1998 (3) TMI 2 - SC - Income Tax

Interest on income tax and surtax, including voluntary disclosure interest, not deductible under s.37 or s.36(1)(iii); indirect levies deductible

SC affirmed HC: appeal dismissed with costs. Court held interest charged on income-tax/surtax (including interest for delayed payment or instalments under ... Interest on delayed payment of income-tax and advance tax - deduction as expenditure wholly and exclusively for the purposes of business - interest payable under the Voluntary Disclosure of Income and Wealth Act, 1976 - deduction under section 36(1)(iii) for interest on capital borrowed for business - section 80V - deduction for interest on money borrowed for payment of taxInterest on delayed payment of income-tax and advance tax - deduction as expenditure wholly and exclusively for the purposes of business - Claim for deduction of interest levied under sections 139 and 215 for assessment year 1972-73 as business expenditure under section 37 - HELD THAT: - The Court examined whether interest paid for delay in payment of advance tax and income-tax (under sections 139 and 215) can be treated as expenditure 'wholly and exclusively' for the purpose of business and hence deductible under section 37. The Court held that such interest arises from a statutory liability to pay tax which is computed after determination of income; it does not represent an expense incurred to earn or preserve business income. Earlier decisions holding that interest on overdrafts or borrowed money used to pay income-tax is not deductible were followed and distinguished authorities relied upon by the assessee (where expenditure was incurred to protect or preserve business or where payments related to indirect business cess) were held inapplicable. The Court therefore concluded that interest paid for default in discharging tax obligations bears no nexus with carrying on the business and cannot be deducted under section 37.Claim rejected; deduction under section 37 disallowed and High Court answer in favour of Revenue upheld.Interest payable under the Voluntary Disclosure of Income and Wealth Act, 1976 - deduction as expenditure wholly and exclusively for the purposes of business - section 80V - deduction for interest on money borrowed for payment of tax - deduction under section 36(1)(iii) for interest on capital borrowed for business - Whether interest paid under section 6 of the Voluntary Disclosure of Income and Wealth Act, 1976 (for delayed payment), is deductible under section 37 or under section 36(1)(iii) for assessment years 1977-78 and 1978-79 - HELD THAT: - The Court held that interest payable under section 6 of the Voluntary Disclosure Act is of the same character as interest on delayed payment of income-tax under the Income-tax Act and is a statutory consequence of failing to pay tax within prescribed periods. Such interest does not have the requisite nexus with business operations and cannot be treated as an expense incurred wholly and exclusively for business; it also cannot be equated to interest paid on money actually borrowed from third parties for payment of tax. Section 80V (allowing deduction for interest on money borrowed to pay tax) applies only where interest is paid on money borrowed; in the present appeals the assessee did not borrow moneys and therefore section 80V is inapplicable. For the same reasons the claim under section 36(1)(iii) fails.Claims rejected; deductions under section 37 and section 36(1)(iii) disallowed and High Court answer in favour of Revenue upheld.Final Conclusion: All appeals dismissed; the High Court correctly answered the referred questions in favour of the Revenue and against the assessees, disallowing deduction of interest paid for delayed or instalment payment of income-tax (including under the Voluntary Disclosure Act) as business expenditure. Issues Involved:1. Deduction of interest levied under sections 139 and 215 of the Income-tax Act, 1961.2. Deduction of interest payable on additional liability for income-tax and surtax under the Voluntary Disclosure of Income and Wealth Act, 1976.3. Applicability of section 80V of the Income-tax Act, 1961.Issue-Wise Detailed Analysis:1. Deduction of Interest Levied Under Sections 139 and 215 of the Income-tax Act, 1961:The primary issue in C.A. No. 5509 of 1985 was whether the interest levied under sections 139 and 215 of the Income-tax Act, 1961, could be deducted under section 37 for the assessment year 1972-73. The assessee, a limited company, argued that the delayed taxes increased its financial resources, which were used for business purposes, and thus the interest paid should be deductible as business expenditure. However, the court rejected this claim, stating that the interest paid for not meeting the advance tax requirements cannot be considered as expenditure laid out wholly and exclusively for business purposes. The judgment referenced several cases, including Padmavati Jaikrishna (Smt.) v. CIT (Addl.) and East India Pharmaceutical Works Ltd. v. CIT, to support its decision that such interest payments are not deductible under section 37. The court concluded that the interest paid for defaulting on statutory tax obligations does not preserve or promote the business and is not deductible before calculating business profits.2. Deduction of Interest Payable on Additional Liability for Income-tax and Surtax Under the Voluntary Disclosure of Income and Wealth Act, 1976:In C.A. Nos. 3355-56 of 1993, the issue was whether the interest paid on additional liability for income-tax and surtax, resulting from income disclosed under the Voluntary Disclosure of Income and Wealth Act, 1976, could be deducted under sections 37 or 36(1)(iii). The assessee argued that the interest paid for obtaining instalments to pay the tax should be deductible as business expenditure. The court rejected this argument, stating that the interest paid under the Voluntary Disclosure of Income and Wealth Act is similar to interest paid under the Income-tax Act and does not constitute expenditure incurred wholly or exclusively for business purposes. The court emphasized that such interest payments are statutory liabilities arising after the determination of income and are not connected to the business. The court also dismissed the applicability of section 80V in this context, as the assessee did not borrow money for tax payment but obtained instalments from the tax department.3. Applicability of Section 80V of the Income-tax Act, 1961:The court addressed the applicability of section 80V, which allows deduction of interest paid on money borrowed for tax payment. The court clarified that section 80V applies only if the assessee borrows money and pays interest on it for tax payment. In both cases, the assessee did not borrow money but instead paid interest on delayed tax payments or obtained instalments from the department. Therefore, section 80V was not applicable. The court referenced the Andhra Pradesh High Court's decision in CIT v. Bakelite Hylam Ltd., which allowed deduction under section 80V for interest on overdraft used for tax payment, but distinguished it from the present cases where no such borrowing occurred.Conclusion:The Supreme Court upheld the High Court's decisions, affirming that interest paid under sections 139 and 215 of the Income-tax Act, and under the Voluntary Disclosure of Income and Wealth Act, 1976, is not deductible under sections 37 or 36(1)(iii). The court emphasized that such interest payments are statutory liabilities unrelated to the business activities and do not qualify as business expenditure. The appeals were dismissed with costs.