Compensatory interest on sales tax arrears allowed as deduction, as the charge was not treated as penal.

Interest charged on arrears of sales tax was characterised as compensatory rather than punitive, so it could not be treated as a penalty merely because it arose from tax default. The court accepted the broader judicial view that the charge was linked to the delay in payment and served a compensatory function. On that basis, the interest was allowable as a deduction in computing the assessee's income, and the disallowance was rejected.

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Issues: Whether interest on arrears of sales tax was compensatory in nature and therefore allowable as a deduction in computing the assessee's income.

Analysis: The dispute on the referred questions was confined to the character of interest charged on arrears of sales tax. The High Court had treated such interest as penal, but the larger judicial view accepted in the case was that the charge was compensatory and not punitive. On that basis, the interest could not be disallowed merely on the footing that it was a penalty.

Conclusion: The interest on arrears of sales tax was held to be compensatory in nature and an allowable deduction, in favour of the assessee and against the Revenue.

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