1995 (3) TMI 160 - AT - Income Tax

Tribunal allows deduction for compensatory interest but disallows penalty as penal in nature.

Choudhari Metal Industries Private Limited. Versus Deputy Commissioner Of Income-Tax.

Choudhari Metal Industries Private Limited. Versus Deputy Commissioner Of Income-Tax. - ITD 056, 405, Issues: Allowability of interest and penalty on late payment of Sales-tax under section 37(1) of the Act.Analysis:1. The main contention in the appeal was whether the claim of the assessee for interest and penalty on late payment of Sales-tax is allowable under section 37(1) of the Act.2. The assessee argued that the interest paid on delayed payment of sales-tax was compensatory in nature and hence allowable under section 37(1) of the Act, citing various decisions of the Supreme Court and High Courts to support their claim.3. The Departmental Representative contended that the allowability of interest, fines, and penalty under section 37 of the Act depends on whether the payment is compensatory or penal in nature. Referring to previous judgments, it was stated that if the payment is partly compensatory and partly penal, the deduction is allowed only for the compensatory part.4. The Tribunal analyzed the provisions of the Central Sales-tax Act under which the interest and penalty were levied for the relevant assessment years. The interest and penalty were imposed under section 9(2) of the Act, and the Tribunal examined the nature of these imposts to determine their compensatory or penal character.5. The Tribunal referred to section 9(2A) of the Central Sales-tax Act, which brings the offences and penalties of the general sales tax law of each State under the Central Sales-tax Act. It was noted that both interest and penalty were levied under section 9(2) of the Act, and the penalty was considered to be penal in nature as it was not automatic and was imposed after considering the explanation of the assessee.6. The Tribunal distinguished between the fixed-rate interest, which was automatic and compensatory in nature, and the penalty, which required discretion and consideration before imposition. Citing relevant case laws, the Tribunal supported the view that interest on delayed payment of sales tax is compensatory and deductible under section 37(1) of the Act.7. After examining the statutory provisions and considering the nature of the interest and penalty imposed, the Tribunal concluded that the interest claimed by the assessee was compensatory and allowable as a deduction under section 37(1) of the Act, while the penalty was not allowable.8. Consequently, the appeal was partly allowed, allowing the deduction for the compensatory interest but disallowing the penalty claimed by the assessee.