BHARAT ROBBINS LTD Vs. INSPECTING ASSISTANT COMMISSIONER
LAWS(IT)-1989-10-2
INCOME TAX APPELLATE TRIBUNAL
Decided on October 05,1989

Appellant
VERSUS
Respondents

JUDGEMENT

K.R. Dixit, Judicial Member - (1.)THE principal ground of appeal is that the Commissioner erred in confirming the disallowance of Rs. 85,808 being the interest paid by the assessee Under Section 220(2) viz. for non-payment of income-tax. This point has been duly considered by a Special Bench of the Tribunal in the case of Arvind Mills Ltd. v. ITO [1983] 2 SOT 207 (Ahd.) and the Tribunal has decided it against the assessee. However, this time the assessee's counsel advanced certain arguments which in substance mean that the said decision of the Special Bench is not correct. THE submissions were -
(1) THE Tribunal in para 2 of its order has stated that "this question is no longer res integra in view of two direct decisions of the High Courts on the point, they are CTT v. Oriental Carpet Mfrs. (India) (P.) Ltd. [1973] 90 ITR 373 (Punj. & Har.) and National Engg. Industries Ltd. v. CIT [1978] 113 ITR 252 (Cal.)' '.It was submitted that this statement is not correct in view of the Supreme Court decision in the case of CIT v. Birla Cotton Spg. & Wvg. Mills Ltd. [1971] 82 ITR 166. According to him, just as in the case of Birla Cotton, the expenditure for the preservation of the assessee's business was allowed to be deducted, so in this case the payment of interest on money retained (although by not paying taxes) for running the business was an allowable deduction. He invited our attention to the Gujarat High Court decision in the cases of Bharat Textile Works v. ITO [1978] 114 TTR 28 and Chandrakant Damodardas v. ITO [1980] 123 ITR 748 where it has been held that the interest Under Section 220(2) is only compensation for retention of money and therefore, according to him, this was not penalty and therefore, it was an allowable deduction. He relied on the decision in the case of Mahalakshmi Sugar Mills Co. v. CIT [1980] 123 ITR 429 (SC) where interest for non-payment of sugarcane cess had been allowed as a deduction. He also relied on the decision of the Supreme Court in the case of Indian Aluminium Co. Ltd. v. CIT [1972] 84 ITR 735 where it has been observed as follows: -

In the case of an artificial or juristic persona like the company before us it seems very difficult to separate the purpose of the juristic persona which is certainly commercial from the character of the persona itself.

He submitted that in view of these observations the retention of the money even by non-payment of taxes was for business and so the interest on it was an allowable deduction.

(2) This deduction has to be allowed because only the real income of the assessee could be taxed. This was a basic principle. Since interest had been paid it had to be allowed as a deduction. He also submitted that Under Section 80V as it was in force for the asst. year before us since interest paid on money borrowed for the purpose of payment of income-tax was an allowable deduction there was no reason why interest paid on money retained by not paying tax should be disallowed.

(2.)The learned Departmental Representative on the other hand, submitted that according to the Supreme Court in the case of Gujarat Travancore Agency v. CIT [1989] 177 ITR 455 penalty was compensation and since according to the Gujarat High Court in the case of Bharat Textile Works (supra) interest under Section 220 was compensation and since penalty was not an allowable deduction so this interest payment was not an allowable deduction. He submitted that the following decisions were in favour of the revenue: -
(1) Aruna Mills Ltd. v. CIT [1957] 31 ITR 153 (Bom.)

(2) CIT v. Oriental Carpet Mfrs. (India) (P.) Ltd. 's case (supra) and National Engg. Industries Ltd.'s case (supra).

According to him, interest was a part of tax and since Under Section 40(ii) tax was not deductible, interest also was not deductible. He relied upon the Kerala High Court decision in the case of CIT v. S. Kumaraswamy Reddiar Sons [1985] 154 ITR 724 to submit that interest paid for not paying taxes is not a business expenditure. He said that since the tax would be known after the profits are known the interest on the tax could not be allowed as a deduction. Therefore, according to him, the real income theory was not applicable here.

The learned counsel for the assessee rejoined that his submission regarding real income had not been considered in any of the decisions cited by the Special Bench. He also submitted that there are no decisions which take into account the said Gujarat High Court decision that the interest is payment for the use of the money in the assessee's business.

(3.)WE are totally un-impressed by any of these arguments put forward on behalf of the assessee. The simple fact is that the purpose of the Income-tax Act is to levy and collect tax on income. If interest was to be allowed for non-payment of taxes it would be contrary to this very purpose. It is no part of the purpose of the Income-tax Act to substitute interest on unpaid tax for the tax. Just as Governments are not run on bank guarantees (Assistant Collector of Central Excise v. Dunlop India Ltd. [1985] 154 ITR 172 (SC) at page 182). Governments are not run on interest on unpaid taxes. The reliance on the Supreme Court decision in the case of Birla Cotton Spg. & Wvg. Mills Ltd. (supra) is unjustified. That case was not concerned with the payment of income-tax. Preserving the business apparatus is certainly part of business activity and the expenditure in relation to that may be allowed as a deduction but it is no part of business activity not to pay the tax earned as a result of business activity. The learned Departmental Representative has rightly pointed out that since the tax liability would not be known prior to the determination of profits, interest on the tax cannot be allowed as deduction. The argument based on real income theory also rests on the same basis that the expenditure incurred for preserving the business has to be allowed. The same applies to the argument based on the decision in the case of Indian Aluminium Co. Ltd. (supra). The decision, in that case was, that a commercial company which is a legal person can only be considered doing business. Our answer is that it can be considered to be doing business only if it pays taxes due from it and carries on its activities with the resources left after discharging that liability. In our view, not paying tax dues cannot be called business activity. If the argument on behalf of the assessee in this connection was to be accepted no penalty for violating any law against a business company can be imposed because according to this argument a company can only do business and cannot violate any law or cannot commit any offence.


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