bombay Sales Tax Act, 1959 was an allowable deduction in computing business income.

Analysis: The provision in question was held to be a penalty provision in terms and in substance, having regard to the scheme of the Sales Tax Act, the marginal note, the opportunity of hearing, the reference to reasonable cause, and the power of remission. The requirement under section 38(2) to deposit the amount initially did not alter its character into interest, because the provision operated along with section 36 and only fixed the amount payable at the threshold, subject to reduction or waiver. The comparison with provisions dealing with interest and penalty under other enactments did not assist the assessee, since the default-based levy here remained penal in nature and the element of wilfulness was relevant.

Conclusion: The amount paid under section 36(3) was held to be a penalty and not an allowable deduction; the question was answered in the negative and against the assessee.

Ratio Decidendi: A statutory levy imposed for default in payment of tax, which is structured as a penalty and depends on reasonable cause and remission, retains its penal character even if quantified by reference to time or interest-like computation, and is not deductible as business expenditure.

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