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Issues involved: Interpretation of provisions for payment of penal interest on sales tax collections withheld by the assessee and its admissibility as a deduction in computing total income.
Summary: The High Court of Rajasthan addressed the issue of whether penal interest paid by the assessee on sales tax collections withheld and utilized for its own business was admissible as a deduction in computing total income. The assessee, a trader, had defaulted in paying sales tax under the Rajasthan Sales Tax Act, leading to the imposition of penal interest. The Income Tax Officer disallowed the deduction claimed by the assessee, a decision upheld by the Appellate Authority and the Tribunal. The Tribunal held that misusing sales tax collections for personal use without remitting them to the Government did not qualify as incidental to business. The assessee appealed to the High Court under section 256(1) of the Income Tax Act, seeking a reference on the legal question. During the proceedings, the counsel for the assessee argued that the interest payable under the Sales Tax Act was not a penalty but deductible expenditure. They cited relevant case laws, including a Supreme Court decision and judgments from the Calcutta and Allahabad High Courts, supporting the deductibility of such interest as revenue expenditure. The Court examined the provisions of the Sales Tax Act and compared them to similar provisions in other statutes considered in the referenced cases. It concluded that the interest payable under the Sales Tax Act was not a penalty but a revenue expenditure eligible for deduction under section 37(1) of the Income Tax Act. In light of the analysis, the Court held that the Tribunal erred in disallowing the deduction for penal interest on sales tax collections withheld by the assessee. The legal question was answered in the negative, affirming the admissibility of the deduction. Each party was directed to bear its own costs in the matter.
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