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Issues:
1. Interpretation of statutory provisions regarding interest payment for delayed electricity charges. 2. Determination of the nature of interest payment - penal or compensatory. 3. Admissibility of deduction under section 37(1) of the Income-tax Act for interest payable. Analysis: The judgment by the High Court of Kerala involved references by the Commissioner of Income-tax regarding assessment years 1971-72, 1976-77, and 1977-78. The primary issue revolved around the nature of interest payment for delayed electricity charges. The court considered whether the interest payable was penal or compensatory in nature, impacting the admissibility of deduction under section 37(1) of the Income-tax Act. For the assessment year 1971-72, the assessee claimed deduction for interest payable to the Kerala State Electricity Board due to delayed payment of power charges. The assessing authority initially deemed the interest as penal and disallowed the deduction. However, the Appellate Assistant Commissioner and the Income-tax Appellate Tribunal ruled in favor of the assessee, emphasizing that the interest was not penal but a result of a commercial agreement following disputes between the parties. Regarding the assessment years 1976-77 and 1977-78, the liability to pay interest for delayed electricity charges was based on statutory provisions. The Kerala State Electricity Board imposed interest at 12% per annum for delayed payment, as per regulations issued under the Electricity (Supply) Act. The assessing authority disallowed the deduction initially, citing lack of enforceable liability, but the Tribunal upheld the claim, emphasizing that the interest was compensatory and not penal. The court analyzed precedents, including the Supreme Court's decision in Prakash Cotton Mills P. Ltd. v. CIT, emphasizing that interest payable for delayed charges is compensatory, not penal. The court highlighted that the liability to pay interest was contractual or regulatory, not punitive. The court differentiated the present case from cases involving statutory obligations, affirming that the interest payable was compensatory and deductible under section 37(1) of the Income-tax Act. In conclusion, the High Court held that the interest payable by the assessee for delayed electricity charges was not penal but compensatory in nature. Therefore, the assessee was entitled to claim deduction under section 37(1) of the Income-tax Act. The court answered the referred questions in favor of the assessee and against the Revenue, affirming the admissibility of the deduction for the interest payable.
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