Statutory interest on delayed municipal tax payment is compensatory, not penal, and remains deductible in computing income.

Interest statutorily payable to the municipal corporation on delayed municipal tax payment under section 236(3) of the Calcutta Municipal Act, 1951, was treated as a compensatory accretion to the tax and not as a penalty for breach of law. On that basis, it was deductible in computing total income. The Tribunal's contrary view was unsustainable because it proceeded on the premise that any payment linked to delayed tax payment is automatically non-deductible. The disallowance was therefore set aside and the deduction allowed.

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Issues: (i) Whether interest paid to the Calcutta Corporation for delayed payment of municipal taxes was allowable as a deduction in computing the total income; (ii) whether such interest was paid for defiance of law and therefore not deductible; (iii) whether the Tribunal's finding that the amount was not allowable was legally sustainable.

Issue (i): Whether interest paid to the Calcutta Corporation for delayed payment of municipal taxes was allowable as a deduction in computing the total income.

Analysis: The liability arose under section 236(3) of the Calcutta Municipal Act, 1951, which made interest automatically payable on unpaid municipal dues after the prescribed period. The payment was treated as an accretion to the municipal levy and, following the principle applied to similar statutory interest in the sugarcane cess context, it was regarded as compensatory rather than penal. The court held that such statutory interest could be considered an allowable outgoing in computing income.

Conclusion: Yes. The amount was allowable as a deduction.

Issue (ii): Whether such interest was paid for defiance of law and therefore not deductible.

Analysis: The statutory scheme distinguished between automatic interest on delayed payment and a separate penal consequence. Interest under section 236(3) was mandatory and arose without discretion, unlike a penalty imposed for deliberate breach. On that basis, the payment could not be characterised as a fine or penalty for infraction of law.

Conclusion: No. The payment was not for defiance of law and was not penal in nature.

Issue (iii): Whether the Tribunal's finding that the amount was not allowable was legally sustainable.

Analysis: The court held that, whether viewed as relatable to business income or to income from other sources, the expenditure satisfied the governing deduction principles because it was a statutory liability and not a disallowable penal payment. The Tribunal's conclusion proceeded on an incorrect legal premise that every payment arising from delayed tax payment was non-deductible as a matter of law.

Conclusion: No. The Tribunal's disallowance was not legally sustainable.

Final Conclusion: The reference was answered in favour of the assessee and the disallowance of interest paid for delayed municipal taxes was set aside as an allowable deduction in computing total income.

Ratio Decidendi: Interest statutorily payable for delayed municipal tax payment, where it operates as a compensatory accretion and not as a penalty for breach of law, is deductible in computing income.

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