[2002] 122 TAXMAN 828 (SC) SUPREME COURT OF INDIA Lachmandas Mathuradas v. Commissioner of Income-tax` S.C.

AGRAWAL AND G.T. NANAVATI, JJ. CIVIL APPEAL NO. 3645 OF 1983 JANUARY 16, 1997 Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowable as - Whether interest on arrears or on outstanding balance of sales tax is compensatory in nature and would be allowable as deduction in computing profits of a business - Held, yes FACTS

The Tribunal accepted the assessees contention that interest on arrears or on outstanding balance of sales tax is compensatory in nature and would be allowable as deduction in computing profits of business. On reference, the High Court held that such interest is penal in nature and it would not be an allowable deduction. On appeal to the Supreme Court :
HELD In taking decision the High Court had placed reliance on its Full Benchs decision in Saraya Sugar Mills (P.) Ltd. v. CIT [1979] 116 ITR 387 (All.). The said judgment of the Full Bench had been reversed by the larger Bench of the High Court in Triveni Engg. Works Ltd.v. CIT [1983] 144 ITR 732/ 15 Taxman 452 (All.) (FB), wherein it had been held that interest on arrears of tax is compensatory in nature and not penal. That question had also been considered by the Supreme Court in Saraya Sugar Mills (P.) Ltd. v. CIT [Civil Appeal No. 830 of 1979 dated 29-2-1996]. In that view of the matter, the appeal was to be allowed. CASE REVIEW

(1) The judgment of the Allahabad High Court in the case of CIT v. Lachhman Das Mathura Das[1980] 124 ITR 411/ 4
Taxman 16 reversed.

(2) The judgment of the Allahabad High Court in the case of Triveni Engg. Works Ltd. v. CIT [1983] 144 ITR 732/ 15 Taxman 452 (FB) approved.
CASES REFERRED TO CIT v. Lachhman Das Mathura Das [1980] 124 ITR 411/ 4 Taxman 16 (All.), Saraya Sugar Mills (P.) Ltd. v. CIT [1979] 116 ITR 387 (All.) (FB), Triveni Engg. Works Ltd. v. CIT [1983] 144 ITR 732/ 15 Taxman 452 (All.) (FB) Saraya Sugar Mills (P.) Ltd. v. CIT [Civil Appeal No. 830 of 1979], dated 29-2-1996. Raja Ram Aggarwal, Ms. Aparna Rohatgi, K.B. Rohatgi and Bharat Aggarwal for the Appellant. A. Raghuvir, Ms. Lakshmi Iyengar and B. Krishna Prasad for the Respondent. ORDER 1. This appeal arises out of the IT Reference No. 54 of 1978 - CIT v. Lachhman Das Mathura Das[1980] 124 ITR

4111 (All.), wherein the Tribunal, Delhi Bench, had referred the following questions to the Allahabad High Court for opinion : "1. Whether the Tribunal was justified in law in allowing the assessees claim in respect of interest on the arrears of sales tax in computing the assessees income for the year under consideration ?
2. Whether the interest on the outstanding balance of sales tax was an allowable deduction under the Income-tax

Act ?
3. Whether there was material on record justifying the Tribunals finding that the liability of Rs. 69,383 for

damages had crystallised in the accounting period relevant to the assessment year under consideration ?
4. Whether the claim of the assessee for damages could be held to be an allowable deduction computing the

assessees income liable to assessment for the year under consideration ?" (p. 413)
2. The Allahabad High Court by its impugned judgment dated 28-1-1980, has answered the said questions against

the assessee and in favour of the revenue. Hence, this appeal.

3. While granting special leave to appeal, the appeal has been confined to question Nos. 1 and 2 only. The High

Court has proceeded on the basis that the interest on arrears of sales tax is penal in nature and has rejected the contention of the assessee that it is compensatory in nature. In taking the said view the High Court has placed reliance on its Full Benchs decision in Saraya Sugar Mills (P.) Ltd. v.CIT [1979] 116 ITR 387 (All.) The learned counsel appearing for the appellant-assessee states that the said judgment of the Full Bench has been reversed by the larger

Bench of the High Court in Triveni Engg. Works Ltd. v. CIT [1983] 144 ITR 732 1 (All.) (FB), wherein it has been held that interest on arrears of tax is compensatory in nature and not penal. This question has also been considered by this Court in Civil Appeal No. 830 of 1979 titled Saraya Sugar Mills (P.) Ltd. v. CIT decided on 29-2-1996. In that view of the matter, the appeal is allowed and question Nos. 1 and 2 are answered in favour of the assessee and against the revenue. No order as to costs.

