Deductibility of interest on sugarcane cess and purchase tax arrears affirmed as a business outgo, not a penalty.

Interest on delayed payment of sugarcane cess and purchase tax was treated as a compensatory business outgo, not as a penalty, because the statutes separately provided for penalty and distinguished it from interest on arrears. The Court applied ordinary commercial accounting principles and held that real business profits must be computed after allowing statutory liabilities incidental to the conduct of business, unless deduction is expressly or impliedly barred. On that basis, the interest linked to these business tax arrears was allowable in computing business income, and its disallowance was incorrect.

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Issues: Whether interest payable on arrears of sugarcane cess and purchase tax is deductible in computing business profits and is not to be treated as penalty or disallowed business expenditure.

Analysis: The liability arose under section 3(3) of the U.P. Sugarcane Cess Act, 1956 and section 3(3) of the Sugarcane Purchase Tax Act, 1961, which separately provide for interest on delayed payment and distinguish it from penalty. The Court held that the levy was not penal in character, as penalty was dealt with independently under the statute. It further held that, even apart from the express deduction provisions, business profits must be computed on ordinary principles of commercial accounting and real profits, and that statutory outgoings incidental to the conduct of business, including the interest attached to such business liabilities, are allowable deductions unless expressly prohibited.

Conclusion: The interest on arrears of cess and purchase tax was allowable as a deduction in computing the assessee's business income and the disallowance was incorrect.

Ratio Decidendi: Interest levied for delayed discharge of a business statutory liability, where it is distinct from penalty and is incidental to the business, is deductible in computing real business profits on ordinary commercial principles unless the Act expressly or by necessary implication forbids it.

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