Interest on delayed sales tax dues can qualify as business expenditure when it is compensatory and part of the trading tax burden.

Interest automatically payable on delayed sales tax dues was treated as a statutory, compensatory accretion to the tax liability and not a separate penal charge. Because it arose in the assessee's capacity as a trader and formed part of the business tax burden, the Rajasthan HC held that the expenditure was laid out wholly and exclusively for the purposes of business. On that reasoning, interest paid on arrears of sales tax under section 11B was held deductible under section 37 of the Income-tax Act.

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Issues: Whether interest paid on arrears of sales tax under section 11B of the Rajasthan Sales Tax Act, 1954, is an allowable deduction under section 37 of the Income-tax Act, 1961.

Analysis: Interest payable under section 11B is a statutory and automatic liability arising from delayed payment of sales tax, without any separate order. The expression "wholly and exclusively for the purposes of business" under section 37 is of wide import and includes expenditure incurred by the assessee in its capacity as a trader for carrying on business. Interest on delayed sales tax payment is treated as part of the sales tax burden and, being an accretion to the tax liability, is compensatory in character rather than penal. On that footing, the amount falls within the scope of business expenditure allowable under section 37.

Conclusion: The deduction is allowable. The question is answered in the affirmative, in favour of the assessee and against the Revenue.

Ratio Decidendi: Interest automatically payable on delayed statutory tax dues, when incurred by the assessee in its capacity as a trader and as part of the business tax burden, is expenditure laid out wholly and exclusively for the purposes of business and is deductible under the residuary business expenditure provision.

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