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The judgment addresses the issue of whether interest paid to the Sales Tax Department on arrears of sales tax under section 11 of the Rajasthan Sales Tax Act, 1954, is an admissible deduction under section 37 of the Income-tax Act, 1961. Summary: The court examined the nature of the expenditure in question by referencing relevant sections of the Rajasthan Sales Tax Act, 1954, and the Income-tax Act, 1961. Section 11B of the Sales Tax Act mandates interest payment by a dealer on delayed tax payment, with rates specified. On the other hand, section 37 of the Income-tax Act allows deductions for expenses incurred wholly and exclusively for business purposes. The court cited precedents, including CIT v. Delhi Safe Deposit Co. Ltd., to emphasize that expenses must be incurred in the capacity of a trader for business purposes to qualify as deductions. In a similar case involving the U.P. Sugarcane Cess Act, the Supreme Court ruled that interest paid on arrears of cess was not a penalty but a part of the liability to pay cess, thus allowing it as a deduction under the Income-tax Act. The court also referenced Haji Lal Mohd. Biri Works v. State of U.P., where interest on sales tax was deemed automatically recoverable, supporting its deductibility. The court concluded that the interest paid on sales tax arrears is a statutory obligation, automatically arising without the need for a specific order, and is considered an amount spent wholly and exclusively for the purpose of business. It clarified that neither necessity nor motive is the test for allowing such deductions under section 37 of the Income-tax Act. Therefore, the court held that the interest paid to the Sales Tax Department on arrears of sales tax is an allowable deduction under section 37 of the Act, ruling in favor of the assessee against the Revenue. The judgment did not find it necessary to delve into authorities cited by the assessee's counsel, as the Supreme Court precedents already addressed the core issue. The court distinguished other cases referred to by the Revenue's counsel, stating that they did not specifically address the deductibility of interest paid due to delayed sales tax payments. Ultimately, the court upheld the Tribunal's decision, answering the question in the affirmative in favor of the assessee and against the Revenue. Each party was directed to bear their own costs, and the answer was to be returned to the Tribunal as per statutory requirements.
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