R.L. Gulati, J. - (1.) THIS is a reference under Section 256(1) of the Income-tax Act, 1961. The reference relates to the assessment year 1963-64.
(2.) THE assessee is a partnership firm owning two sugar factories--one at Bhatni in district Deoria and the other at Motinagar in district Faizabad. At the end of the relevant previous year the assessee made a provision in its books of accounts for the payment of a sum of Rs. 1,04,023 towards interest due on arrears of cess and purchase tax, an amount which the assessee had become liable to pay but had not paid during the relevant previous year. THE yum of Rs. 1,04,023 is made up of two items, (i) Rs. 1,02,461 in respect of interest payable on arrears of cess, and (ii) Rs. 1,352 in respect of interest on arrears of purchase tax in respect of Bhatni Mills, THE assessee claimed to deduct this amount from its profits liable to income-tax. THE claim was disallowed by the Income-tax Officer on the ground that the provision for interest represented a contingent liability only. THE Appellate Assistant Commissioner of Income-tax did not agree with this view and held that the amount in question represented an accrued liability and, as such, was an allowable deduction. THE department took the matter in appeal before the Income-tax Appellate Tribunal. Before the Tribunal, the view of the Appellate Assistant Commissioner that the amount represented an accrued liability was not challenged but the deduction of the amount was contested on another ground. It was urged that the assessee had become liable for payment of interest because it violated the provisions contained in Section 3(2) of the U. P. Sugarcane Cess Act, 1956, as validated by the U. P. Sugarcane (Validation) Act, 1961. Similarly, the interest on purchase tax had become payable because the assessee had contravened a similar provision of the Sugarcane Purchase Tax Act, 1961. THE interest, therefore, was in the nature of penalty and could not be allowed as business expenditure. THE Tribunal accepted the contention and in doing so relied upon a decision of the Supreme Court in the case of Haji Aziz and Abdul Shakoor Bros, v. Commissioner of Income-tax, [1961] 41 ITR 350 (SC) and a decision of the Delhi High Court in the case of Commissioner of Income-tax v. Mahalaxmi Sugar Mills Ltd., 1972 85 ITR 320 On this view the Tribunal allowed the department's appeal holding that the assessee v/as not entitled to deduct the amount of interest from its profits liable to tax. At the instance of the assessee, however, the Tribunal has referred the following question of law for our opinion : "Whether the Income-tax Appellate Tribunal erred in holding that the assessee's claim for deduction of a sum of Rs. 1,04,023.43 being the payment made on account of interest as a result of violation of the provisions of Section 3(3) of the U. P. Sugarcane Cess Act, 1956, was not a business expenditure ?" Before we proceed to answer the question, we must point out that the question as framed by the Tribunal is not happily worded and is also inaccurate. The entire sum of Rs. 1,04,023.43 is not the interest under the U. P. Sugarcane Cess Act but a part of it (Rs. 1,352) is under the U. P. Sugarcane Purchase Tax Act, 1961. Moreover, the interest has not been charged for violation of Section 3(3) of the Cess Act or of the Purchase Tax Act but it has been charged under Section 3(3) for the failure of the assessee to pay the tax in time as required by Section 3(2) of the two Acts. The more serious infirmity with which the question suffers is that it presumes that the deduction was claimed as business expenditure under Section 37 of the Income-tax Act. The assessee no doubt based its claim on that provision but it also claimed deduction in the alternative under Section 28(1) of the Income-tax Act. This is clear from the statement of the case annexed by the assessee to its application under Section 256(1), which has not been controverted by the department. This is what has been stated in the ultimate paragraph of the statement: "The Appellate Tribunal overruled the plea of the applicant that even if deduction of the sum was found not to be permitted under Section 37 (corresponding to Section 10(2)(xv) of the 1922 Act) of the Income-tax Act, 1961, as a business expenditure following the above decisions, nevertheless it was liable to be allowed under Section 28(1) (corresponding to Section 10(1) of the Act of 1922) of the Income-tax Act, 1961, as an outgoing necessarily incurred in carrying out the business." We, accordingly, reframe the question to eliminate the inaccuracy and to bring out the real controversy between the parties. The reframed question would read : "Whether, on the facts and in the circumstances of the case, the Tribunal was right in disallowing the deduction of an aggregate sum of Rs. 1,04,023 payable by the assessee as interest on arrears of