1981 (2) TMI 29 - HC - Income Tax

Summary

Issues Involved:
1. Deductibility of interest on purchase tax in computing business income.
2. Validity of the Commissioner's direction regarding the allowance of interest on purchase tax.

Summary:

Issue 1: Deductibility of Interest on Purchase Tax

The Tribunal upheld the Commissioner's view that the interest on arrears under the U.P. Sugarcane (Purchase Tax) Act, 1961, was of a penal nature and not deductible in computing business income. The Tribunal referenced several decisions, including CIT v. Mahalaxmi Sugar Mills [1972] 85 ITR 320 and Mahalakshmi Sugar Mills Co. v. CIT [1980] 123 ITR 429, concluding that the interest was prejudicial to the revenue's interest.

The Supreme Court in Mahalakshmi Sugar Mills Co. v. CIT [1980] 123 ITR 429 analyzed the U.P. Sugarcane Cess Act, 1956, and held that interest on arrears of cess was not a penalty but an allowable deduction under s. 10(2)(xv) of the Indian I.T. Act, 1922. The interest was considered part and parcel of the liability to pay tax, an accretion to the cess, and not a penalty for an infringement of law.

Issue 2: Validity of the Commissioner's Direction

The Commissioner of Income-tax set aside the assessments, directing the ITO to re-examine the allowability of the interest paid under the U.P. Sugarcane (Purchase Tax) Act, 1961. The Tribunal supported this direction, deeming it legal and tenable.

The Supreme Court's analysis indicated that interest under s. 3(3) of the U.P. Sugarcane Cess Act, 1956, was compensation for delayed payment, not a penalty. The provisions of the U.P. Sugarcane (Purchase Tax) Act, 1961, were found to be in pari materia with the Cess Act, implying that the interest was similarly compensatory.

Conclusion:

The High Court concluded that the interest paid under the U.P. Sugarcane (Purchase Tax) Act, 1961, was deductible, aligning with the Supreme Court's interpretation in Mahalakshmi Sugar Mills Co. [1980] 123 ITR 429. Consequently, the Commissioner's view was erroneous. Both questions were answered in the negative, favoring the assessee, with each party bearing its own costs.