1980 (4) TMI 1 - SC - Income Tax

Cess is to be paid by assessee manufacturer of sugar for entry of sugarcane into factory - whether interest paid on arrears of cess under s. 3(3) of the U.P. Sugarcane Cess Act, 1956, is a permissible deduction under s. 10(2)(xv) - Held, yes

Summary

Issues:
- Whether interest paid on arrears of cess under the U.P. Sugarcane Cess Act, 1956 is a permissible deduction under s. 10(2)(xv) of the Indian Income-tax Act, 1922.

Analysis:
The judgment in question revolves around the issue of whether interest paid on arrears of cess under the U.P. Sugarcane Cess Act, 1956 is allowable as a deduction under s. 10(2)(xv) of the Indian Income-tax Act, 1922. The assessee, a public limited company engaged in sugar manufacturing, claimed deductions for interest paid on arrears of cess for multiple assessment years. The Income Tax Officer disallowed the claims, but the Appellate Authorities upheld them. The matter was referred to the Delhi High Court, which ruled against the assessee, stating that the interest paid did not satisfy the provisions of the Income-tax Act. The High Court certified the cases for appeal to the Supreme Court.

The Supreme Court delved into the provisions of the U.P. Sugarcane Cess Act, particularly s. 3(3), which imposes interest on arrears of cess. The Court analyzed the nature of the interest payment, distinguishing it from penalties under other sections of the Act. It highlighted that interest under s. 3(3) is automatic and accrues as part of the cess liability, not as a penalty. The Court rejected the revenue's argument that the interest was a penalty for infringing the law, emphasizing that it was a legitimate business expenditure. The Court referenced precedents from other High Courts but focused on the specific statutory scheme of the Cess Act at hand.

Ultimately, the Supreme Court allowed the appeal, overturning the High Court's judgment. It held that the interest paid under s. 3(3) of the Cess Act is not a penalty for a law violation but a valid deduction under s. 10(2)(xv) of the Income-tax Act. The Court confirmed that the interest payment was a revenue expenditure incurred for business purposes. Consequently, the Court ruled in favor of the assessee, allowing the deduction for the interest paid on arrears of cess. The assessee was granted costs for the appeals.

In conclusion, the Supreme Court's judgment clarifies the treatment of interest paid on arrears of cess under the U.P. Sugarcane Cess Act, 1956 for income tax purposes, establishing it as a permissible deduction under the relevant provisions of the Income-tax Act.