Deductibility of RBI interest for cash reserve ratio default treated as compensatory business expenditure, not penalty.

Interest charged by the Reserve Bank of India for default in maintaining the cash reserve ratio was treated as a compensatory payment linked to banking operations, not as a penalty, and was therefore allowable as business expenditure in computing business income. The Court followed its earlier banking decision on similar interest paid for non-maintenance of statutory reserve requirements, including cash reserve ratio and statutory liquidity ratio, and held the deduction admissible.

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Issues: Whether interest paid to the Reserve Bank of India under Section 42(3) of the Reserve Bank of India Act, 1934 for non-maintenance of the cash reserve ratio was allowable as a deduction in computing business income.

Analysis: The question was answered by applying the settled view that interest charged by the Reserve Bank for default in maintaining the statutory reserve requirement is not a penalty but a compensatory payment related to the banking business, and therefore forms part of admissible business expenditure. The earlier decision of the same Court in the connected banking context was followed, where similar interest paid for non-maintenance of cash reserve ratio and statutory liquidity ratio was held to be deductible and the revenue appeal was dismissed.

Conclusion: The interest paid to the Reserve Bank of India was allowable as a deduction and the issue was decided in favour of the assessee.

Ratio Decidendi: Interest charged for default in maintaining the cash reserve ratio, when found to be compensatory rather than penal, is deductible in computing business income.

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