Assam Forest Products (P.) Ltd. vs Commissioner of Income Tax

B.L. Hansaria, J.—The following question of law has been referred by the Income Tax Appellate Tribunal to this court u/s 256(1) of the Income Tax Act, 1961, hereinafter "the Act" :

"Whether, on the facts and in the circumstances of the case, the interest paid by the assessee under Sections 139: 215 and 217 of the Income Tax Act, 1961, was allowable as a deduction in computing, the income of the assessee chargeable under the head ''Profits and gains of business or profession'' ?"

The facts of the case are these. The assessee is a company. For the assessment year 1972-73, the assessee filed a return along with the profit and Loss account which showed net profit of Rs. 1,88,500.10. In computing its net profit, the assessee deducted a sum of Rs. 29,320 being the interest paid by the assessee to the Department on various counts, namely, late filing of return mention of which has been made in Section 139 of the Act, the shortfall in the payment of advance tax covered by Section 215 of the Act and failure to make estimate, interest for which is chargeable as per Section 217 of the Act. The Income Tax Officer disallowed the deductions claimed. The assessee appealed to the Appellate Assistant Commissioner who dismiss the appeal on the ground that the payment of interest to the Department could not be regarded as business expenditure. The appellate authority was of the further opinion that the interest levied under the Act was penal in nature and did not qualify for deduction, On further appeal to the Appellate Tribunal, the learned Tribunal came to the following conclusions :

(a) the payment of interest under Sections 139, 215 and 217 were payments out of profit and not expenditure for earning profit ;

(b) such interest was not trading loss which could be taken into account u/s 28 under ordinary commercial principles ; and

(c) such interest was-

(i) not incurred for reducing liability to tax but, in fact, increased, it,

(ii) not incurred for preserving the business, (iii) not incurred as interest on capital borrowed for the business,

(iv) not incidental to business as they related to a liability to which all assessees were exposed whether they did business or not, and

(v) was penal in nature.

In assailing the view taken by the learned Tribunal, it has been contended by Shri Bhattacharjee, appearing for the assessee, that as per the decision of the Supreme Court in Central Provinces Manganese Ore Co. Ltd. Vs. Commissioner of Income Tax, the levy of interest cannot be regarded as a penalty inasmuch as it has been held in the aforesaid decision that though the expression "penal interest" has acquired usage, it is in fact an inaccurate description of the levy. It was further pointed out that having regard to the reason for the levy and the circumstances under which it is imposed, it is clear that interest is charged by way of compensation and not by way of penalty. It was then stated that the Act makes a clear distinction between the levy of a penalty and other levies under that statute. It was opined that interest is levied under Sections 139(8) and 215 because, by reason of the omission or default in question, the Revenue is deprived of the benefit of the tax for the period it has remained unpaid..

Because of the aforesaid decision, the view taken in some cases, viz., Haji Aziz and Abdul Shakoor Bros. Vs. The Commissioner of Income Tax, Bombay City II, and Indian Aluminium Co. Ltd. Vs. Commissioner of Income Tax, West Bengal I, that penalty for infraction of law does not amount to expenditure for the purpose of business would not seem to stand in the way of the assessee claiming deduction of interest u/s 37 of the Act which allows deduction of any expenditure laid out or expended wholly or exclusively for the purpose of business or profession while computing the income chargeable under the head "Profits and gains of business or profession". This negative argument does not, however, help us in answering the referred question one way or the other inasmuch as there are positive decisions of some High Courts which have held that interest paid, inter alia, for delayed payment of tax is not deductible u/s 37. In this connection, Shri Talukdar draws our attention to Commissioner of Income Tax Vs. Oriental Carpet Manufacturers (India) P. Ltd., which has held that interest charged for delayed payment of tax has no connection with the business of the assessee. It was opined in this case that liability to pay tax, though arising out of business activity, cannot be said to be in any manner a liability which has anything to do with the business of the assessee and so where an assessee is given time for payment of tax and is charged interest in respect of the delayed payment, such interest is not deductible as business expenditure. The same view was taken in National Engineering Industries Ltd. Vs. Commissioner of Income Tax (Central), In Bharat Commerce and Industries Ltd. Vs. The Commissioner of Income Tax, also, it was held that interest paid due to delay in payment of tax would not be deductible ; but this view was taken by stating that interest would be part and parcel of the liability to pay Income Tax. Since Income Tax paid by the assessee is not a permissible deduction in view of what has been laid down in Section 40(a)(ii), the interest paid for delay in payment of tax would also not be a permissible deduction as the interest would take the colour of the original amount liable to be paid as Income Tax.

