Compensatory interest on delayed purchase tax payments is deductible as business income and cannot be treated as penal.

Interest charged for delayed payment of purchase tax under the U.P. Sugarcane (Purchase Tax) Act, 1961 was treated as compensatory accretion to the statutory levy, not a penalty for infraction of law. On that footing, it was deductible in computing business income. Because the allowance of that deduction was legally sustainable, the Commissioner could not regard the Income-tax Officer's assessment as erroneous or prejudicial to the interests of revenue. The deduction was therefore upheld and the reference was answered in favour of the assessee on both questions.

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Issues: (i) Whether interest on arrears of purchase tax payable under the U.P. Sugarcane (Purchase Tax) Act, 1961, was deductible in computing the business income of the assessee. (ii) Whether the Commissioner was justified in holding that the Income-tax Officer's allowance of such interest was erroneous and prejudicial to the interests of revenue.

Issue (i): Whether interest on arrears of purchase tax payable under the U.P. Sugarcane (Purchase Tax) Act, 1961, was deductible in computing the business income of the assessee.

Analysis: The liability to pay interest under section 3(3) of the U.P. Sugarcane (Purchase Tax) Act, 1961, arose only because of delay in payment of the tax and operated as an accretion to the tax liability. The provision was treated as compensatory rather than penal. The Court compared the purchase tax statute with the cess statute considered by the Supreme Court and held the two enactments to be in pari materia. The interest was therefore not an amount paid by way of penalty for infraction of law but was a charge for delayed payment of a statutory levy.

Conclusion: The interest was deductible in computing the business income and the answer was in favour of the assessee.

Issue (ii): Whether the Commissioner was justified in holding that the Income-tax Officer's allowance of such interest was erroneous and prejudicial to the interests of revenue.

Analysis: Once the interest payable under the purchase tax statute was held to be compensatory and deductible, the Income-tax Officer's allowance of the claim could not be treated as erroneous or prejudicial to the interests of revenue. The revisional direction rested on the contrary view that the interest was penal, which the Court rejected.

Conclusion: The Commissioner was not justified, and the answer was in favour of the assessee.

Final Conclusion: Both referred questions were answered against the revenue and the deduction claimed by the assessee was upheld.

Ratio Decidendi: Interest payable automatically for delayed payment of a statutory tax or cess, when it is compensatory in character and not a penalty for infraction of law, is an allowable deduction in computing business income.

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