2002 (6) TMI 174 - AT - Income Tax

Tribunal allows deduction for interest under Income-tax Act, considers it part of income tax

The tribunal reversed the CIT(A)'s decision and directed the assessing officer to allow the deduction claimed by the assessee for interest under sections ... Chargeable Profits Issues:- Whether the interest charged under sections 217 and 220 of the Income-tax Act forms part of the income-tax and is deductible in computing the chargeable profits under rule 2(i) of the Companies (Profits) Surtax Act, 1964.Analysis:Issue 1: Deductibility of Interest under Income-tax Act in Computing Chargeable Profits:The appeal was filed against the CIT(A)'s order for the assessment year 1982-83. The main contention was whether the interest charged under sections 217 and 220 of the Income-tax Act should be deductible in computing chargeable profits under the Companies (Profits) Surtax Act, 1964. The assessee argued that the interest should be considered part of income tax and hence deductible, relying on the decision of the Supreme Court in a specific case. However, the CIT(A) disagreed, stating that interest under section 215 cannot be considered as tax based on the Act's definition. The argument revolved around the interpretation of rule 2 of the First Schedule of the Companies (Profits) Surtax Act, 1964.Issue 2: Interpretation of Rule 2 of the First Schedule of Companies (Profits) Surtax Act, 1964:The crux of the matter was the interpretation of rule 2 of the First Schedule of the Companies (Profits) Surtax Act, 1964. The rule specifies deductions to be made from the total income to arrive at chargeable profits. The debate centered on whether interest payable under sections 215 and 217 of the Income-tax Act should be excluded along with income tax while computing chargeable profits. The assessee contended that interest should be excluded, arguing that it is part of income tax. The tribunal reviewed relevant legal precedents and statutes to determine the correct interpretation of the rule.Judicial Precedents and Interpretation:The tribunal referred to various judicial decisions to support its interpretation. It discussed cases where interest on arrears of cess was considered an allowable deduction, emphasizing that interest is not a penalty but a component of the tax assessment process. The tribunal also highlighted conflicting decisions by different courts on similar issues. Ultimately, the tribunal decided in favor of the assessee, citing principles of construction favoring the taxpayer and rejecting a rigid interpretation adopted by the CIT(A). The tribunal held that interest under sections 215 and 217 should be allowed as a deduction in computing chargeable profits.Conclusion:The tribunal reversed the CIT(A)'s order and directed the assessing officer to allow the deduction claimed by the assessee for interest under sections 215 and 217 of the Income-tax Act. The tribunal's decision was based on the interpretation of the relevant provisions and legal precedents supporting the inclusion of interest as part of income tax for computing chargeable profits. The appeal was allowed in part, deciding in favor of the assessee on the issue of interest deductibility.