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Issues:
- Allowability of deduction for interest paid on arrears of sales tax for the assessment year 1975-76. Analysis: The case involved a joint Hindu family firm assessed to income tax claiming a deduction of Rs. 30,246 for interest paid to the Sales Tax Department for the calendar year 1974. The Income-tax Officer disallowed the deduction on the grounds that the interest did not relate to 1974 and was paid on belated sales tax payment for earlier years. The Appellate Assistant Commissioner allowed the deduction, stating that the liability arose in 1974 when the demand notice was received. The Tribunal upheld this decision, considering the interest as an accretion to sales tax rather than a penalty. The central question was whether this interest payment was an allowable deduction under the Income-tax Act. The court analyzed Section 37(1) of the Income-tax Act, which allows deductions for expenditures incurred wholly and exclusively for business purposes. It noted that under Section 22(4A) of the Madhya Pradesh General Sales Tax Act, interest could be paid on tax demanded in instalments, making it an allowable expenditure. The court highlighted that this interest was not a penalty but a business expense, as affirmed in the case of Mahalakshmi Sugar Mills Co. v. CIT [1980] 123 ITR 429. In that case, the Supreme Court held that interest on arrears of entry tax was a business expenditure, not a penalty, as it was an extension of the liability to pay tax. Drawing parallels, the court concluded that the interest paid on sales tax arrears in this case was an allowable deduction. It emphasized that the interest was a statutory liability, not a penalty, and aligned with the decision in Mahalakshmi Sugar Mills Co.'s case. Therefore, the court ruled in favor of the assessee, affirming that the interest amount was deductible for the assessment year 1975-76. The judgment favored the assessee, and each party was directed to bear their own costs related to the reference.
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