2013 (8) TMI 78 - HC - Income Tax

Deduction u/s 37(1) - Whether, payment of interest on delayed payment of instalments is penal in nature - Held that - payment in question concerned interest for delayed payment of instalments. Though the agreement referred to as penal interest, the same was rightly not treated by the Tribunal as penalty. Merely because the agreement referred to such interest as a penal interest, any such payment would not partake the character of penalty. It is not even the case of the Revenue that the sum expended by the assessee was for payment of penalty. It was simplicitor liability of interest on delayed payment of installments - Decided against Revenue.

Summary

Issues:
1. Disallowance of penal interest paid to Government of Gujarat under Section 37(1) of the Act.

Analysis:
The primary issue in this case was whether the sum paid by the assessee as interest on delayed payment of instalments to the Government of Gujarat could be considered as penalty and hence not deductible under Section 37(1) of the Act. The respondent, a public sector undertaking, had paid Rs. 51.14 lakhs towards interest on delayed payments as per the repayment schedule agreed upon with the Government. The Revenue contended that this interest was penal in nature and therefore not eligible for deduction under Section 37(1) of the Act.

The CIT (Appeals) initially ruled in favor of the Revenue, but the assessee then approached the Tribunal. The Tribunal, after considering the relevant documents and resolutions, concluded that the interest paid by the assessee on delayed payments was in the nature of financial charges for late payment of instalments and not a penalty. The Tribunal emphasized that the term "penal interest" did not imply a penalty for infringement of law, and there was no violation of public policy or law by the assessee in this case. Therefore, the Tribunal allowed the appeal of the assessee and held that the interest paid was deductible under Section 37(1) of the Act.

The Tribunal's decision was based on the fact that the payment in question was related to interest on delayed payment of instalments and not a penalty. Even though the agreement referred to the interest as penal interest, the Tribunal correctly interpreted it as financial charges for late payment. The Revenue did not argue that the payment was for a penalty, and it was established that it was a liability for interest on delayed payments. As a result, the High Court concluded that no legal issue arose in this case, and the Tax Appeal was dismissed.