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Issues involved: Interpretation of interest under section 201(1A) as a deductible business expenditure.
Summary: The High Court of Madras addressed the issue of whether interest paid under section 201(1A) of the Income-tax Act, 1961, by the assessee was deductible as a business expenditure for the assessment year 1981-82. The Income-tax Appellate Tribunal allowed the deduction, but the Revenue contended that it was contrary to the Income-tax Act's scheme. The court analyzed the provisions of sections 201, 198, and 200 of the Act, emphasizing the consequences of failure to deduct or remit tax as specified in section 201. It noted that interest under section 201(1A) is payable for failure to deduct or remit tax, and such interest is directly related to the failure to comply with tax deduction requirements. The Revenue relied on a Supreme Court decision stating that payments required under the Income-tax Act, including interest for delayed tax payments, are not deductible as business expenditure under section 37. The court highlighted that interest on tax liabilities is connected to the tax itself and cannot be considered a business expense. Contrary to the assessee's argument that the interest paid was compensatory, the court referenced various judgments to establish that income tax is not allowable as business expenditure. It rejected the notion that retaining tax amounts payable to the State could augment an assessee's capital, emphasizing that such amounts must be remitted and cannot be utilized for business purposes. Ultimately, the court answered the question in the negative, in favor of the Revenue, concluding that the interest under section 201(1A) was not deductible as a business expenditure. The Revenue was awarded costs amounting to Rs. 1,000.
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