1969 (3) TMI 26 - HC - Income Tax

Interest paid for arrears of sugarcane cess under the U.P. Sugarcane Cess Act, 1956 - amount paid u/s 3(5) of the U.P. Sugarcane Cess Act, 1956, for default in making the payment of cess in due time was not allowable as a deduction either u/s 10(1) or s. 10(2)(xv) of the Income Tax Act, 1922

Summary

Issues:
- Deduction of interest paid for arrears of sugarcane Cess under the Uttar Pradesh Sugarcane Cess Act, 1956.
- Allowability of the deduction under section 10(1) or section 10(2)(xv) of the Indian Income-tax Act, 1922.
- Interpretation of sections 3 and 4 of the Uttar Pradesh Sugarcane Cess Act, 1956.
- Classification of the payment under section 3(5) as a penalty or additional interest.
- Applicability of commercial expediency in allowing the deduction.
- Comparison with relevant case laws for determining the deductibility of the payment.

Analysis:
The case involved a reference under section 66(1) of the Indian Income-tax Act, 1922, concerning the deduction of interest paid for arrears of sugarcane Cess under the Uttar Pradesh Sugarcane Cess Act, 1956. The dispute arose when the Income-tax Officer rejected the deduction claim, arguing that the amount was penal in nature and not provided for in the assessee's accounts for the relevant year. The Appellate Assistant Commissioner allowed the deduction of a portion of the claimed sum, distinguishing between interest and penalty components.

The Tribunal upheld the decision, stating that the amount under section 3(5) of the Cess Act was intended to penalize defaulters in addition to interest. The Tribunal concluded that the penalty amount was not allowable as a deduction. The main question referred to the court was whether the penalty amount was deductible under section 10(1) or section 10(2)(xv) of the Income-tax Act, 1922.

The court analyzed the nature of the payment under section 3(5) and compared it with relevant case laws. It was argued that the payment was not a penalty for contumacious conduct but additional interest for delayed payment. However, the court held that the payment did not qualify as a deductible expense under section 10(1) as it did not arise from the normal course of business activities. The court referenced judgments emphasizing that expenses paid as penalties for law violations are not allowable deductions under commercial expenditure provisions.

In conclusion, the court answered the referred question in the negative, stating that the penalty paid under section 3(5) of the Cess Act was not allowable as a business expenditure deduction under section 10(2)(xv) of the Income-tax Act, 1922. The court emphasized that an infraction of the law is not a typical incident of trade, thereby disallowing the deduction.