TMI Blog1994 (3) TMI 60X X X X Extracts X X X X X X X X Extracts X X X X ..... 959, as it was then in force. The assessee claimed deduction of this amount in his income-tax return on the ground that this amount formed a part of the expenditure wholly and exclusively incurred for the purpose of business of the assessee. The assessee contended that the payment of sales tax could not be made in time on account of financial stringency facing the assessee. Had the assessee borrowed monies for the payment of sales tax it would have had to pay interest which would have been more than the amount payable under section 36. Hence the sum of Rs. 13,800 should be considered as interest amount and it should be included in its expenditure wholly and exclusively incurred for the purpose of business. This contention of the assessee has been upheld by the Tribunal which has held that the payment of the said sum which was by way of penalty was not for infraction of the law but for the discharge by the assessee of its statutory liability, and hence was admissible as a revenue deduction. From the above finding of the Tribunal, the following question has been referred to us under section 256(1) of the Income-tax Act, 1961 : "Whether, on the facts and in the circumstances of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sequent months is an increased percentage. The last factor which requires to be noticed in section 36(3) is that the Commissioner or any appellate or revisional authority has the power to remit the whole or any part of the penalty payable in respect of any delay. Taking all these factors into account, a Division Bench of this court in Jairamdas Bhagchand v. CIT [1988] 171 ITR 545 held that section 36(3) imposed a penalty and hence such penalty was not an allowable deduction under section 37 of the Income-tax Act, 1961. The Division Bench relied upon the fact that under section 36(3) it was necessary for the Commissioner to give a notice to the dealer to show cause and pass a speaking order imposing penalty. The Division Bench also referred to the power of the Commissioner to remit the amount of penalty. It held that taking all these factors into consideration, the payment cannot be considered as in the nature of interest. It was submitted before the Division Bench that under section 38(2) a registered dealer furnishing returns as required under the said Act was required first to pay into the Government treasury the whole of the amount of tax due from him according to such return ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provisions. In the case before the Division Bench the Tribunal had observed that the delay had arisen on account of technicalities and it could not be said that there was any mala fide intention on the part of the assessee to evade or delay the payment of tax. The Division Bench said that the Tribunal, therefore, ought to have remitted the entire penalty. In the case of CST v. Machinery Sales Service [1990] 77 STC 131 (Bom), to which one of us was a party (Mrs. Sujata Manohar C. J.), the court said that penalty could not be levied on the dealer under section 36(3) of the Bombay Sales Tax Act, 1959, read with section 9(2A) of the Central Sales Tax Act, 1956, for failure to pay tax in accordance with the returns in the absence of any notice under section 38(4) of the Bombay Sales Tax Act, which if not complied with, would attract penalty. This decision proceeds on the basis that penalty levied under section 36(3) is to be treated as penalty and can be levied only if the necessary ingredients for levy of such penalty are present. Apart from the above decisions, if we look at the scheme of section 36, it is clear that the entire section 36 deals with the imposition of penalty. Unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... adesh High Court referred to the scheme of section 36(3) and held that the payment had an element of penalty and hence was a composite payment comprising both penalty and compensation for delayed payment. To the extent the payment was compensatory, a deduction had to be allowed under the Income-tax Act. The attention of the Andhra Pradesh High Court does not appear to have been drawn to several cases of this High Court relating to the interpretation of section 36(3) of the Bombay Sales Tax Act, 1959. The assessee has strongly relied upon a decision of the Supreme Court in the case of Prakash Cotton Mills P. Ltd. v. CIT [1993] 201 ITR 684, where the judgment of the Andhra Pradesh High Court in the case of Hyderabad Allwyn Metal Works Ltd. [1988] 172 ITR 113 is cited with approval. The Supreme Court has observed that 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, 1961, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f compensation in it. The question whether such penalty should be considered as interest payment was directly before the Division Bench of this court in the case of Jairamdas Bhagchand [1988] 171 ITR 545. In any case we have ourselves examined whether penalty under section 36(3) is a composite payment containing an element of compensation. According to Mr. Patil, the following factors would indicate that the payment of penalty is a composite payment containing an element of interest, i.e., compensation for delayed payment. Firstly, the amount of penalty is calculated with reference to the period of delay and the rate is fixed as a percentage of the tax. It should, therefore, be considered substantially as interest. In this connection, he has pointed out that no maximum or minimum amount is prescribed and the payment is entirely dependent upon the period of delay. Secondly, under section 38(2) the amount of penalty should also be calculated and paid along with the return. Thirdly, there is no provision in the Bombay Sales Tax Act, 1959, for payment of interest on delayed payment of tax. He has submitted that normally such a provision would have been there. In the absence of such a p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (b) is found liable to pay tax under the provisions of clause (c) of sub-section (2), then, without prejudice to the provisions of sub-section (2), he shall be liable to pay simple interest at the rate of two per cent. of the amount of such tax for each month after the last date by which he should have paid such tax : Provided that the Commissioner or any appellate or revisional authority may, for reasons to be recorded in writing, remit the whole or any part of the interest payable in respect of any period : Provided further that no interest under this section shall be payable by a dealer to whom an eligibility certificate has been granted and for whom the due date of payment has been extended, moratorium has been granted or instalments have been granted under the second proviso to sub-section (4) of section 38 and the payments have been made in accordance with the provisions of this Act." The new section has now substituted payment of simple interest in the place of penalty. It has deleted the requirement that the dealer should have failed to pay the tax within the prescribed time without reasonable cause. Therefore, under section 36(3), the calculation of payment of what ..... X X X X Extracts X X X X X X X X Extracts X X X X
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