1982 (6) TMI 65 - AT - Income Tax

Summary

Issues Involved:
1. Allowability of interest paid under section 220(2) of the Income-tax Act as a deduction under section 37 or 28.
2. Claim under section 35B for various expenses.
3. Nature of interest under section 220(2) as penal or compensatory.
4. Timing of liability accrual for interest payment.

Detailed Analysis:

1. Allowability of Interest Paid under Section 220(2) as a Deduction:
The primary issue was whether the interest amounting to Rs. 1,41,516 paid to the Income-tax Department under section 220(2) of the Income-tax Act could be allowed as a deduction under section 37 or 28 while computing the business income of the assessee.

The Tribunal referred to two High Court decisions, CIT v. Oriental Carpet Manufacturers (India) (P.) Ltd. and National Engineering Industries Ltd. v. CIT, which had already settled the matter by disallowing such claims. The Tribunal noted that the interest paid on delayed tax payment does not have any connection with the business activities of the assessee. It was observed that "the liability to tax, though arising out of business activity, cannot be said to be in any manner a liability which has anything to do with the business of the assessee."

The Tribunal dismissed the argument that a corporate entity should be treated differently from a non-corporate entity regarding the claim of expenditure under section 28 or 37. It was emphasized that the tests laid down in decided cases apply equally to both.

The Tribunal also considered the Supreme Court's observations in various cases, including Indian Aluminium Co. Ltd. v. CIT and CIT v. Birla Cotton Spg. & Wvg. Mills Ltd., but found them inapplicable to the present case. The Tribunal concluded that the interest paid due to non-payment of tax is not incurred in the capacity of carrying on business and is thus not deductible.

2. Claim under Section 35B:
The assessee claimed deductions under section 35B for various expenses such as bank charges, credit extension charges, counseling charges, pump charges, ocean freight, mukadami, and dock charges. The Tribunal noted that these items were covered by the Special Bench decision in the case of J. Hemchand & Co. and held the claim against the assessee, following the precedent.

3. Nature of Interest under Section 220(2):
The Tribunal addressed the argument regarding the nature of interest under section 220(2), whether it is penal or compensatory. It referred to the Gujarat High Court decisions in Bharat Textiles Works v. ITO and Chandrakant Damodardas v. ITO, which held that such interest is compensatory and not penal. However, the Tribunal found it unnecessary to delve deeper into this aspect due to the primary reasoning provided.

4. Timing of Liability Accrual for Interest Payment:
The Tribunal rejected the argument that the liability for interest did not accrue in the year under appeal because it related to earlier periods. It clarified that the liability to pay interest arose only upon the passing of the order by the ITO on 1-11-1976, and therefore, the liability accrued in the year the order was passed.

Conclusion:
The Tribunal concluded that the interest paid under section 220(2) is not an allowable deduction under section 37 or 28, as it does not relate to the business activities of the assessee. The claim under section 35B was also disallowed following precedent. The interest was deemed compensatory, and the timing of liability accrual was clarified to be upon the passing of the order. Consequently, the cross-objection by the assessee was dismissed.