Agrawal, J. - (1.)THE Tribunal, Jaipur Bench, has referred to this court the following question under Section 256(1) of the I.T. Act, 1961 ("the Act"):
" Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the provisions for payment of penal interest amounting to Rs. 5,050 on sales tax collections withheld by the assessee and utilised for the purpose of its own business, was not admissible as a deduction in computing its total income ? "

(2.)THE facts, briefly stated, are as under :
Rajasthan Central Stores (P.) Ltd., applicant herein (" the assessee"), is a trader. It had committed default in the payment of sales tax payable under the provisions of the Rajasthan Sales Tax Act, 1954 (" the Sales Tax Act"), and it was made liable to pay penal interest for its failure to remit the sales tax into the Government account within time. THE assessee claimed a deduction of Rs. 5,050 as deductible expenditure in computing the total income on account of the amount paid by it towards interest on the sales tax dues in the assessment year 1968-69. THE said deduction was disallowed by the ITO and the said disallowance was upheld by the AAC as well as the Tribunal. THE Tribunal was of the view that it is not incidental to the carrying on of a business that a trader should misuse sales tax collections and convert them to his own use without paying them into the Government account when called upon to do so. In taking the aforesaid view, the Tribunal placed reliance on the decisions of the Delhi High Court in CIT v. Mahalaxmi Sugar Mills Ltd. [1972] 85 ITR 320 and CIT v. Upper Doab Sugar Mills Ltd, [1972] 85 ITR 489. Feeling aggrieved by the aforesaid order of the Tribunal, the assessee moved an application before the Tribunal for making a reference of the questions of law arising out of the order passed by the Tribunal for this court for its opinion. THEreupon, the Tribunal has referred the question mentioned above for the opinion of this court under Section 256(1) of the Act.

We have heard Shri S. P. Agarwal, the learned counsel for the asses-see, and Shri R. N. Surolia, the learned counsel for the Department.

Shri Agarwal has submitted that the interest that is payable under the Sales Tax Act cannot be regarded as a penalty and, therefore, it was a deductible expenditure and the income-tax authorities as well as the Tribunal have erred in disallowing the said deduction. In support of his aforesaid submission, Shri Agarwal has placed reliance on the decision of the Supreme Court in Mahalakshmi Sugar Mills Co. v. CIT [1980] 123 ITR 429, wherein the Supreme Court has reversed the decision of the Delhi Court in Mahalaxmi Sugar Mills Ltd.'s case [1972] 85 ITR 320. Shri Agarwal has also placed reliance on the decision of the Calcutta High Court in Balrampur Sugar Co. Ltd. v. CIT [1982] 135 ITR 227 and the Full Bench decision of the Allahabad High Court in Triveni Engg. Works Ltd. v. CIT [1983] 144 ITR 732.

In Mahalakshmi Sugar Mills Co.'s case [1980] 123 ITR 429, the Supreme Court has construed the provisions of the UP Sugarcane Cess Act, 1956. Section 3(3) of the said Act provided that any arrear of cess not paid on the date prescribed under Sub-section (2) shall carry interest at 6 per cent. per annum from such date to the date of payment. The Supreme Court held that the interest that was paid under Section 3(3) of the Cess Act could not be described as a penalty for infringement of law and that it was in the nature of a revenue expenditure in respect of which the assessee could claim deduction under Section 10(2)(xv) of the Indian I.T. Act, 1922, In that case, the Supreme Court has noticed the decision of the Full Bench of the Allahabad High Court in Saraya Sugar Mills (P.) Ltd, v. CIT [1979] 116 ITR 387, wherein it has been held that the payment of interest under Section 3(3) of the UP Sugarcane (Purchase Tax) Act, 1961, was a penal liability which accrues on an infraction of the law. The Supreme Court while observing that Section 3(3) of the UP Sugarcane (Purchase Tax) Act, 1961, seemed to be in pari materia with Section 3(3) of the UP Sugarcane Cess Act, did not consider it necessary to examine the correctness of the aforesaid decision of the Full Bench of the Allahabad High Court in Saraya Sugar Mills (P.) Ltd.'s case [1979] 116 ITR 387.

