Revenue expenditure principle allows deduction of non-penal interest on sales tax arrears as business expenditure.

Interest paid on arrears of sales tax was treated as revenue expenditure because it was not penal in character and was incurred wholly and exclusively for business purposes. Applying this principle, the Rajasthan High Court held that such interest was deductible under section 37(1) of the Income-tax Act, 1961. The court followed the view taken earlier in the assessee's own case and accepted that payment to the Sales Tax Department in these circumstances formed part of allowable business expenditure.

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Issues: Whether interest paid on arrears of sales tax under section 11B of the Rajasthan Sales Tax Act, 1954, was allowable as a deduction under section 37(1) of the Income-tax Act, 1961.

Analysis: The claim was examined in the light of the earlier decision in the assessee's own case, where such interest was held not to be a penalty but a revenue expenditure. Following that view, and applying the principle that an outlay incurred wholly and exclusively for business purposes is deductible, the amount of interest paid to the Sales Tax Department was treated as business expenditure.

Conclusion: The interest paid under section 11B of the Rajasthan Sales Tax Act, 1954, was deductible under section 37(1) of the Income-tax Act, 1961. The answer to the referred question was in the affirmative, in favour of the assessee and against the Revenue.

Ratio Decidendi: Interest paid on arrears of sales tax, where it is not penal in character and is incurred wholly and exclusively for business purposes, constitutes revenue expenditure deductible under section 37(1) of the Income-tax Act, 1961.

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