1989-VIL-561-CAL-DT

Equivalent Citation: [1994] 209 ITR 490

CALCUTTA HIGH COURT

Date: 31.05.1989

ORIENT GENERAL INDUSTRIES LIMITED

Vs

COMMISSIONER OF INCOME-TAX

BENCH

Judge(s)  : BHAGABATI PRASAD BANERJEE., AJIT KUMAR SENGUPTA 

JUDGMENT

AJIT K. SENGUPTA J.--In this application under section 256(1) of the Income-tax Act, 1961, for the assessment year 1975-76, the following question of law has been referred to this court :

"Whether, on the facts and in the circumstances of the case and on proper construction of law, the Income-tax Appellate Tribunal was right in holding that interest of Rs. 43,907 paid to the Income-tax Department was not allowable in computing the total income of the assessee ?"

The dispute relates to the claim for Rs. 43,007 paid by the assessee as interest to the Income-tax Department under section 139 as a deduction in computing its total income. The Income-tax Officer referred to the case of River Valley Tea Co. (P.) Ltd. v. Agrl. ITO [1974] Tax LR 805 (Gauhati) and disallowed the claim. On appeal, the Commissioner of Income-tax (Appeals) further referred to Balmer Lawrie and Co. Ltd. v. CIT [1960] 39 ITR 751 (Cal) and National Engineering Industries Ltd. v. CIT [1978] 113 ITR 252 (Cal) in which the Calcutta High Court had taken a similar view and confirmed the order of the Income-tax Officer.

The assessee came in second appeal to the Tribunal.

The Tribunal, following the decision of the Calcutta High Court in National Engineering Industries Ltd. v. CIT [1978] 113 ITR 252, which was also referred to by the Commissioner of Income-tax (Appeals), upheld the disallowance.

Our attention has been drawn to the decision of the Supreme Court in the case of Central Provinces Manganese Ore Co. Ltd. v. CIT [1986] 160 ITR 961 where the Supreme Court has indicated the nature and character of the interest levied under section 139(8) of the Income-tax Act for delay in filing the return. There the Supreme Court observed as follows :

"Having regard to the reason for the levy and the circumstances in which it is imposed, it is clear that interest is levied by way of compensation and not by way of penalty. The Income-tax Act makes a clear distinction between the levy of a penalty and other levies under that statute. Interest is levied under sub-section (8) of section 139 and under section 215 because by reason of the omission or default mentioned in the relevant provision, the Revenue is deprived of the benefit of the tax for the period during which it has remained unpaid. The very period for which interest is levied under the relevant provision points to the nature of the levy. If that is borne in mind, it will be apparent that the levy of interest is part of the process of assessment. Although section 143 and section 144 do not specifically provide for the levy of interest and the levy is, in fact, attributable to sub-section (8) of section 139 or section 215, it is nevertheless a part of the process of assessing the tax liability of the assessee. Where the Income-tax Officer considers that there is a case for levying interest under sub-section (8) of section 139 or under section 215, what he does in practice, is to make an order levying such interest after completing the assessment of the assessee's total income and the tax payable by him."

It is contended by Mr. Bagaria, learned advocate, that having regard to the aforesaid observation of the Supreme Court, the interest being compensatory in nature, it should be allowed as a revenue deduction. We are, however, unable to accept this contention.

The expenditure has been claimed as deductible under section 37 of the Act. Any expenditure which is wholly and exclusively laid out for the purpose of business is an allowable deduction in computing the business income. Any expenditure incurred for the preservation and protection of the assessee's business is an allowable deduction under the Income-tax Act. Tax is levied, inter alia, on the business profits. These profits are ascertained according to commercial principles. If an assessee who carries on business commits any default in discharging statutory obligations under the Income-tax Act, payment if any made in consequence of such default cannot constitute an allowable expenditure inasmuch as such expenditure cannot be said to have been made for the purpose of the business. The Division Bench of this court in Balmer Lawrie Co. v. CIT [1960] 39 ITR 751 held that interest paid by the assessee under section 18A(6) of the Indian Income-tax Act, 1922, was not interest in respect of capital borrowed and. was, therefore, not allowable under section 10(2)(iii) of the Act of 1922. It was further held that this amount was not a trading loss under section 10(1) of the Act of 1922.

A similar view has been taken by the court in National Engineering Industries' case [1978] 113 ITR 252 (Cal). In the course of carrying on business the assessee may commit default for which interest may be payable. Interest is payable on an arrear of cess under section 3(3) of the U. P. Sugarcane Case Act, 1956. But it is a part and parcel of the liability to pay cess. The Supreme Court in Mahalakshmi Sugar Mills Co. v. CIT [1980] 123 ITR 429, held that such interest is not a penalty and is accordingly allowable. The reason is that liability to pay cess is an allowable deduction. because it is incurred for the purpose of business of a sugar manufacturing company and any expenditure connected with such liability is also allowable. It cannot, however, be said that interest paid for delay in filing the return has any connection with the business of the assessee. The assessee does not pay the interest for the purpose of business. It has nothing to do with the carrying on of or carrying out of the business activity. The liability to tax no doubt arises out of the business activity. But the income-tax itself is not deductible in computing the income of the assessee. The interest which is paid for any infraction of the provisions of the Income-tax Act by the assessee must derive its colour from the principal payment, i.e., income-tax and will partake of it. Under the Income-tax Act interest or penalty is inextricably connected with the tax liability. If income-tax is not a permissible deduction under section 37, any interest payable for default committed by the assessee in discharging its statutory obligation under the Income-tax Act which is calculated with reference to the tax or income cannot be allowed as a deduction.

For the reasons aforesaid, we answer the question in this reference in the affirmative and in favour of the Revenue.

There will be no order as to costs.

BHAGABATI PRASAD BANERJEE J.--I agree.

 

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