1994 (3) TMI 60 - HC - Income Tax

Summary

Issues Involved:
1. Interpretation of section 36(3) of the Bombay Sales Tax Act, 1959.
2. Whether the penalty under section 36(3) can be considered as an allowable deduction under section 37 of the Income-tax Act, 1961.
3. Distinction between penalty and interest under the provisions of the Bombay Sales Tax Act, 1959.

Issue-Wise Detailed Analysis:

1. Interpretation of Section 36(3) of the Bombay Sales Tax Act, 1959:
The primary issue revolves around the interpretation of section 36(3) of the Bombay Sales Tax Act, 1959, as it stood before its amendment in 1987. Section 36(3) imposes a penalty on dealers who fail to pay tax within the prescribed time without reasonable cause. The penalty is calculated as a percentage of the tax amount for each month of delay. The Commissioner has the authority to remit the whole or any part of the penalty. The court emphasized that the penalty is not automatic and requires a notice to show cause, a hearing, and a written order by the Commissioner.

2. Allowable Deduction Under Section 37 of the Income-tax Act, 1961:
The assessee claimed deduction of the penalty amount under section 37 of the Income-tax Act, 1961, arguing that it was an expenditure incurred wholly and exclusively for business purposes. The Tribunal upheld this contention, viewing the penalty as a compensatory payment akin to interest. However, the court referred to previous judgments, such as Jairamdas Bhagchand v. CIT [1988] 171 ITR 545, which held that penalties under section 36(3) are not allowable deductions under section 37 because they are penal in nature and not compensatory.

3. Distinction Between Penalty and Interest:
The court examined whether the penalty under section 36(3) could be considered as interest. Previous decisions, such as CST v. Rajendra Motors [1985] 59 STC 155, clarified that the penalty, though calculated with reference to the delay period, remains a penalty and not interest. The court noted that the scheme of section 36, which includes provisions for penalties for various infractions, reinforces the penal nature of section 36(3). The court also highlighted that the absence of a provision for interest on delayed tax payments in the Bombay Sales Tax Act does not convert the penalty into interest.

Additional Considerations:
The court noted that the Andhra Pradesh High Court in CIT v. Hyderabad Allwyn Metal Works Ltd. [1988] 172 ITR 113 had considered the penalty under section 36(3) as having both penal and compensatory elements. However, the court distinguished this case, emphasizing that in its jurisdiction, the penalty under section 36(3) has consistently been interpreted as wholly penal.

The court also addressed the Supreme Court's decision in Prakash Cotton Mills P. Ltd. v. CIT [1993] 201 ITR 684, which suggested examining the nature of statutory imposts to determine if they are compensatory or penal. The court agreed with the principle but found no need to remit the question to the Tribunal, as the penalty under section 36(3) had already been established as penal in previous judgments.

Conclusion:
The court concluded that the penalty under section 36(3) of the Bombay Sales Tax Act, 1959, is penal in nature and not an allowable deduction under section 37 of the Income-tax Act, 1961. The question posed in Income-tax Reference No. 305 of 1982 was answered in the negative and in favor of the Revenue. The court noted that the question was somewhat misleading, as it referred to "interest" when the relevant provision only allowed for the imposition of a penalty. The same conclusion applied to the other references heard alongside this case. There was no order as to costs.