1975 (5) TMI 14 - HC - Income Tax

Court allows deduction of interest on arrears of taxes as business expense

The court ruled in favor of the assessee, allowing the deduction of interest on arrears of cess and purchase tax as a permissible business expenditure ... Assessment Year, Burden Of Proof, Income Tax, Jurisdiction Of High Court, Notice Of Reassessment, Previous Year, Works Contract Issues Involved:1. Whether the interest on arrears of cess and purchase tax is a deductible business expenditure.2. Whether the interest payable under the U.P. Sugarcane Cess Act, 1956, and the U.P. Sugarcane Purchase Tax Act, 1961, constitutes a penalty.3. Whether the deduction can be claimed under sections 28(1) or 37 of the Income-tax Act, 1961.Issue-wise Detailed Analysis:1. Deductibility of Interest on Arrears of Cess and Purchase Tax:The assessee, a partnership firm owning two sugar factories, made a provision for the payment of Rs. 1,04,023 towards interest on arrears of cess and purchase tax. The Income-tax Officer disallowed the deduction, considering it a contingent liability. However, the Appellate Assistant Commissioner allowed the deduction, stating it was an accrued liability. The Tribunal, while agreeing on the accrued liability, disallowed the deduction on the grounds that the interest was a penalty for violating statutory provisions. The reframed question for the court was whether the interest payable on arrears of cess and purchase tax is deductible in computing business profits for the assessment year 1963-64.2. Nature of Interest under U.P. Sugarcane Cess Act and U.P. Sugarcane Purchase Tax Act:The court examined the true nature of the interest. Under section 3(3) of the U.P. Sugarcane Cess Act, 1956, and the U.P. Sugarcane Purchase Tax Act, 1961, interest is payable on arrears of cess and purchase tax if not paid on time. The court found that the interest is not a penalty but a statutory liability for delayed payment. The distinction between interest and penalty was emphasized, with the court noting that penalties are separately provided under section 3(5) of the Cess Act, which was not applicable in this case.3. Applicability of Sections 28(1) and 37 of the Income-tax Act, 1961:The court analyzed sections 28(1) and 37 of the Income-tax Act, 1961. Section 28 deals with profits and gains of business, while section 37 allows for the deduction of any expenditure laid out wholly and exclusively for business purposes. The court reasoned that if the principal amount of cess and purchase tax is deductible, the interest payable on these amounts should also be deductible. The court distinguished between contractual and statutory liabilities, asserting that both are allowable deductions if incurred in the course of business.The court also referred to precedents, such as the Supreme Court's decision in Haji Aziz and Abdul Shakoor Bros. v. Commissioner of Income-tax, which dealt with penalties but not interest. The court disagreed with the Delhi High Court's decision in Commissioner of Income-tax v. Mahalaxmi Sugar Mills Ltd., which had disallowed the deduction, emphasizing the distinction between interest and penalty.Conclusion:The court concluded that the interest on arrears of cess and purchase tax is not a penalty but a statutory liability. It held that such interest is a permissible deduction under section 37 and also under section 28(1) as an outgoing necessarily incurred in carrying out the business. The court emphasized that profits should be computed after deducting all losses and expenditures incurred for business purposes, unless expressly disallowed by the Act.Final Judgment:The court answered the reframed question in the negative, in favor of the assessee, and against the department, allowing the deduction of the interest on arrears of cess and purchase tax in computing business profits. The assessee was awarded costs assessed at Rs. 200.