cess and arrears of purchase tax in the computation of its business profits for the assessment year 1963-64 ?" Before we examine the admissibility of the deduction claimed by the assessee, it is necessary to ascertain the true nature of the amount. Section 3 of the U. P. Sugarcane Cess Act, 1956 (hereinafter referred to as the Cess Act), provides for the imposition of cess tax. Under Sub-section (1) of Section 3 of the Cess Act the State Government may by notification in the official Gazette impose a cess not exceeding four annas per maund on the entry of cane into the premises of a factory for use, consumption or sale therein. Sub-section (2) then provides : "(2) The cess imposed under Sub-section (1) shall be payable by the owner of the factory and shall be paid on such date and at such place as may be prescribed." Then comes Sub-section (3), which says: "(3) Any arrear of cess not paid on the date prescribed under subsection (2) shall carry interest at 6 per cent. per annum from such date to date of payment." It is under this provision that the assessee had become liable to pay interest for which he made a provision in the account books. Similar is the position with regard to the Sugarcane Purchase Tax Act, 1961 (hereinafter referred to as the Purchase Tax Act). There also the tax is imposed by Section 3 and under Sub-section (2) it has to be paid within the time and in the manner prescribed. Sub-section (3) then provides for payment of interest if the amount is not paid within the prescribed time. The assessee has become liable to pay interest under this provision in respect of the arrears of purchase tax.
(3.) NOW, let us examine the relevant provisions of the Income-tax Act, 1961. Section 28 deals with the profits and gains of business or profession. Section 29 then provides the manner in which the income from profits and gains of business or profession shall be computed. It says that the income referred to in Section 28 shall be computed in accordance with the provisions contained in sections 30 to 43A. Sections 30 to 43A enumerate various deductions which have to be made while computing the net profits of a business. The material sections for our purposes are sections 36 and 37. Section 36{l)(iii) provides for the deduction of the amount of interest paid in respect of capital borrowed for the purposes of the business or profession. Here we are dealing with the interest no doubt, but interest is not on capital borrowed for the purposes of business or profession. So this provision will not be attracted. Section 37 is a residuary section and provides: "Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head ' profits and gains of business or profession'." It is under this provision that the Tribunal has considered the assessee's case even though it has not said so in its appellate order. We shall, for the time being, presume that Section 37 is applicable. NOW, the payment of cess and purchase tax on sugarcane consumed by the assessee in its factory for production of sugar is an expenditure laid out wholly and exclusively for the purposes of business, inasmuch as these levies directly increase the cost of sugarcane. This position is not disputed. On principle, we see no reason why interest payable on such levies should also not be a permissible deduction. If the principal (made up of cess and purchase tax) is a permissible deduction the interest payable thereon would also be a permissible deduction because principal and interest together constitute the assessee's liability. We have already noticed that any interest paid by a businessman on the capital borrowed for the purposes of business is an allowable deduction under Section 36(1)(iii) and any interest paid by a businessman in respect of any of its business liability which is not an interest on borrowed capital would be an allowable deduction under Section 37 as being expenditure laid out wholly and exclusively for the purposes of the business. If a businessman purchases goods on credit with the stipulation to pay interest, in case the payment is not made within a specified time, such interest will be a business expenditure and would be an allowable deduction in the computation of business profits. Now, the payment of cess and purchase tax is admittedly a business liability and if the assessee had to pay interest on the arrears of cess and purchase tax, for its failure to make payment within time, we see no reason why interest should not be an allowable deduction. In the illustration which we have given, interest is payable under a contract while in the instant case interest is payable under a statute, but the nature of interest is the same in both the cases, namely, the failure of the businessman to discharge his obligation within the stipulated time. On principle we see no difference between a contractual liability and a statutory liability of this nature.;