1971 (9) TMI 55 - HC - Income Tax

Assessee is a private limited company. It manufactures woollen cloth and carpets. These items are also exported out of India. In the year 1966-67, the assessee could not pay the provisional demand of tax in respect of earlier assessment and approached the Income-tax Officer for time which was allowed. In respect of these delayed payments, the assessee was charged interest and he paid a sum of Rs. 6,733. This payment of interest has been claimed by the assessee as permissible deduction under sections 37 and 36(1)(iii) of the Income-tax Act, 1961. The Income-tax Officer disallowed this claim and held that the assessee was not entitled to claim it as a permissible deduction under the Act held that the interest on belated tax payment is not deductible under section 10(2)(xv)

Summary

Issues:
- Deductibility of interest payment as a revenue expenditure under sections 37 and 36(1)(iii) of the Income-tax Act, 1961.

Analysis:
The case revolved around the deductibility of interest payment of Rs. 6,733 by a private limited company engaged in manufacturing woollen cloth and carpets. The company, facing a provisional tax demand for an earlier assessment, sought time from the Income-tax Officer and incurred interest on delayed payments. The primary contention was whether this interest payment could be claimed as a permissible deduction under sections 37 and 36(1)(iii) of the Income-tax Act, 1961.

The Income-tax Officer disallowed the claim, asserting that the interest payment did not qualify as a permissible deduction under the Act. This decision was upheld by the Appellate Assistant Commissioner, who emphasized that the deduction under section 36(1)(iii) was not applicable as the company did not borrow capital for business purposes. Additionally, it was deemed that the interest payment was not an expenditure incurred wholly and exclusively for business purposes, nor was it of a personal nature.

The Appellate Assistant Commissioner relied on decisions from the Bombay, Patna, and Calcutta High Courts to support the disallowance of the interest payment as a deductible expense. However, the Income-tax Appellate Tribunal took a different stance, allowing the company's claim for deduction. The Tribunal highlighted that interest and tax were distinct items, with no prohibition against allowing interest as a deduction. It was reasoned that the interest payment was a legitimate business expense necessary to safeguard the company's operations.

The matter was further escalated when the department sought clarification from the Tribunal under section 256(1) of the Income-tax Act. The department contended that interest on delayed tax payments was not deductible, citing previous decisions and emphasizing the non-business nature of the interest payment. The company's counsel, drawing on the Supreme Court decision in Commissioner of Income-tax v. Malayalam Plantations Ltd., argued that the interest payment was a valid business expense critical for maintaining business operations.

Ultimately, the High Court ruled in favor of the department, negating the deductibility of the interest payment as a revenue expenditure. The Court emphasized that the interest payment did not align with the test for business-related expenses and was not incurred in the course of conducting business activities. The Court differentiated between interest on tax refunds and interest on delayed tax payments, concluding that the latter did not qualify as a legitimate business expense.