TMI Blog1981 (6) TMI 19X X X X Extracts X X X X X X X X Extracts X X X X ..... spect, we may point out a fact upon which some reliance was placed on behalf of the revenue; that is to say, that the assessee sought to raise another additional question, namely : " Whether the Tribunal was justified in not dealing with the contention of the assessee that the interest claimed on the outstanding Corporation taxes was to be deductible against the income from business ? " The Tribunal declined to do so on the ground that the question did not arise out of the order of the Tribunal. Thereafter, there was no further attempt to seek any reference under s. 256(2) of the I.T. Act, 1961, on this aspect of the matter. In view of the contentions raised in this matter, it would be desirable to refer to the order of the ITO. The assessee claimed a deduction of the amount which was the interest paid on account of delayed payment of Corporation taxes. It is the case of the assessee that a sum of Rs. 49,413 was payable to the Corporation of Calcutta on account of delayed payment of Corporation taxes. Be that as it may, dealing with the " income from other sources ", the ITO observed in his order for the assessment year 1971-72 as follows: " The total amount of interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt had drawn my attention to section 236(3) of the Calcutta Municipal Act, 1951. Such section is to be read with section 253 of that Act. According to section 236, interest is payable at the rate of 1/2% per month for the period commencing on the first day of the quarter following that in which, the bill is presented. Such interest is paid in circumstances where the bill as presented under s. 235 of that Act is not paid within 15 days from such presentation. Section 253 states that interest payable will be along with principal amount first charged upon the land or building or movable property, if any. 21. The only point for consideration is whether the payment of interest was incidental to the earning of income from other sources. The appellant has attempted to draw inferences from, the statute, viz., Calcutta Municipal Act, 1951, and therefrom it has concluded that such payment was a statutory obligation. This argument is readily acceptable. However, while such payment might be a statutory obligation under that Act it is only under certain peculiar circumstances. These circumstances are where a person defaults in making the payment of Corporation taxes within 15 days of the pre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... " Thereafter, as we have mentioned before, the assessee made a petition before the Appellate Tribunal and there set out the grounds, as we have mentioned before, in the appeal before the AAC and the contentions before the ITO. The assessee had further stated in the said application, which is annexure to the statement of case here, that before the Appellate Tribunal the following grounds were taken : " 4. For that on the facts of the case the learned AAC was wrong in upholding the disallowance of interest claimed, Rs: 49,413, on Corporation tax which is obligatory as per statute of the Calcutta Municipal Act. The observations and remarks in this behalf and the findings of the learned AAC showed that he failed to appreciate the appellant's explanation as regards the claim of interest and, therefore, his findings were completely erroneous." Along with the said miscellaneous application the assessee had annexed a statement of interest on the debit side showing the amount the assessee had to pay which contained interest payments to various parties and also payment to the Corporation of Calcutta of Rs. 49,413. The total interest on the debit side was Rs. 1,67,084.03. On the othe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lowed the assessee's claim only on the ground that this interest was paid for the infraction of the law. The Tribunal was of the view that the interest of Rs. 49.413 was paid for the defiance of the provisions of law for non-payment of tax in time. Therefore, according to the Tribunal, any payment made for the defiance of law could not be deductible in computing the total income of the assessee. In order to resolve this question, we are to examine the provisions of the Calcutta Municipal Act, 1951, under which the interest became payable. Section 236 of the Calcutta Municipal Act provides for the notice of demand for the dues of the Corporation. Sub-section (1) of s. 236 provides that if any amount for which a bill has been presented under s. 235, which incidentally deals with the consolidated rate of taxes, is not paid within 15 days from such presentation into the municipal office, or to a municipal officer appointed to receive the same, the Commissioner may cause to be served upon the person liable, a notice of demand in a particular form. Sub-section (2) of s. 236 provides that for every notice of demand a fee of an amount not exceeding two rupees, shall be payable by the sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the arrears of cess constituted permissible deduction but the High Court on a reference held, inter alia, that the interest did not fall within the scope of s. 10(2)(xv) of the Indian I.T. Act, 1922, because it was paid by way of penalty for infringement of the Cess Act. The assessee appealed to the Supreme Court. Learned advocate for the revenue drew our attention to that the department did not dispute that the payment of interest represented expenditure laid out wholly and exclusively for the purpose of the business and that it was of the nature of revenue expenditure. The Supreme Court referred to the provisions of the section imposing liability to pay interest. It may be instructive to refer to the said provisions (at p. 432 of 123 ITR) : "3. Imposition of cess.-(1) The State Government may by notification in the Official Gazette impose a cess not exceeding four annas per maund on the entry of the cane into the premises of a factory for use, consumption or sale therein. (2) The cess imposed under sub-section (1) shall be payable by the owner of the factory and shall be paid on such date and at such place as may be prescribed. (3) Any arrear of cess not paid on the date ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id for delayed payment of municipal tax would also be deductible from the total income of the assessee. Learned advocate for the revenue, however, sought to urge on the analogy of interest payable on income-tax dues, that such payment should not be allowed as deduction. If an assessee carries on business with house properties, municipal tax, namely, consolidated rates and taxes, would, in our opinion, be allowable expenditure of business for earning income, if any income is earned by the amount of the employment of the interest which would otherwise have been payable if the Corporation tax had been paid in time. He drew our attention to the observations of the Calcutta High Court in the case of National Engineering Industries Ltd. V. CIT [1978] 113 ITR 252 (Cal), where the Division Bench held that interest paid for delayed payment of income-tax was not an allowable deduction. There is a basic difference on this aspect between interest paid on account of delayed income-tax and interest paid for delayed payment of Corporation tax. Income-tax is a liability which arises after income is earned but the tax in respect of the buildings or consolidated rates and taxes in respect of build ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 115 ITR 519, was dealing with the question of taxability of interest paid under s. 57(iii) of the I.T. Act, 1961. The Supreme Court observed that the natural construction of the language used in s. 57(iii) of the I.T. Act, 1961, irresistibly led to the conclusion that to bring a case within that section it was not necessary that any income should in fact have been earned as result of the expenditure. What s. 57(iii) required was that the expenditure must be laid out or expended wholly and exclusively for the purpose of making or earning income. The section did not require that this purpose must be fulfilled in order to qualify the expenditure for deduction. It did not say that the expenditure should be deductible only if any income was made or earned. The Supreme Court was of the view that the assessee had borrowed moneys for the purpose of making investment in certain shares and paid interest thereon during the accounting period relevant to the assessment year but did not receive any dividend on the shares purchased with those moneys. It was held that interest on moneys borrowed for investment in shares which had not yielded any dividend was admissible as a deduction under s. 57(i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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