- (1.) C.A. No. 5509 of 1985 The following question was referred to the High Court of Delhi under Section 256 (1) of the Income-tax Act, 1961 at the instance of the assessee :- "Whether on the facts and in the circumstances of the case the claim for deduction of interest levied under Section 139 to the extent of Rs. 11,470/- and interest levied under Section 215 to the extent of Rs. 1,04,339/- was rightly rejected as not allowable under Section 37 of the Income-tax Act, 1961 for the assessment year 1972-73 - The High Court has answered the question in the affirmative and in favour of the revenue. The question pertains to assessment year 1972-73. The assessee is a limited company manufacturing yarn. It also does some other business activities. The Income-tax Officer at the time of completing the assessment for assessment year 1972-73 levied interest under Section 139 to the extent of Rs. 11,470/- and interest under Section 215 of the Income-tax Act, 1961 to the extent of Rs. 1,04,339/-. The assessee claimed deduction of these amounts of interest under Section 37 of the Income-tax Act, 1961 in computing its business income. This claim has been rejected.
(2.) The assessee contends that the taxes which were payable were delayed and to that extent the assessee's financial resources increased. These increased resources became available for business purposes. Hence the interest which is paid to the Government under Sections 139 and 215 represent, in effect, interest on capital that would have been borrowed by the assessee otherwise. Hence these amount should be allowed as deduction under Section 37 as expenses incurred wholly and exclusively for the purpose of its business.
(3.) The assessee was required to pay advance tax under Section 212 on the basis of his own estimate. Under Section 215, if the tax so paid is less than 75% of the assessed tax, interest as prescribed therein, is payable. It is difficult to see how the interest so paid for not paying the requisite amount of advance tax as prescribed can be considered as expenditure laid out wholly and exclusively for the purpose of business. In the case of Smt. Padmavati Jaikrishna v. Addl. Commr. of Income-tax, Gujarat, (1987) 166 ITR 176 : (AIR 1987 SC 1723) the assessee borrowed money for the purpose of discharge of her liabilities for the payment of income-tax, wealth-tax and annuity deposit. She paid interest on this borrowed amount. The income earned by the assessee was income from other sources. Hence the allowable deduction would have been under Section 57 (3). In respect of the payment of annuity deposit this Court said that the dominant purpose of making the annuity deposit was not to earn income but to meet the statutory liability of making the deposit. The liability for payment of income-tax and wealth-tax was a statutory liability. Therefore, the expenditure in the form of interest which was paid was not expenditure wholly or exclusively for the purpose of earning income. Hence it could not be allowed as a deduction under Section 57 (3) of the Income-tax Act, 1961. In the case of East India Pharmaceutical Works Ltd. v. Commr. of Income-tax, (1997) 224 ITR 627 : (1997 AIR SCW 1992), this Court held that interest on an overdraft for payment of income-tax was not expenditure wholly and exclusively incurred for the purpose of business and was not deductible under Section 37 of the Income-tax Act. This Court affirmed the decision in the case of Smt. Padmavati Jaikrishna (supra).;