In Balrampur Sugar Co. Ltd.'s case [1982] 135 ITR 227, a Division Bench of the Calcutta High Court, while considering the provisions of the Act, has held that the liability to pay interest under Section 3(3) of the UP Sugarcane (Purchase Tax) Act which arises for the delayed payment of tax, is compensation for the delayed payment and not in the nature of a penalty imposed for an infraction of law and, therefore, the interest is an allowable deduction in computing the business income of an assessee who carries on the business of manufacture and sale of sugar. The Calcutta High Court after comparing the provisions of the UP Sugar Cane (Purchase Tax) Act, 1961, with the UP Sugarcane Cess Act, 1956, has held that the same were in pad materia and the decision of the Supreme Court in Mahalakshmi Sugar Mills Co.'s case [1980] 123 ITR 429; was applicable. The Calcutta High Court has disagreed with the decision of the Full Bench of the Allahabad High Court in Saraya Sugar Mills (P.) Ltd.'s case [1979] 116 ITR 387, and expressed the view that the said decision of the Full Bench of the Allahabad High Court was not correct because the interest paid is not for an infraction of law as such, but it is for the default for payment in time which is a kind of damage in default in the performance of an obligation.

(3.)THEREAFTER, the matter was considered by a Special Bench of five judges of the Allahabad High Court in Triveni Engg. Works Ltd.'s case [1983] 144 ITR 732 and the learned judge, after referring to the decision of the Calcutta High Court in Balrampur Sugar Co. Ltd.'s case [1982] 135 ITR 227, have overruled the earlier decision of the Full Bench in Saraya Sugar Mills (P.) Ltd.'s case [1979] 116 ITR 387.
In the present case, the relevant provision which provided for payment of interest was contained in Section 11B of the Sales Tax Act. The said provision, as it stood at the relevant time, reads as under :

" 11B. Interest on failure to pay tax, fee or penalty.-

(a) If the amount of any tax payable under Sub-sections (2) and (2A) of Section 7 is not paid within the period allowed, or

(6) If the amount specified in any notice of demand whether for tax, fee or penalty is not paid within the period specified in such notice or in the absence of such specification within 30 days from the date of service of such notice, the dealer shall be liable to pay simple interest on such amount at one per cent. from the day commencing after the end of the said period for a period of three months and at one and a half per cent. per month thereafter during the time he continues to make default in the payment:

Provided that where as a result of any order under this Act, the amount on which interest was payable under this section has been reduced, the interest shall be reduced accordingly and the excess interest paid shall be refunded:

Provided further that no interest shall be payable under this section on such amount and for such period in respect of which interest is paid and under the provisions of Sections 11 and 14."

A perusal of the aforesaid provisions contained in Section 11B of the Sales Tax Act shows that interest was payable automatically on the amount of tax payable if the amount of tax payable under Sub-sections (2) and (2A) of Section 7 was not paid within the period allowed or, if amount specified in any notice of demand, whether for tax, fee or penalty was not paid within the period specified in such notice, or in the absence of such specification within 30 days from the date of service of such notice. The aforesaid provisions contained in Section 11B of the Sales Tax Act were not much different from the provisions contained in Section 3(3) of the UP Sugarcane Cess Act, which came up for consideration before the Supreme Court in Mahalakshmi Sugar Mills Co.'s case [1980] 123 ITR 429 and the provisions contained in Section 3(3) of the UP Sugarcane (Purchase Tax) Act, which came up for consideration before the Calcutta High Court in Balrampur Sugar Co. Ltd.'s case [1982] 135 ITR 227 and the Allahabad High Court in Triveni Engg. Works Ltd.'s case [1983] 144 ITR 732. For the reasons given in the aforesaid judgment, it must be held that the interest that was payable under Section 11B of the Sales Tax Act is not a penalty but is a revenue expenditure which is deductible as interest under Section 37(1) of the Act.