2007 (4) TMI 200 - SC - Income Tax

Revenue argues that payment made by the assessee towards the shortfall within the maturity period is not allowable as deduction under section 37 - revenue pointed out that the amount payable by the assessee was treated as additional levy by this court and therefore the said amount partakes of the character of penalty; and therefore in the light of the Explanation given to section 37 the said amount is not deductible - revenue s submission is not acceptable - appeal is dismissed

Summary

Issues Involved:
1. Whether the payment made towards the shortfall of the maturity period should be treated as a penalty.
2. Whether the payment made towards the shortfall of the maturity period should be treated as a fee or excise duty under section 43B(a) of the Income-tax Act.
3. Whether the amount paid for adhesive labels should be considered a fee or cost of labels under sub-rule (8) of rule 15 of the Karnataka Excise (Manufacturing and Bottling of Arrack) Rules, 1987.

Detailed Analysis:

Issue 1: Payment towards Shortfall of Maturity Period as Penalty
The appellant argued that the Tribunal erred in law by relying on the judgment in Ugar Sugar Works Ltd. v. State of Karnataka, which concluded that the payment made by the assessee towards the shortfall within the maturity period is allowable as a deduction under section 37 of the Income-tax Act. The appellant contended that this payment should be treated as a penalty and thus not deductible.

However, the High Court dismissed this contention, stating that the amount paid for the shortfall in the maturity period was not a penalty but an additional levy. This was supported by a Division Bench of the court in Ugar Sugar Works Ltd., which held that the payment was an additional levy and not a penalty. The court also referred to CIT v. Ahmedabad Cotton Mfg. Co. Ltd., where the Supreme Court held that a payment described as a penalty but resulting from commercial expediency cannot be considered a penalty. Similarly, in CIT v. Mandya National Paper Mills Ltd., it was held that a penalty paid under the Karnataka Sales Tax Act was not a penalty in the real sense but compensation for delay in payment of tax due, thus allowable as a deduction under section 37(1) of the Income-tax Act.

Issue 2: Payment towards Shortfall of Maturity Period as Fee or Excise Duty
The appellant's second contention was that the payment made by way of additional duty for the shortfall of the maturity period should be treated as either excise duty or a fee under section 43B(a) of the Income-tax Act. The High Court rejected this argument, noting that the additional amount paid for the shortfall of the maturity period could not be treated as a fee or excise duty. The court emphasized that a fee is typically in the nature of quid pro quo for services rendered, which was not the case here. Thus, the second contention was also found to be devoid of merit.

Issue 3: Payment for Adhesive Labels as Fee or Cost of Labels
The final issue was whether the amount paid by the assessee for adhesive labels should be considered a fee or the cost of labels as per sub-rule (8) of rule 15 of the Karnataka Excise (Manufacturing and Bottling of Arrack) Rules, 1987. The High Court noted that the rule imposes an obligation on the licensee to affix excise labels at their cost. However, if labels are not available, the Commissioner may allow the release of bottled arrack for sale without labels on payment of the cost of labels to the Government. The court held that the language of the rule explicitly states that the payment is towards the cost of labels and not a fee. Therefore, the third submission was also rejected.

Conclusion:
The High Court concluded that the appeal lacked merit and upheld the Tribunal's decision, affirming that the payments made by the respondent were neither penalties nor excise duties but additional levies and costs of labels. Consequently, section 43B of the Income-tax Act was not applicable. The appeal was dismissed with costs assessed at Rs. 25,000.