Interest on cess arrears is deductible as revenue expenditure where it compensates delay and is not a penalty for breach of law.

Interest on arrears of cess under section 3(3) of the U.P. Sugarcane Cess Act, 1956 was held to be an automatic accretion to the cess liability, recoverable as arrears of land revenue, rather than a penalty for infringement of law. The statute distinguished this interest from the separate civil penalty and criminal penalty provisions, showing that the charge compensated the Government for delayed payment. It was therefore treated as revenue expenditure laid out wholly and exclusively for business purposes and was allowable as a deduction under section 10(2)(xv) of the Indian Income-tax Act, 1922.

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Issues: Whether interest paid on arrears of cess under section 3(3) of the U.P. Sugarcane Cess Act, 1956, is deductible as revenue expenditure under section 10(2)(xv) of the Indian Income-tax Act, 1922, or whether it is a penalty for infringement of law.

Analysis: The statutory scheme distinguished between three separate consequences for non-payment of cess: automatic interest on arrears under section 3(3), a civil penalty under section 3(5), and a criminal penalty under section 4. The liability to pay interest arose automatically on default in payment and was treated by the statute as part of the arrears recoverable as land revenue under section 3(6). The interest was therefore an accretion to the cess liability and not a separate penalty. It represented compensation to the Government for delayed payment, and the record also showed no dispute that the payment was laid out wholly and exclusively for the purposes of business and was revenue in character.

Conclusion: The interest paid under section 3(3) was not a penalty for infringement of law and was allowable as a deduction under section 10(2)(xv) of the Indian Income-tax Act, 1922.

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