1998 (3) TMI 2 - SC - Income Tax

Interest levied by ITO at the time of completing the assessment for the assessment year 1972-73 - Whether the claim for deduction of interest levied under section 139 and interest levied under section 215 was rightly rejected as not allowable under section 37 - Held yes

Summary

Issues Involved:
1. Deduction of interest levied under sections 139 and 215 of the Income-tax Act, 1961.
2. Deduction of interest payable on additional liability for income-tax and surtax under the Voluntary Disclosure of Income and Wealth Act, 1976.
3. Applicability of section 80V of the Income-tax Act, 1961.

Issue-Wise Detailed Analysis:

1. Deduction of Interest Levied Under Sections 139 and 215 of the Income-tax Act, 1961:
The primary issue in C.A. No. 5509 of 1985 was whether the interest levied under sections 139 and 215 of the Income-tax Act, 1961, could be deducted under section 37 for the assessment year 1972-73. The assessee, a limited company, argued that the delayed taxes increased its financial resources, which were used for business purposes, and thus the interest paid should be deductible as business expenditure. However, the court rejected this claim, stating that the interest paid for not meeting the advance tax requirements cannot be considered as expenditure laid out wholly and exclusively for business purposes. The judgment referenced several cases, including Padmavati Jaikrishna (Smt.) v. CIT (Addl.) and East India Pharmaceutical Works Ltd. v. CIT, to support its decision that such interest payments are not deductible under section 37. The court concluded that the interest paid for defaulting on statutory tax obligations does not preserve or promote the business and is not deductible before calculating business profits.

2. Deduction of Interest Payable on Additional Liability for Income-tax and Surtax Under the Voluntary Disclosure of Income and Wealth Act, 1976:
In C.A. Nos. 3355-56 of 1993, the issue was whether the interest paid on additional liability for income-tax and surtax, resulting from income disclosed under the Voluntary Disclosure of Income and Wealth Act, 1976, could be deducted under sections 37 or 36(1)(iii). The assessee argued that the interest paid for obtaining instalments to pay the tax should be deductible as business expenditure. The court rejected this argument, stating that the interest paid under the Voluntary Disclosure of Income and Wealth Act is similar to interest paid under the Income-tax Act and does not constitute expenditure incurred wholly or exclusively for business purposes. The court emphasized that such interest payments are statutory liabilities arising after the determination of income and are not connected to the business. The court also dismissed the applicability of section 80V in this context, as the assessee did not borrow money for tax payment but obtained instalments from the tax department.

3. Applicability of Section 80V of the Income-tax Act, 1961:
The court addressed the applicability of section 80V, which allows deduction of interest paid on money borrowed for tax payment. The court clarified that section 80V applies only if the assessee borrows money and pays interest on it for tax payment. In both cases, the assessee did not borrow money but instead paid interest on delayed tax payments or obtained instalments from the department. Therefore, section 80V was not applicable. The court referenced the Andhra Pradesh High Court's decision in CIT v. Bakelite Hylam Ltd., which allowed deduction under section 80V for interest on overdraft used for tax payment, but distinguished it from the present cases where no such borrowing occurred.

Conclusion:
The Supreme Court upheld the High Court's decisions, affirming that interest paid under sections 139 and 215 of the Income-tax Act, and under the Voluntary Disclosure of Income and Wealth Act, 1976, is not deductible under sections 37 or 36(1)(iii). The court emphasized that such interest payments are statutory liabilities unrelated to the business activities and do not qualify as business expenditure. The appeals were dismissed with costs.