2009 (10) TMI 421 - HC - Income Tax

Business Expenditure- Fines and penalties- The assessee paid royalty to the State Government at rates which were finalized by the pricing committee by the State Government. The assessee ws liable to pay interest on belated payment of royalty and other amounts payable to the state government. The forest department was liable to pay sales tax on royalty but in actual fact this amount was actually deposited by the assessee on behalf of the Forest Department. A lease deed was executed by the Forest Department in favour of assessee. The Commissioner (Appeals) upheld the order of the Assessing Officer and the Tribunal allow the appeal. further appeal to High Court. Held that- Since the assessee follows the mercantile system of accounts this deduction was allowable. The case has been disposed of in favour of assessee and against the department.

Issues Involved:
1. Disallowance of interest on belated payment of sales tax.
2. Disallowance of interest paid on belated payment of royalty.
3. Disallowance of interest on interest on belated payment of royalty.
4. Misinterpretation of material and law by the Income-tax Appellate Tribunal.

Issue-wise Detailed Analysis:

1. Disallowance of Interest on Belated Payment of Sales Tax:
The court examined whether the disallowance made on account of interest on belated payment of sales tax is penal in nature or compensatory. The court referred to Section 37(1) of the Income-tax Act, 1961, which allows deduction of expenditure laid out wholly and exclusively for business purposes unless it is an offence or prohibited by law. The court noted that the interest paid under Section 17A of the H.P. General Sales Tax Act, 1968, is compensatory and not penal. The court cited the Supreme Court's decision in Mahalakshmi Sugar Mills Co. v. CIT, which held that interest on arrears of cess is part of the liability to pay cess and is deductible. The court concluded that despite the lease agreement terming the payment as "penalty," the interest paid for delayed payment of sales tax is compensatory and thus deductible under Section 37.

2. Disallowance of Interest Paid on Belated Payment of Royalty:
The court addressed whether the disallowance on account of interest paid on belated payment of royalty crystallized during the year. The court determined that the issue of when the payment crystallized is a question of fact rather than a substantial question of law. The court found that the payment crystallized on January 22, 1996, when the H.P. High Court settled the dispute, making it deductible in the assessment year 1996-97.

3. Disallowance of Interest on Interest on Belated Payment of Royalty:
The court considered whether the disallowance made on account of interest on interest on belated payment of royalty is compensatory or penal. The court agreed with the Tribunal's finding that the interest on interest is not penal but is compound interest. The court noted that the interest on interest related to the period from April 1, 1983, to March 31, 1990, but was paid in the assessment year 1996-97 after the dispute was settled and crystallized on December 6, 1995. Therefore, the deduction was allowable as the assessee follows the mercantile system of accounting.

4. Misinterpretation of Material and Law by the Income-tax Appellate Tribunal:
The court dismissed this issue, stating that it is not a substantial question of law.

Conclusion:
The court answered all questions in favor of the assessee and against the Revenue, concluding that the interest payments were compensatory and deductible under Section 37 of the Income-tax Act. The appeals were disposed of with no order as to costs.

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