Compensatory interest on delayed sales tax payment is deductible as business expenditure, not a penalty.

Interest payable under section 11B of the Rajasthan Sales Tax Act on delayed remittance of sales tax collections was treated as compensatory rather than punitive. Because the liability arose automatically on default and functioned as compensation for late payment, it was not regarded as a penalty. On that principle, the interest paid was held to be revenue expenditure incurred in the course of business and was deductible under section 37(1) of the Income-tax Act, 1961.

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Issues: Whether interest payable under section 11B of the Rajasthan Sales Tax Act, 1954 on delayed payment of sales tax collections withheld by the assessee was compensatory in nature and therefore deductible in computing business income under section 37(1) of the Income-tax Act, 1961.

Analysis: The interest liability under section 11B arose automatically on default in payment of tax or demand and operated in a manner similar to the interest provisions considered by the Supreme Court and other High Courts in relation to delayed statutory payments. The governing principle applied was that where the statutory levy is compensation for delayed payment and not a sanction for infraction of law, it is not to be treated as a penalty. On that basis, the interest paid for delay in remitting sales tax collections was treated as revenue expenditure incurred in the course of business.

Conclusion: The interest was not a penalty and was deductible under section 37(1) of the Income-tax Act, 1961; the question was answered in the negative, in favour of the assessee.

Ratio Decidendi: Interest levied solely for delayed payment of a statutory liability, where it is compensatory rather than punitive, constitutes allowable revenue expenditure and is not disallowed as a penalty.

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