1982 (8) TMI 119 - AT - Income Tax

Summary

Issues:
- Disallowance of interest as penal interest
- Allowability of interest at a higher rate
- Treatment of interest relating to the preceding assessment year

Disallowance of interest as penal interest:
The appeal involved the disallowance of interest claimed by the assessee on the grounds that it was paid as penal interest and thus not allowable as a deduction. The Income Tax Officer (ITO) disallowed the entire claim, which was confirmed by the first appellate authority. However, in the second appeal, the assessee argued that the interest was not penal but rather a contractual payment. The Tribunal noted that the interest was a contractual obligation between the assessee and the State Government, and there was no infringement of law. The Tribunal held that the interest at the higher rate, as stipulated in the Government order, should have been allowed as a deduction.

Allowability of interest at a higher rate:
The Tribunal considered the Supreme Court decision in the case of Mahalakshmi Sugar Mills Co. v. CIT, which dealt with interest payable on arrears of cess. The Tribunal found that the higher rate of interest in the present case was due to the assessee's default in adhering to the instalment dates, not an infringement of law. The Tribunal emphasized that the higher interest was a compensation for delayed payment and not a penalty. It held that the interest at the rate of 16 1/2 per cent should be allowed as a deduction, amounting to Rs. 89,666.35.

Treatment of interest relating to the preceding assessment year:
Regarding the interest relating to the preceding assessment year, the Tribunal acknowledged that the amount of Rs. 25,797.36 should have been claimed in the relevant year. Since the assessee anticipated rescheduling of dates and did not provide for it, the Tribunal confirmed the disallowance of this amount. However, it noted that if the rescheduling did not occur and the amount became payable and paid, it could be treated as a liability of the year of the Government order or the year of payment, but not for the current year.

In conclusion, the Tribunal partly allowed the appeal, granting relief of Rs. 89,666.35 for the interest at the higher rate, while confirming the disallowance of Rs. 25,797.36 for interest relating to the preceding assessment year.