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

Bharat Commerce And Industries Ltd. Versus Commissioner of Income-Tax

SC affirmed HC: appeal dismissed with costs. Court held interest charged on income-tax/surtax (including interest for delayed payment or instalments under ... Deduction of interest levied under sections 139 and 215 - Interest levied by ITO at the time of completing the assessment for the assessment year 1972-73 - Whether, the claim for deduction of interest levied u/s 139 and interest levied u/s 215 was rightly rejected as not allowable u/s 37 - Interest payable on account of additional liability for income-tax and surtax on account of the disclosure of income made under the Voluntary Disclosure of Income and Wealth Act, 1976, under section 37 or 36(1)(iii). Held That:- The payment of sugarcane cess is very much a part of the assessee's business expense. Any interest on arrears of cess would, therefore, take colour from the cess which is payable. It is an indirect tax which has to be paid in the course of carrying on business. It is required to be deducted in order to arrive at the net profits of the assessee for the relevant assessment year. We are here not concerned with the payment of any indirect tax which the assessee may have to pay in the course of his business. We are concerned with the tax which was required to be paid after the ascertainment of the net income of the assessee for the relevant assessment year. Interest which is paid for delayed payment of advance tax on such income cannot be considered as expenditure wholly and exclusively for the purpose of business. Under the Income-tax Act, the payment of such interest is inextricably connected with the assessee's tax liability. If income-tax itself is not a permissible deduction under section 37, any interest payable for default committed by the assessee in discharging his statutory obligation under the Income-tax Act, which is calculated with reference to the tax on income cannot be allowed as a deduction. High Court has rightly answered the question in favour of the Revenue and against the assessee. The appeal is, therefore, dismissed with costs. Interest payable on account of additional liability for income-tax and surtax on account of the disclosure of income made under the Voluntary Disclosure of Income and Wealth Act, 1976, under section 37 or 36(1)(iii) - The contention of the assessee seems to be, that he had avoided borrowing money for payment of tax by obtaining instalments from the Department and paying interest. Therefore, the payment of interest should be considered as equivalent to his paying interest on borrowed money for payment of tax. The submission has to be stated to be rejected. Obtaining instalments from the Department and paying interest cannot be considered as equivalent to borrowing moneys from a third party for payment of tax and paying interest on such borrowed money. The assessee's argument, if taken to its logical conclusion, would amount to saying that the assessee had, in effect, borrowed moneys from the Income-tax Department, to pay tax for which he was paying interest to the Income-tax Department. Such is clearly not the case, as it cannot be. Apart from section 37, the assessee had also pressed into service section 36(1)(iii) which permits deduction in respect of the amount of interest paid in respect of capital borrowed for the purposes of the assessee's business or profession. For the reasons set out earlier, the claim for deduction under section 36(1)(iii) is also misconceived just as the assessee's claim under section 37 is misconceived. Appeals are, therefore, dismissed with costs. 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.