TMI Blog2009 (10) TMI 421X X X X Extracts X X X X X X X X Extracts X X X X ..... k Gupta J .- The aforesaid appeals are being disposed of by a common judgment since similar questions of law are involved in all the three appeals. In I. T. A. No. 21 of 2003 the questions of law are as follows: "1. That the disallowances made on account of interest on belated payment of sales tax is not penal in nature but is compensatory despite the stipulation in clause 18G of the lease agreement. 2. That the disallowance on account of interest paid on belated payment of royalty to Raja of Kutlehar crystallised during the year. 3. That the disallowances made on account of interest on interest on belated payment of royalty expense tantamounts to compound interest and is compensatory in nature instead of being penal interest. Further, this liability crystallised only during the year and not earlier. 4. That the learned Income-tax Appellate Tribunal has misconstrued and misinterpreted the material on record as well as the law." 2. In I. T. A. Nos. 25 and 26 of 2004 two questions of law have been framed which are virtually identical to questions Nos. 1 and 4 quoted hereinabove. 3. Briefly stated the facts of the case are that the H. P. Forest Corporation is an undertak ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted payment of sales tax from the due date." 7. Payment of sales tax is governed by the H. P. General Sales Tax Act, 1968. Under section 17A(1), an assessee is liable to pay interest on the delayed payment of sales tax. The provision reads as follows: "17A. Payment of interest.(1) If any dealer fails to pay the amount of tax due from him as required by subsection (4) of section 12 he shall, in addition to the amount of tax, be liable to pay simple interest on the amount of tax due from him at the rate of one percentum per month from the date immediately following the last date for the submission of the return under subsection (3) of that section, for a period of one month and thereafter at the rate of one and a half percentum per month till the default continues." 8. A bare perusal of section 37 of the Income-tax Act shows that when an expenditure is laid out wholly and exclusively for the purpose of business it can be deducted in computing the income under the head of profits and gains business. However, expenditure incurred by the assessee for any purpose, which is an offence or prohibited by law is not deemed to be incurred for the purpose of business. The general principl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the liability of tax and hence deductible. 13. The apex court again considered this question in Prakash Cotton Mills P. Ltd. v. CIT [1993] 201 ITR 684, and held as follows (page 690): "Therefore, whenever any statutory impost paid by an assessee by way of damages or penalty or interest is claimed as an allowable expenditure under section 37(1) of the Income-tax Act, the assessing authority is required to examine the scheme of the provisions of the relevant statute providing for payment of such impost notwithstanding the nomenclature of the impost as given by the statute, to find whether it is compensatory or penal in nature. The authority has to allow deduction under section 37(1) of the Income-tax Act, wherever such examination reveals the concerned impost to be purely compensatory in nature. Wherever such impost is found to be a composite nature, that is, partly of compensatory nature and partly of penal nature, the authorities are obligated to bifurcate the two components of the impost and give deduction to that component which is compensatory in nature and refuse to give deduction to that component which is penal in nature." 14. This principle enunciated in Prakash Cott ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tice is required but where the assessee gives valid reasons for not depositing the tax in time penalty need not be imposed. Where the payment of interest is automatic for the delayed period, the imposition is compensatory in nature. In the present case, no doubt, the word "penalty" has been used in clause 18G but if we read the entire lease deed and the provisions of the H. P. General Sales Tax Act together, it is apparent that the parties to the lease deed decided that though the sales tax in fact was to be deposited by the State it would be deposited on its behalf by the assessee Forest Corporation. In case the amount of sales tax was not paid in terms of section 17A the State being the dealer became liable to pay simple interest at 12 per cent. per annum for delay of one month and thereafter 18 per cent. per annum till the default continues. 18. We have been informed at the Bar that though in clause 18G of the lease deed the penalty fixed is at 18 per cent. per annum but the amount claimed by the assessee is strictly in accordance with section 17A. It is more than obvious that this interest was not payable by way of penalty but by way of compensation to compensate the State fo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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