2006 (8) TMI 248 - AT - Income Tax

Interest payment deemed compensatory, not penal. Section 43B inapplicable. Disallowance deleted. Appeal in favor of assessee.

Southern Electrodes Limited. Versus Assistant Commissioner Of Income-tax, Circle 3(2), Hyderabad.

The Tribunal allowed the assessee's appeal, ruling that the interest payment was compensatory and not penal. Therefore, section 43B of the Income-tax Act ... Business Expenditure Issues Involved:1. Disallowance of interest expenditure claimed by the assessee.2. Nature of interest payment: whether penal or compensatory.3. Applicability of section 43B of the Income-tax Act, 1961.Detailed Analysis:Issue 1: Disallowance of Interest Expenditure Claimed by the AssesseeThe assessee, a company engaged in the manufacture and sale of industrial gases, claimed an interest expenditure of Rs. 2,04,230 on an interest-free sales tax loan sanctioned by the Government of Andhra Pradesh. The Assessing Officer disallowed this claim, interpreting the interest as penal for non-payment of sales tax, thus invoking section 43B of the Income-tax Act. The CIT(A) upheld this disallowance, leading the assessee to appeal to the Tribunal.Issue 2: Nature of Interest Payment: Penal or CompensatoryThe primary contention revolves around whether the interest charged on the delayed repayment of the sales tax loan is penal or compensatory. The assessee argued that the interest is compensatory, arising from a delay in repayment, and thus should not attract the provisions of section 43B. The assessee cited various judicial precedents, including CIT v. Padmavati Raje Cotton Mills Ltd, which supported their stance that such interest is compensatory.Conversely, the Revenue maintained that the interest is penal, citing the Supreme Court's decision in Swedeshi Cotton Mills Co. Ltd. v. CIT and the Rajasthan High Court's decision in Mewar Motors v. CIT, which held that interest on delayed payment of sales tax is in the nature of sales tax and thus covered by section 43B.Issue 3: Applicability of Section 43B of the Income-tax Act, 1961Section 43B stipulates that certain expenses, including tax, duty, cess, or fee, are deductible only on actual payment. The Assessing Officer and CIT(A) held that the interest on the sales tax loan falls under this provision, thereby disallowing the deduction.Tribunal's Findings:1. Nature of Interest Payment:- The Tribunal analyzed the nature of the interest payment, distinguishing between penal and compensatory interest. It referred to the Supreme Court's guidelines in Swedeshi Cotton Mills Co. Ltd., which necessitate examining the statutory provisions to determine the nature of the interest.- The Tribunal found that the interest in this case is compensatory, as it arises automatically on default and is not within any authority's discretion. This conclusion aligns with the Apex Court's decision in Mahalakshmi Sugar Mills Co., which clarified that interest for delayed tax payments is compensatory.2. Judicial Precedents:- The Tribunal noted conflicting decisions from various High Courts, including the Rajasthan High Court, which had both supported and opposed the assessee's stance in different cases.- Decisions favoring the assessee included CIT v. Udaipur Distillery and CIT v. Western Indian State Motors, which held that interest on delayed tax payments is compensatory and deductible under section 37.3. Section 43B Applicability:- Given the compensatory nature of the interest, the Tribunal concluded that section 43B does not apply. The interest is not a tax, duty, cess, or fee but a compensatory charge for delayed repayment, thus not falling under section 43B's purview.Conclusion:The Tribunal allowed the assessee's appeal, deleting the disallowance made by the Assessing Officer and sustained by the CIT(A). It held that the interest payment in question is compensatory and not penal, and therefore, the provisions of section 43B do not apply. The appeal was allowed in favor of the assessee.