Sankar Prasad Mitra, J. - (1.) This is a reference under Section 66(1) of the Indian Income-tax Act, 1922. The assessment year is 1958-59. The relevant previous year is the year which ended on the 31st August, 1957. The assessee carried on business in the manufacture and sale of sugar. It had its mill at Deoria, Uttar Pradesh, and its registered office at Calcutta. For the assessment year 1958-59, by its letter dated 25th November, 1961, the assessee claimed a deduction of Rs. 34,355 as interest paid for arrears of sugarcane cess under the Uttar Pradesh Sugarcane Cess Act, 1956.
(2.) The Income-tax Officer rejected this claim. His first ground was that the liability related to the assessee's accounting year which ended on the 31st August, 1957, and the assessee had not made any provisions for the said sum in its accounts for that year though the assessee's method of accounting was mercantile. Secondly, he said that the amount in question was not allowable as a deduction since it was penal in nature for nonpayment of the cane cess on the due date.
(3.) Before the Appellate Assistant Commissioner the assessee based the claim for deduction of the said sum of Rs. 34,355 either under Section 10(1) or under Section 10(2)(xv) of the Act of 1922. The argument was that under the Uttar Pradesh Sugar cane Cess Act, 1956, interest was payable for delayed payment of cess and an additional amount was also payable for non-payment of cess in certain circumstances which though described as penalty in the Act was in effect an additional levy of cess. The Appellate Assistant Commissioner was of opinion that the claim aforesaid could not be rejected merely on the plea that the amount was not provided for in the assessee's books of account in the relevant previous year. And as the liability for the payment of this amount was incurred during the year in question, the deduction should be allowed if otherwise permissible. The Appellate Assistant Commissioner found that the said sum of Rs. 34,355 was made up of two items, namely, (a) Rs. 16,443.68 and (b) Rs. 17,911.39. The first item was interest on arrears of cane cess for the period December 23, 1956, to August 31, 1957. The second item was the amount directed to be paid by way of penalty under Section 3(5) of the Uttar Pradesh Sugarcane Cess Act, 1956. The Appellate Assistant Commissioner held that the second item was inadmissible since it was a levy by way of penalty and this payment could not be said to have been incurred for commercial expediency. He, however, allowed the deduction of the first item, namely, the sum of Rs. 16,443.68.;