1993 (1) TMI 45 - HC - Income Tax

Summary

Issues Involved:
1. Whether the additional payment of Rs. 28,843 under section 45 of the Gujarat Sales Tax Act was for an infraction of law.
2. Whether the said payment is allowable as revenue expenditure under section 37 or section 28 of the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

1. Infraction of Law:
The primary issue was whether the additional payment of Rs. 28,843 under section 45 of the Gujarat Sales Tax Act constituted a penalty for an infraction of law. The assessee argued that the payment was compensatory in nature and should be treated as interest for the period during which the tax remained unpaid. The Tribunal, however, rejected this contention, citing the decision in CIT v. Mihir Textiles Ltd., which held that payments made for the infraction of law are penalties and cannot be considered as commercial losses. The Tribunal also noted that the instalments granted to the assessee included both arrears of sales tax and penalties, indicating that the delay in payment was not entirely condoned.

2. Allowability as Revenue Expenditure:
The second issue was whether the payment of Rs. 28,843 could be allowed as revenue expenditure under section 37 or section 28 of the Income-tax Act, 1961. The Tribunal reframed the question to focus on whether the sum was an allowable revenue expenditure. The assessee's counsel argued that the payment, although termed as a penalty, was compensatory and should be considered as interest. They relied on the Karnataka High Court's decision in CIT v. Mandya National Paper Mills Ltd., which held that similar payments were compensatory and allowable as business expenditure. However, the Tribunal distinguished this case by analyzing the scheme and specific provisions of the Gujarat Sales Tax Act, particularly section 45(5), which explicitly uses the term "penalty" and includes provisions for remission by the Commissioner, indicating that the payment was indeed a penalty and not compensatory interest.

The Tribunal also considered other relevant case laws, including decisions from the Andhra Pradesh High Court and the Supreme Court, which supported the view that such payments are penalties and not compensatory interest. The Tribunal concluded that the payment under section 45(5) of the Gujarat Sales Tax Act was intended as a penalty for the infraction of the law, and not as compensatory interest. Therefore, it was not an allowable expenditure under the Income-tax Act.

Conclusion:
The Tribunal held that the additional payment of Rs. 28,843 under section 45 of the Gujarat Sales Tax Act was indeed a penalty for the infraction of law and not compensatory interest. Consequently, it was not allowable as revenue expenditure under section 37 or section 28 of the Income-tax Act, 1961. The question referred to the court was answered in the affirmative, against the assessee and in favor of the Revenue. There was no order as to costs.