Business deduction for statutory tax differential and compensatory interest allowed where concessional sales tax forms were not furnished.

Differential sales tax paid because concessional forms were not furnished, together with interest on delayed payment of sales tax, customs duty and service tax, was treated as a deductible business outgo under section 37(1). The differential tax was viewed as the full statutory tax liability that arose once the concessional route failed, not as a penal levy. The interest was also regarded as compensatory and part of the statutory tax burden rather than a payment for contravention of law. On that basis, the disallowance was deleted and the claim was allowed.

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Issues: Whether the differential sales tax paid because concessional forms were not furnished, together with interest paid for delayed payment of sales tax, custom duty and service tax, was allowable as a business deduction under section 37(1) of the Income-tax Act, 1961.

Analysis: The assessee had sold goods at concessional sales tax rates against prescribed forms under the Central Sales Tax Act, 1956, but could not furnish the forms in respect of some transactions. As a result, it became liable to pay the tax at the normal rate and also interest for delayed payment. The expenditure was examined in the light of the distinction between a penalty for contravention of law and a compensatory payment arising from a statutory obligation. The differential tax represented only the amount payable at the full rate once the concessional route failed, and the interest was held to be compensatory and part of the statutory tax burden rather than a penal outgo.

Conclusion: The claim was allowable under section 37(1); the disallowance was deleted and the issue was decided in favour of the assessee.

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