TMI Blog1994 (10) TMI 36X X X X Extracts X X X X X X X X Extracts X X X X ..... able under the Abkari Act and the Rules for the period beyond 20th of the month is not penal in nature and that the deduction of the same can be allowed as business expenditure under the Income-tax Act, 1961 ?" The assessment years concerned are 1978-79 and 1979-80 for which the relevant accounting periods ended on March 31, 1978, and March 31, 1979. The assessee is an abkari contractor. The rental (called kist) for the grant of the privilege to vend liquor in retail shops is payable by the licensee in terms of rule 6(25) of the Kerala Abkari Shops (Disposal in Auction) Rules, 1974 (hereinafter referred to as "the Rules"). As per the said rule, the rental remaining due has to be paid in ten equal monthly instalments beginning from April ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpensatory and not penal in character and, therefore, the payment thereof constituted expenditure incurred wholly and exclusively for the purpose of the business and hence deductible. It was accordingly that the Income-tax Officer allowed deduction in respect of the payment of the interest for the period from 11th to 20th, but not thereafter. The assessee's appeal before the Commissioner of Income-tax (Appeals) was successful and he deleted the entire amount of interest paid by the assessee, inclusive of that paid for the period subsequent to 20th as business expenditure. This was affirmed in appeal by the Appellate Tribunal, and the Revenue is before us with this reference. The contention of the Revenue is that having regard to the provi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Bros. v. CIT [1961] 41 ITR 350, and certain other decisions, held that interest accruing up to the 20th of each month was not penal in character. This court said: "the liability to pay interest is an option given to the assessee by the very terms of the statutory licence itself. In paying interest between the 10th and the 20th of the month, the assessee commits no wrong, and no infraction of the law; and the payment of interest, in the circumstances, constitutes an expenditure incurred wholly and exclusively for the purpose of the business. Payment of rental was necessary to carry on business as abkari contractor and the mode of payment under clause 27 of the licence contemplates and permits payment of interest, if paid between the 11th a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rules stipulating that the non-payment will be visited with consequences of a penal character, or that it will be treated as infraction of any law justifying penal action against the licensee, it cannot be held that the amount of interest paid for the period subsequent to the 25th (20th : sic) of every month partakes of the character of penalty, not deductible under section 37. It must be remembered that the nature of the interest, whether it is for the period from 10th to 25th, or thereafter, is not in any manner different from each other. The continuation of the default beyond the 25th only exposes the licensee to coercive action by way of cancellation of the licence or resale of the shop, and not any penal action for infraction of any la ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to accrue. It is not a penalty for any criminal liability and there is no criminal prosecution. It is, therefore, an allowable deduction in the computation of the profits and gains of business. The matter was considered again recently by the Supreme Court in Prakash Cotton Mills Pvt. Ltd. v. CIT [1993] 201 ITR 684, in which the court, after an exhaustive reference to the decision of the Andhra Pradesh High Court in CIT v. Hyderabad Allwyn Metal Works Ltd. [1988] 172 ITR 113, held that the question whether the liability for interest was compensatory or penal in nature has to be decided with reference to the provisions of the relevant statute providing for the impost, ignoring the nomenclature of the impost as given by the statute. The amo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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