1978 (5) TMI 22 - HC - Income Tax

Allowable Expenditure, Business Expenditure, Provident Fund, Purchase Tax, Whether Allowable Deduction

Summary

Issues Involved:
1. Whether interest paid on arrears of sugarcane purchase tax is an allowable deduction.
2. Whether the loss on the sale of securities is a capital loss and not allowable as a revenue deduction.
3. Whether interest paid to the Provident Fund Commissioner is an admissible deduction under Section 37(1).

Issue-Wise Detailed Analysis:

1. Interest on Arrears of Sugarcane Purchase Tax:
The primary issue was whether the interest paid on arrears of sugarcane purchase tax could be considered an allowable deduction. The court examined the nature and character of interest and penalty under the U.P. Sugarcane Purchase Tax Act, 1961. Section 3 of the Act imposes a tax on the purchase of sugarcane and provides for interest on delayed payments. The court noted that both interest and penalty are recoverable as arrears of land revenue, and their accrual is automatic depending on the delay.

The court referred to previous cases, including Kamlapat Motilal v. CIT, which distinguished between interest and penalty, treating interest as a deductible business expense. However, the court reconsidered this view, noting that both interest and penalty are civil sanctions aimed at deterring delay in tax payments and compensating the government for damages caused by such delays.

The court cited several precedents, including CIT v. Bhikaji Dadabhai & Co., which held that the description or label of an impost is not decisive of its true character. The court concluded that both interest and penalty under the Sugarcane Purchase Tax Act are civil sanctions and not deductible business expenses. The court also referred to the Supreme Court's decision in Haji Aziz and Abdul Shakoor Bros. v. CIT, which held that expenses incurred for breach of law are not deductible as they are not incidental to the business.

2. Loss on Sale of Securities:
Although this issue was not referred to the Full Bench, it was mentioned in the judgment. The court had to determine whether the loss on the sale of securities was a capital loss and hence not allowable as a revenue deduction. The court did not provide a detailed analysis of this issue in the judgment.

3. Interest Paid to Provident Fund Commissioner:
The third issue concerned whether the interest paid to the Provident Fund Commissioner could be deducted under Section 37(1). The court referred to Section 14-B of the Employees' Provident Funds Act, which allows for the recovery of damages for default in payment of contributions. The court noted that damages and penalties under this Act are civil sanctions similar to those under the Sugarcane Purchase Tax Act.

The court concluded that payments made as damages for delay in paying contributions to the provident fund stand on the same footing as interest payable for nonpayment of purchase tax. Therefore, such payments are not deductible as business expenses.

Conclusion:
The court answered the first and third questions in the affirmative, in favor of the department and against the assessee. The interest on arrears of sugarcane purchase tax and the interest paid to the Provident Fund Commissioner were not considered allowable deductions as they were penalties for breach of statutory obligations and not incidental to the business. The papers were directed to be laid before the Division Bench with these answers to the questions referred to the Full Bench.