TaxTMI 
TaxTMI 
2009 (10) TMI 421
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....ility crystallised only during the year and not earlier. 4. That the learned Income-tax Appellate Tribunal has misconstrued and misinterpreted the material on record as well as the law." 2. In I. T. A. Nos. 25 and 26 of 2004 two questions of law have been framed which are virtually identical to questions Nos. 1 and 4 quoted hereinabove. 3. Briefly stated the facts of the case are that the H. P. Forest Corporation is an undertaking of the H. P. Government. The main business of the corporation is to extract timber and resin and sell the same. The trees to be felled are handed over by the Forest Department to the Forest Corporation. The corporation pays royalty to the State Government at rates which are finalised by the Pricing Committee constituted by the State Government. The corporation is liable to pay interest on belated payment of royalty and other amounts payable to the corporation. 4. The Forest Department is liable to pay sales tax on royalty but in actual fact this amount is actually deposited by the Forest Corporation on behalf of the Forest Department. A lease is executed by the Forest Department in favour of the Corporation. The assessee claimed deduction of t....
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....l the default continues." 8. A bare perusal of section 37 of the Income-tax Act shows that when an expenditure is laid out wholly and exclusively for the purpose of business it can be deducted in computing the income under the head of profits and gains business. However, expenditure incurred by the assessee for any purpose, which is an offence or prohibited by law is not deemed to be incurred for the purpose of business. The general principle is that portion of interest paid on delayed payment which is compensatory in nature is allowed to be deducted and that portion which is penal cannot be deducted. 9. In the present case, one factor which has to be noted is that the Corporation was paying the royalty to the State after deducting the sales tax and the sales tax was being deposited with the sales tax authorities on behalf of the State. In case of delayed payment interest paid under section 17A(1) was also being deducted. The question is whether such deduction is permissible or not. Both sides have referred to a number of decisions at the Bar. 10. In Mahalakshmi Sugar Mills Co. v. CIT [1980] 123 ITR 429, the apex court was dealing with section 10(2)(xv) of the Indian Incom....
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....reveals the concerned impost to be purely compensatory in nature. Wherever such impost is found to be a composite nature, that is, partly of compensatory nature and partly of penal nature, the authorities are obligated to bifurcate the two components of the impost and give deduction to that component which is compensatory in nature and refuse to give deduction to that component which is penal in nature." 14. This principle enunciated in Prakash Cotton Mills P. Ltd.' s case [1993] 201 ITR 684 has stood the test of time and is now the law of the land. The same principle has been followed by the Bombay High Court in New Mahalakshmi Silk Mills P. Ltd. v. CIT [1994] 206 ITR 302 (Bom) and CIT v. Jolly Steel Industries P. Ltd. [1999] 236 ITR 881 (Bom). The Delhi High Court has also taken the same view in Mahalakshmi Sugar Mills Co. Ltd. v. CIT [2001] 252 ITR 691. The apex court in Swadeshi Cotton Mills Co. Ltd. v. CIT [1998] 233 ITR 199 was dealing with the question as to whether damages paid for delayed payment of employees' contribution to employees' provident fund was compensatory or penal. The court following the judgment in Prakash Cotton Mills Pvt. Ltd. [1993] 201 ITR 684 (SC) re....
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.... at 12 per cent. per annum for delay of one month and thereafter 18 per cent. per annum till the default continues. 18. We have been informed at the Bar that though in clause 18G of the lease deed the penalty fixed is at 18 per cent. per annum but the amount claimed by the assessee is strictly in accordance with section 17A. It is more than obvious that this interest was not payable by way of penalty but by way of compensation to compensate the State for the interest which it would have been liable to pay under section 17A. We are, therefore, of the considered view that question No. 1 has to be answered in favour of the assessee and against the Revenue. 19. Questions Nos. 2 and 3 in Income-tax Appeal No. 21 of 2003 are similar. The question is on which date the payments made crystallised. We are of the opinion that these questions are in fact not substantial questions of law but questions of fact. Whether a particular payment crystallized in one year or the other may at the best be a mixed question of law and fact but cannot be a substantial question of law. Even otherwise, we find that as far as question No. 2 is concerned the finding of the learned Tribunal that the payment....