[1987] 31 TAXMAN 412 (RAJ) HIGH COURT OF RAJASTHAN Commissioner of Income-tax v. Western Indian State Motors N.M. KASLIWAL AND FAROOQ HASAN, JJ. D.B. IT REFERENCE NO. 28 OF 1978 SEPTEMBER 24, 1986 Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of - Whether interest paid by assessee to sales tax department on arrears of sales tax is an admissible deduction under section 37 - Held, yes Facts

The assessee-company paid interest to the sales tax department on the arrears of sales tax and claimed its deduction under section 37(1) which was allowed by the Tribunal. On reference :
Held In Rajasthan Central Stores (P.) Ltd. v. CIT [1984] 19 Taxman 163, it was held by this High Court that the Tribunal was not right in holding that the provision for payment of penal interest on sales tax withheld by the assessee and utilised for the purpose of its own business, was not admissible as deduction in computing its total income. Therefore, following the said decision, it was to be held in the present case that the Tribunal was right in accepting the assessee's claim. Cases referred to Rajasthan Central Stores (P.) Ltd. v. CIT [1984] 19 Taxman 163 (Raj.) and Mahalaxmi Sugar Mills Co. Ltd. v. CIT AIR [1980]

SC 754.
R.N. Surolia for the Applicant. ORDER Kasliwal, J. - The Tribunal, Jaipur Bench, Jaipur has referred the following question of law for the opinion of this Court:

"Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the interest paid by the assessee to Sales Tax Department on the arrears of sales tax was an admissible deduction under section 37 of the Income-tax Act, 1961 ?"
2. In Rajasthan Central Stores (P.) Ltd. v. CIT [1984] 19 Taxman 163 , a Division Bench of this Court was called upon to

give its opinion on the following question of law : "Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the provision for payment of penal interest amounting to Rs. 5,050 on sales tax corporations withheld by the assessee and utilised for the purpose of its own business, was not admissible as no deduction in computing its total income ?" While deciding the above question several cases of the High Courts and Supreme Court were considered by the Bench. In Mahalaxmi Sugar Mills Co. Ltd. v. CIT AIR [1980] SC 754, the Supreme Court had considered the provisions of the UP Sugarcane Cess Act, 1956. Section 3(3) of the said Act provided that any arrear of cess not paid on the date prescribed under sub-section (2) shall carry interest at 6 per cent per annum from such date to date of payment. The Supreme Court in the above case held that the interest that was paid under section 3(3) could not be described as a penalty paid for an infringement of the law and that it was in the nature of revenue expenditure in respect of which the assessee could claim deduction under section 10(2)(xv) of the Indian Income-tax Act, 1922. The Bench of this Court placing reliance on the above Supreme Court case held that the Tribunal was not right in law, in holding that the provision for payment of interest amounting to Rs. 5,050 and sales tax collections withheld by the assessee in utilising for the purpose of its own business was not admissible as deduction in computing its total income. The question was, therefore, answered in the negative.
3. We agree with the view taken by this Court in Rajasthan Central Stores (P.) Ltd.'s case (supra). In the result the

abovementioned question of law referred to us is answered in the affirmative and against the revenue.

[1988] 174 ITR 116 (RAJ.) HIGH COURT OF RAJASTHAN JAIPUR BENCH Commissioner of Income-tax v. Western Indian State Motors J.S. VERMA, CJ. AND ISRANI, J. D.B. IT REFERENCE NO. 37 OF 1981 MARCH 11, 1988 Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of - Assessment year 1974-75 - Whether interest paid by assessee on arrears of sales tax was an admissible deduction - Held, yes FACTS

The assessee paid interest to the sales tax department on the arrears of sales tax due and claimed the same as expenditure deductible under section 37. The ITO rejected the assessees claim, which was, however, allowed on appeal by the AAC. The Tribunal affirmed the view taken by the AAC. On reference:
HELD In view of the decision of the Supreme Court in Mahalakshmi Sugar Mills Co. v. CIT [1980]123 ITR 429, the Tribunal was justified in treating the interest paid by the assessee on the arrears of sales tax as an admissible deduction under section 37. Note: The decisioin was in favour of assessee. CASES REFERRED TO Mahalakshmi Sugar Mills Co. v. CIT [1980] 123 ITR 429 (SC) and CIT v. Western Indian State Motors [1987] 167 ITR 395

(Raj.)
D.P. Govil for the Applicant. JUDGMENT

This is a reference under section 256(1) of the Income-tax Act, 1961, at the instance of the Revenue to answer the following question of law, namely: "Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in holding that interest paid by the assessee to the sales tax department on the arrears of sales tax was an admissible deduction under section 37 of the Income-tax Act, 1961?" The relevant assessment year is 1974-75. The assessee derives income from the sale of motor vehicles. It also has income from the sale of petrol and petroleum products. During the previous year pertaining to the relevant assessment year, the assessee paid a sum of Rs. 41,010 as interest to the sales tax department on the arrears of sales tax due to the department. The assessee claimed deduction of this amount paid as interest on the sales tax arrears as expenditure laid out wholly for the purpose of the business on the basis that it was a permissible deduction under section 37 of the Act. The Income-tax Officer rejected the assessee's claim, which was, however, allowed on appeal by the Appellate Assistant Commissioner. The Tribunal has affirmed the view taken by t-he Appellate Assistant Commissioner. Hence, this reference at the instance of the Revenue. The only point involved for decision is covered by the decision of the Supreme Court in Mahalakshmi Sugar Mills Co. v. CIT [1980] 123 ITR 429 . Following that decision of the Supreme Court in respect of the same assessee, this court, for an earlier year of assessment, has held that the interest paid by the assessee to the sales tax department on arrears of sales tax is an admissible deduction under section 37 of the Income-tax Act, 1961 (See CIT v. Western Indian State Motors [1987] 167 ITR 395 (Raj)). Consequently, this reference also has to be answered in favour of the assessee and against the Revenue by holding that the Tribunal was justified in treating the interest paid by the assessee on the arrears of sales tax as an admissible deduction under section 37 of the Income-tax Act, 1961. No costs.