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Deductibility of sales tax penalty under the Income-tax Act for the assessment year 1979-80. Analysis: The judgment by the Andhra Pradesh High Court dealt with the deductibility of a sales tax penalty paid by the assessee under section 36(3) of the Bombay Sales Tax Act as a deduction under the Income-tax Act for the assessment year 1979-80. The Income-tax Officer initially disallowed the amount as a permissible deduction, but the Commissioner (Appeals) allowed the claim. The Revenue then appealed before the Income-tax Appellate Tribunal, which upheld the appellate authority's decision. The Tribunal concluded that the penalty paid was for the business purpose of the assessee. The key issue was whether the penalty paid could be considered as an allowable deduction under the Income-tax Act. The court discussed the nature of the levy under section 36(3) of the Bombay Sales Tax Act. It was established that if an amount is spent for payment of interest or compensation, it would be an allowable deduction, but if it is paid as a penalty for an infraction of the law, it would not be deductible. The court emphasized that the nomenclature used to describe a payment as interest, compensation, or penalty is not conclusive. The authorities must analyze the provisions to determine the true nature of the levy, which may be composite, comprising compensatory and penal elements. The court referred to previous judgments, including the Supreme Court's decision in Prakash Cotton Mills' case, which approved the view that the levy under section 36(3) is composite in nature and requires apportionment between compensatory and penal components. The court also considered the judgments in Hyderabad Allwyn Metal Works Ltd. and Vegetable Vitamin Foods Co. P. Ltd. cases. While the Bombay High Court held that the penalty under section 36(3) was penal in character and not compensatory, the Andhra Pradesh High Court's view was that the levy was compensatory and penal in nature. The court emphasized that if the levy partakes the character of a penalty, its deductibility is contested, but if it is compensatory, it may be considered as an allowable deduction. The court directed the Tribunal to determine the apportionment between compensatory and penal elements of the levy and consider the permissibility of deduction accordingly. In conclusion, the court held that the nature of the levy under section 36(3) of the Bombay Sales Tax Act was compensatory and directed the Tribunal to assess the apportionment of the amount between compensatory and penal components for the purpose of deduction under the Income-tax Act. The reference was answered in favor of considering the levy as compensatory and requiring apportionment for deduction purposes.
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