2006 (4) TMI 97 - HC - Income Tax

Deduction on liability of interest - Not allowing the interest on delayed payment of sales tax payable considering it as tax within the meaning of section 43B? - HELD THAT - We are fortified in our view by the decision of this court in the case of Mewar Motors v. CIT 2002 (9) TMI 51 - RAJASTHAN HIGH COURT . While considering the provisions of section 43B of the Act this court opined that the object of section 43B of the Act of 1961 is to curb the activities of those taxpayers who do not discharge their statutory liability of payment of sales tax or excise duty for long periods but claim deduction in that regard from the income on the ground that the liability to pay this amount has been incurred by them in the relevant previous year. The interest paid is part of the sales tax. The interest payable to the Sales Tax Department is also tax and the provisions of section 43B of the Act are applicable thereto. We are in respectful agreement with the aforesaid ratio. Therefore if we look at the direct context in which the provision has been enacted there is no difficulty in reaching the conclusion that if the principal liability of tax which is otherwise allowable u/s 37 of the Act of 1961 shall be allowed as deduction and interest thereon becomes part of it. We make it clear that it is not every liability that has been made subject to the provisions of section 43B. Section 43B is restricted to various liabilities in respect of which provision has been made. It is pertinent to notice that section 43B is not a charging section which has to be strictly construed. The restriction on claim to deduction envisaged u/s 43B is for computing the total taxable income and is part of the machinery provisions for effective implementation of the taxing statute. As the decision in Shantilal Mehta s case 1998 (5) TMI 25 - SUPREME COURT was rendered in the context of the special provisions of the Act of 1992 for fixing priorities of certain liabilities incurred during the specified period only its ratio does not govern the case where restriction on allowability of a claim to deduction which is otherwise allowable has been provided which is not confined to liability of tax for a specified period but refers to taxes payable. In this connection it is also apposite to note there that the provisions of section 11B of the Rajasthan Sales Tax Act 1954 provide for charging interest on failure to pay tax fee or penalty. Section 11M of the Act of 1954 provides that the penalty or interest payable under this Act shall be deemed to be tax under this Act. Apparently the legal fiction for the purpose of collection and recovery of tax must be carried to its logical end to effectuate the object with which it has been enacted viz. to remedy the mischief of gaining other advantages by defaulters in payment of tax in the matter of using it as a vehicle for reducing tax liability on the one hand but on the other hand not paying such taxes due to the public exchequer. There is a public element in it. Thus we hold that interest accrued on delayed payment of tax which is otherwise allowable as deduction under the provisions of the Income-tax Act while computing the total income is part of tax within the meaning of section 43B. The appeal has therefore no force and the same is hereby dismissed.

Issues Involved:

1. Deduction of liability of interest accrued on outstanding dues under the Rajasthan Sales Tax Act and the Income-tax Act.
2. Interpretation of section 43B(a) of the Income-tax Act, 1961, in relation to tax, duty, cess, or fee.
3. Nature of interest on delayed payment of tax.
4. Applicability of case laws and precedents in interpreting section 43B.

Issue-wise Detailed Analysis:

1. Deduction of Liability of Interest:

The core issue revolves around whether the interest of Rs. 3,76,654 accrued on delayed payment of sales tax payable by the assessee can be allowed as a deduction under section 43B of the Income-tax Act, 1961. The Tribunal had rejected this claim, stating that unless the liability of interest is discharged in terms of section 43B(a), the assessee is not entitled to claim deduction under section 37.

2. Interpretation of Section 43B(a):

Section 43B(a) stipulates that any sum payable by the assessee by way of tax, duty, cess, or fee must be paid on or before the statutory time to claim deduction. The court emphasized that the provision was introduced to ensure that statutory liabilities are discharged before claiming deductions, thus preventing taxpayers from claiming deductions on unpaid liabilities.

3. Nature of Interest on Delayed Payment of Tax:

The court examined the nature of interest on delayed payment of tax, referring to various case laws. It concluded that interest is an ancillary charge to the principal tax liability and becomes part and parcel of the tax liability. The court cited the Supreme Court's decision in Mahalakshmi Sugar Mills Co. v. CIT, which held that interest on arrears of cess is an accretion to the cess and not a penalty.

4. Applicability of Case Laws and Precedents:

The court reviewed several precedents, including decisions from the Calcutta High Court and the Supreme Court. It noted that the expression "tax" must be construed in the context of the statute. The court disagreed with the Calcutta High Court's view in Hindustan Motors Ltd. v. CIT, which separated interest from the principal tax liability for the purposes of section 43B. Instead, it aligned with the decision in Mewar Motors v. CIT, which treated interest as part of the tax liability under section 43B.

Conclusion:

The court concluded that interest accrued on delayed payment of tax, which is otherwise allowable as a deduction under the Income-tax Act, is part of the tax within the meaning of section 43B. Therefore, the assessee's appeal was dismissed, affirming that the interest on delayed payment of sales tax is not deductible unless paid within the statutory period as required by section 43B.

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