2003 (4) TMI 576 - HC - Income Tax

Summary

Issues:
Whether interest paid as income-tax and wealth-tax is deductible in computing the income of an assessee in view of the provisions in section 40(a)(ii )/(iia) read with section 2(43) of the Income-tax Act, 1961?

Analysis:
The case revolves around the question of whether interest paid on income tax can be considered part of the tax itself, thereby disallowing deduction under section 40(a)(ii) of the Income Tax Act. The appellant claimed exemption for interest paid due to non-payment of income tax as business expenditure, which was denied by the assessing authority. The Commissioner of Income Tax (Appeals) allowed the appeal, but the Income Tax Appellate Tribunal reversed the decision, leading to the current appeal.

The appellant relied on the decisions in Mahalakshmi Sugar Mills Co. v. CIT and CIT v. Veneer Mills (P.) Ltd. to support the deduction of interest as business expenditure. The Mahalakshmi case established that interest paid on non-payment of cess related to business activities is deductible. However, the Veneer Mills case held that interest on non-payment of Sales Tax is part of the tax itself, aligning with the revenue's argument. This court found the Veneer Mills decision unfavorable to the appellant's case, as it considered interest on Sales Tax as part of the tax, similar to interest on Income Tax.

Section 156 of the Income Tax Act outlines the consequences of non-payment, including interest. Section 40(a)(ii) specifies that any sum paid on account of tax levied on business profits shall not be deductible. The court cited precedents like Orissa Cement Ltd. v. CIT and CIT v. Ghatkopar Estate & Finance Corpn. (P.) Ltd. to support the view that interest on delayed income tax payment is not deductible as business expenditure. The interest, being an accretion to income tax due to default in payment, is deemed part of the tax itself, disallowing deduction under the Income Tax Act.

In conclusion, the court ruled in favor of the revenue, stating that interest paid on delayed income tax is not deductible as business expenditure under the Income Tax Act. The appeal was dismissed without costs, upholding the decision that interest on delayed tax payment is not an allowable deduction.