SENGUPTA, J. - (1.) IN this reference under S. 256 (1) of the IT Act, 1961 ('the Act') for the asst. yr. 1977-78, the following question of law has been referred to this Court : "Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the interest for delayed payment of tax deducted on salary of the employees amounting to Rs. 35,769 charged under S. 201 (1A) of the IT Act, 1961, was not deductible in computing the business income of the assessee for the asst. yr. 1977-78?" Shortly stated, the facts are during the assessment year under reference the assessee-company claimed deduction of a sum of Rs. 35,769 being the expenditure incurred for the payment of interest under S. 201 (1A) of the Act on the amount of tax which was not deposited within the time after deducting from salary paid to its employees. The IAC disallowed the said sum of Rs. 35,769 being the interest claimed by the assessee-company as deduction on account of interest paid under s. 201 (1A) for delay in payment of income-tax deducted under S. 192 of the Act holding, inter alia, that the income-tax being disallowable item, interest on income-tax could not be allowed and it was also in the nature of a penalty for infraction of law.
(2.) THE assessee preferred an appeal against the order of IAC. It was contended before the CIT (A) that interest is in the nature of compensation for the delay in deducting tax from the employee' salary and paying it to the Government in time and as such was allowable deduction. In support of the said argument, the Supreme Court judgment in the case of Mahalakshmi Sugar Mills Co. vs. CIT (1980) 16 CTR (SC) 198 : (1980) 123 ITR 429 (SC), was cited, The CIT (A) rejected the contentions of the assessee holding, inter alia, that the interest was calculated on the income-tax deducted at source on the salary payable to the employees, and the said income-tax was not an admissible expense in the hands of the assessee. The CIT (A) following the Supreme Court judgment referred to herein before observed that the interest can be taken to be additional tax which is paid by the assessee-company for not complying with the statutory provisions under s. 201 (1) and, therefore, such additional tax is not admissible expense in any view of the matter. On further appeal to the Tribunal it was argued that the interest was not really paid on the income-tax but on the portion of salary which had been deducted from the payment made to its employees and ultimately deposited to the credit of the Government. It was also argued that since salary was an allowable expenditure, the interest payable thereon for delayed deposit with the Government should be allowed. On behalf of the Revenue it was argued that the liability under s. 201 (1A) was in the nature of income-tax liability since the assessee was to be treated as an assessee-in-default and, therefore, any interest payable thereon was in no way different from interest paid under any other provision of the Act. In support of the said contentions the decision of the Calcutta High Court in National Engg. Industries Ltd. vs. CIT (1978) 113 ITR 252 (Cal) was cited. The assessee also relied on a decision of the Calcutta High Court in Balrampur Sugar Co. Ltd. vs. CIT (1982) 135 ITR 227 (Cal). The Tribunal rejected the contentions made on behalf of the assessee holding, inter alia, that the assessee being treated as an assessee-on-default and method of recovery being the same as in case of other taxes and penalties payable under the Act. It cannot be considered to be a part of the salary if the deduction has not been made. The Tribunal observed that the point of course is fine but upon the word used in S. 201 (1A) the ground was held having been rejected.
(3.) AT the hearing Mr. Anil Roy Choudhury, the learned counsel for the assessee, has seriously contended that since payment of interest does not come within the purview of S. 40 (a) (i) or 40 (a) (ii) of the Act, the assessee is entitled to claim the said deduction under S. 37 of the Act. It is his contention that the assessee has utilised part of the salary which was deducted for payment of tax on behalf of the employees and as such the assessee is entitled to this deduction. Had the assessee obtained loan from outside sources, interest on such loan would have been allowed as a deduction being the interest on the capital borrowed for the purpose of business.;