TMI Blog1975 (5) TMI 14X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee claimed to deduct this amount from its profits liable to income-tax. The claim was disallowed by the Income-tax Officer on the ground that the provision for interest represented at contingent liability on. The Appellate Assistant Commissioner of Income-tax did not agree with this view and held that the amount in question represented all accrued liability and, as such, was an allowable deduction. The department took the matter in appeal before the Income-tax Appellate Tribunal. Before the Tribunal, the view of the Appellate Assistant Commissioner that the amount represented an accrued liability was not challenged but the deduction of the amount was contested on another ground. It was urged that the assessee had become liable for payment of interest because it violated the provisions contained in section 3(2) of the U. P. Sugarcane Cess Act, 1956, as validated by the U. P. Sugarcane (Validation) Act, 1961. Similarly, the interest on purchase tax had become payable because the assessee had contravened a similar provision of the Sugarcane Purchase Tax Act, 1961. The interest, therefore, was in the nature of penalty and could not be allowed as business expenditure. The Tribun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1922) of the Income-tax Act, 1961, as an outgoing necessarily incurred in carrying out the business." We, accordingly, reframe the question to eliminate the inaccuracy and to bring out the real controversy between the parties. The reframed question would read: " Whether, on the facts and in the circumstances of the case, the Tribunal was right in disallowing the deduction of an aggregate sum of Rs. 1,04,023 payable by the assessee as interest on arrears, of cess and arrears of purchase tax in the computation of its business profits for the assessment year 1963-64 ?" Before we examine the admissibility of the deduction claimed by the assessee, it is necessary to ascertain the true nature of the amount. Section 3 of the U. P. Sugarcane Cess Act, 1956 (hereinafter referred to as the Cess Act), provides for the imposition of cess tax. Under sub-section (1) of section 3 of the Cess Act the State Government may by notification in the official Gazette impose a cess not exceeding four annas per maund on the entry of cane into the premises of a factory for use, consumption or sale therein. Sub-section (2) then provides : " (2) The cess imposed under sub-section (1) shall be pay ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der. We shall, for the time being, presume that section 37 is applicable. Now, the payment of cess and purchase tax on sugarcane consumed by the assessee in its factory for production of sugar is an expenditure laid out wholly and exclusively for the purposes of business, inasmuch as these levies directly increase the cost of sugarcane. This position is not disputed. On principle, we see no reason why interest payable on such levies should also not be a permissible deduction. If the principal (made up of cess and purchase tax) is a permissible deduction the interest payable thereon would also be a permissible deduction because principal and interest together constitute the assessee's liability. We have already noticed that any interest paid by a businessman on the capital borrowed for the purposes of business is an allowable deduction under section 36(1)(iii) and any interest paid by a businessman in respect of any of its business liability which is not an interest on borrowed capital would be an allowable deduction under section 37 as being expenditure laid out wholly and exclusively for the purposes of the business. If a businessman purchases goods on credit with the stipulati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ture itself has made a distinction between interest and penalty and while interest and cess have been treated at par, penalty has been dealt with separately. In Sir Shadi Lal Sugar General Mills Ltd. v. Commissioner of Income-tax (ITR No. 180 of 1973, decided on August 17, 1974), a Bench of this court had to deal with penalty under section 3(5) of the Cess Act. There it was held that a penalty under section 3(5) was not an allowable deduction. That case is clearly distinguishable because in the instant case we are concerned with interest under sub-section (3) and not with penalty under sub-section (5). The case of Haji Aziz and Abdul Shakoor Bros. v. Commissioner of Income-tax, upon which main reliance has been placed, is also distinguishable. That was also a case of fine and not of interest. There the assessee imported dates from Iraq partly by steamer and partly by country craft at a time when import of dates by steamer was prohibited. The dates which were imported by steamer were confiscated by the customs authorities under section 167 of the Sea Customs Act. Under section 183 of that Act the assessee was given the option to have the dates released on payment of fine. The asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efinitely established by the Privy Council in Commissioner of tax v. Chitnavis where a bad debt was held to be an admissible deduction, though there was no special allowance for bad debts in the 1922 Act, as it then stood. Lord Russell, delivering the judgment of the Board, said: " Although the Act nowhere in terms authorises the deduction of had debts of a business, such a deduction is necessarily allowable. What are chargeable to income-tax in respect of a business are the profits and gains of a year; and in assessing the amount of the profits and gains of a year account must necessarily be taken of all losses incurred, otherwise you would not arrive at the true profits and gains." In Badridas Daga v. Commissioner of Income-tax and in Calcutta Co. Ltd. v. Commissioner of Income-tax the Supreme Court quoted the observations of Lord Russell with approval and held that an item of loss or expenditure not falling within any of the express deductions may be allowed if it is deductible on ordinary principles of commercial accounting. The liability of the assessee on account of cess and purchase tax is not in reality an expenditure, but it is a loss or an outgoing connected directl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee, a paddy procuring agent under the Government of Orissa, was required under an agreement to supply paddy and rice of a certain standard, known as " fair average quality ". Under one of the clauses in the agreement the Collector had the power to levy such penalty as he may deem fit for supply of foodgrains not conforming to the fair average quality. In exercise of this power the Collector imposed penalty upon the assessee for supplying sub-standard foodgrains. The assessee claimed to deduct this amount from its profits under section 10(1) of the Indian Income-tax Act, 1922, which corresponds to section 28(1) of the Income-tax Act, 1961. The deduction was allowed by the Tribunal but at the instance of the Commissioner of Income-tax the following question was referred to the Orissa High Court: " Whether, on the facts and circumstances of the case, the amount of Rs. 25,700 paid by the assessee by way of penalty to the Government of Orissa shall be an admissible deduction under section 10(1) of the Indian Income-tax Act, 1922 ? " The High Court of Orissa disallowed the deduction on the ground that the deduction claimed was not admissible as it amounted to a penalty i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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