While coming to the aforesaid conclusion, the Delhi High Court had relied, inter alia, on the decision of the apex court in Mahalaxmi Sugar Mills Co. Vs. Commissioner of Income Tax , Delhi, In that case, the Supreme Court was called upon to decide the question as to whether interest paid by the assessee on the arrears of cess is an allowable revenue expenditure. On the language of Section 3(3) of the U. P. Sugarcane Cess Act, 1956, it was held by the Supreme Court that the interest payable under the aforesaid provision was not by way of penalty inasmuch as the section stated that "Any arrear of cess not paid on the date prescribed under Sub-section (2) shall carry interest of 6% per annum from such date to date of payment". As to this type of interest which was stated to be different from the interest imposed by Section 3(5) of the Cess Act, it was stated that the interest payable on the arrear was in reality part and parcel of the liability to pay cess. It was opined that this type of interest was an accretion to the cess. The enlargement of the cess liability being automatic and for which no specific order was necessary, it was held that, as distinguished from the liability to interest u/s 3(5) of the Cess Act which was in the nature of a penalty, the liability u/s 3(3) of the Cess Act shall be an accretion to the cess, i.e., part and parcel of the liability to pay tax. We have to take the same view about interest chargeable under Sections 139(8): 215 and 217 of the Act. We have said so because from the language of Section 139(8), it is clear that the interest charged under this provision is an accretion to the amount of tax found payable on the total income as determined on regular assessment. We may state that due to the failure to file returns in time, the Revenue loses the amount of tax due as per the return and so by charging interest, it enlarges its receipt, i.e., augments the amount of tax. In so far as interest levied under Sections 215 and 217 of the Act is concerned, that has a direct connection with the amount payable as advance tax, by charging interest on which the corpus of the tax amount is enlarged. So, in all these three cases, interest paid has to be regarded as part and parcel of the liability to pay tax. Now, if, u/s 40(a)(ii), any sum paid on account of tax is not deductible, we would think that the same should be the position with regard to payment of interest under the aforesaid sections of the Act.

We may add that though from what has been stated in Mahalaxmi Sugar Mills Co. Vs. Commissioner of Income Tax , Delhi, it is not explicit whether payment of cess itself was a deductible expenditure but the same being an expenditure laid out by the mill wholly and exclusively for the purpose of business was definitely covered by Section 37 of the Act. Now, if cess is a deductible expenditure, as we think it to be, interest paid on arrear of cess u/s 3(3) of the relevant Act has also to be regarded as a deductible expenditure in the context of the view taken about the interest payable on arrear of cess u/s 3(3) of the relevant Act. But as the amount of Income Tax paid is not deductible under the Act in view of what has been stated in Section 40(a)(ii), interest on it would also not be deductible.

Shri Bhattacharjee has also referred in this connection to Rajasthan Central Stores (P.) Ltd. Vs. Commissioner of Income Tax, in which payment of interest on the failure of the assessee to remit the sales tax to the Government account within time was held to be a permissible deduction. This view was taken following, inter alia, the decision in Mahalaxmi Sugar Mills Co. Vs. Commissioner of Income Tax , Delhi, The Bench deciding the case regarded the interest payable under the relevant Sales Tax Act as not much different from the interest payable u/s 3(3) of the U. P. Sugarcane Cess Act which had conic for consideration in Mahalaxmi Sugar Mills Co. Vs. Commissioner of Income Tax , Delhi, which was followed in Balrampur Sugar Co. Ltd. Vs. Commissioner of Income Tax, and Triveni Engineering Works Ltd. Vs. Commissioner of Income Tax, As the payment of sales tax which was under consideration in Rajasthan Central Stores (P.) Ltd. Vs. Commissioner of Income Tax, and for that matter, other taxes coming up for consideration in the Calcutta and Allahabad cases were held as deductible expenditure, the interest paid on the same was also regarded as revenue expenditure deductible u/s 37(1) of the Act. But these decisions cannot assist the assessee as payment of Income Tax is not deductible as per Section 40(a)(ii) of the Act and so interest under Sections 139: 215 and 217 which have to be regarded, for reasons given, as accretion to tax, cannot also be allowed to be deducted.

Though Shri Talukdar brings to our notice the decision of this court in Ganesh Das Sreeram Vs. Income Tax Officer, "A" Ward and Others, the same is not relevant inasmuch as it had laid down that, for the purpose of calculating interest u/s 139(1)(iii)(a) of the Act, the advance tax paid by the assessee was deductible. The controversy at hand is however different. So, the fact that the decision of this court in Ganesh Das was overruled in Ganesh Dass Sreeram Vs. Income Tax Officer, ''A'' Ward, Shillong and Others, is of no avail to the assessee also.

In view of all the above, we answer the question referred to us in the negative i.e., against the assessee.

The delay in delivery of judgment has occurred because after the hearing was over, records of the case reached my hand only recently.

J. Sangma, J.

I agree.