ORDER
N.D. Raghavan, Vice President
1. This appeal is filed by the assessee, challenging the order dated 7.1.2005 passed by the CIT(Appeals)-IV, Hyderabad, as erroneous.
2.1 Facts of the case in brief are THAT: The assessee is a company engaged in the business of manufacture and sale of industrial gases. While framing the assessment for the assessment year 2002-03, the Assessing Officer noticed that the assessee claimed interest expenditure of Rs. 2,04,230 representing interest on Interest-free Sales Tax.Loan. The Government of Andhra Pradesh sanctioned an amount of Rs. 90.50- lakhs as loan to the assessee to be repaid, Since the loan amount was not paid, penal interest was charged as per proceedings No. 20/A11/87 dated 19.3.2001. The Assessing Officer held that the loan granted is with reference to sales tax payable and the repayment of loan partakes the character of sales tax. The Assessing Officer held that the assessee defaulted in repayment of loan and the interest is charged for non-payment of sales tax within the time allowed. He further held that the interest charged on non-payment of the loan is also in the nature of sales tax as held by the Rajasthan High Court in the case of Mewar Motors v. CIT 260 ITR 218. He further held that payment of interest is covered by the provisions of Section 43B of the Act and the amount claimed is therefore not allowable. He, therefore, concluded that the interest charged by the Government of Andhra Pradesh is penal and not compensatory in nature and as such not allowable, in view of the decision of the Supreme Court in the case of Swedeshi Cotton Mills Co. Ltd. v. CIT 233 ITR 199.
2.2 Aggrieved inter-alia’ by the disallowance thus made by the Assessing Officer, assessee preferred appeal before the CIT(A), who, concurring with the reasoning given by the Assessing Officer upheld the disallowance made by the Assessing Officer in terms of Section 43B of the Act. Hence, assessee is in second appeal before this Tribunal.
3. The learned counsel for the assessee submitted THAT: The Appellate Commissioner erred in sustaining the disallowance of interest of; Rs. 2,04,250 payable by the assessee to Government of Andhra Pradesh on the delay in payment of instalments of sales tax loan, stating that interest payable for non-payment of sales tax is either in the nature of sales tax and thus attracts the provisions of Section 43B or is in the nature of penal interest. As per the terms or sanction of interest free sales tax loan, interest is payable if there is delay in repayment of such loan and therefore, the interest payable on such loan is for delayed payment and therefore cannot be said to be in the nature of sales tax and thus the provisions of Section 43B are not attracted. The Appellate Commissioner ought to have seen that the interest payable is not penal in nature but only compensatory and therefore, there is no justification for disallowing the same. Interest payable on account of delayed repayment of loan cannot be treated as sales tax, since interest is different altogether. Reliance is placed on the decision of the Hon’ble Calcutta High Court in the case of CIT v. Padmavati Raje Cotton Mills Ltd. 239 ITR 355. Such interest is also not covered by any of the items listed under the provisions of Section 2543B of the Act. Reliance is placed on the decisions following-
(1) CIT v. Westem Indian State Motors 167 ITR 395 Raj.
(2) CIT v. Western Indian State Motors 174 ITR 116 Raj
(3) CIT v. Pheros and Co.(P)Ltd. 178 ITR 472 Gau.
(4) CIT v. Orient Beverages Ltd. 247 ITR 230 Cal.
4. On the other hand, the learned representative for the Revenue countered to say in brief by defending the order impugned, besides submitting that interest is penal in nature because loan itself is interest free, and interest was levied only because of the default committed by the assessee. Reliance is placed on the decisions following:
(a) Mewar Motors v. CIT 260 ITR 218 Raj.
(b) Swedeshi Cotton Mills Co. Ltd. 233 ITR 199J SC
Both the above decisions were also relied upon by the Assessing Officer, and rightly confirmed by the CIT(A) too.
5. In reply, the learned counsel for the assessee highlighted that the decisions relied upon by the Assessing Officer and followed by the CIT(A), besides cited by the Departmental Representative too, are two. One of them is rendered by the Hon’ble Rajasthan High Court and the other one is rendered by the Hon’ble Supreme Court. Indeed and in fact, the very same Rajasthan High Court in the cases relied upon by the assessee, viz. in 167 ITR 395 and 174 ITR 116 decided the issue in favour of the assessee. Apart from this, the decisions of Calcutta and Gauhati High Court decisions relied upon by him earlier and noted above, are also in favour of the ‘ assessee. Therefore, there are conflicting decisions on the point at issue rendered not only by different High Courts, but rendered by the very same Hon’ble Rajasthan High Court and as such; the view that favours the assessee should be preferred. It is also respectfully highlighted that only for default of payment of loan, interest has been charged, which only is attributed as penal, whereas it is only compensatory in nature, and that therefore, the decision of the Supreme Court relied upon by the Revenue is distinguishable.
6.1 Rival submissions heard and relevant orders read, including the case-laws cited supra. After doing so, I am of the opinion that the stand of the assessee has substantial force unlike the defence of the Revenue in this appeal, for the reasons following.
6.2 It is an undisputed fact that payment of interest in the instant case has arisen on account of default on the part of the assessee in repaying the interest free sales tax loan. The point in dispute is as to the nature of such interest, viz. whether such interest payment is penal or compensatory. While it is the contention of the assessee that the interest in question is compensatory in nature, as it arises only on account of default in repayment of loan and in terms of the very agreement, the stand of the Revenue is that since the loan itself is interest free, the interest liability arising out of default in repayment of instalment of loan is penal in nature.
6.3 In the case of Swedeshi Cotton Mills Co. Ltd., cited supra, relied upon by the Revenue and cited supra, Hon’ble Supreme Court has held as follows-
Whenever any statutory impost paid by an assessee by way of damages or penalty or interest, is claimed as an allowable expenditure under Section 37(1) of the Income-tax Act, 1961, the assessing authority is required to examine the scheme of the provisions of the relevant statute providing for payment of such impost notwithstanding the nomenclature of the impost as given by the statute, to find out whether it is compensatory or penal in nature. The authority has to allow deduction under Section 37(1) of the Act, wherever such examination reveals the concerned impost to be purely compensatory in nature. Wherever such impost is found to be of a composite nature, i.e., partly of compensatory nature and partly of penal nature, the authorities are obliged to bifurcate the two components of the impost and give deduction tot hat component which is compensatory in nature and refuse to give deduction to that component which is penal in nature.
Even though the above decision of the Apex Court is relied not only by the learned Departmental Representative before us but also by the lower authorities in their orders impugned herein, it does not straight away support the disallowance made in the instant case and clinch the issue in their favour, as it only lays down certain guidelines and holds that any impost has to be examined in the light of the relevant statutory provisions to find out whether it is penal or compensatory in nature, so as to decide whether it could, being of compensatory nature, be allowed as a deduction under Section 37 of the Act.
6.4 In the case of Mewar Motors v. CIT, also relied upon by the
Revenue authorities, and cited supra, Hon’ble Rajasthan High Court held as per the head-note in the context of provisions of Section 43B of the Act as follows-
The object of Section 43B of the Income-tax Act, 1961, is to curb the activities of those tax payers who do not discharge their statutory liability of payment of sales tax or excise duty for long periods but claim deduction in that regard from the income on the ground that the liability to pay this amount had been incurred by them in the relevant previous year. Interest paid is part of the sales tax. Interest payable to the Sales Tax Department is also “tax” and the provisions of Section 43B of the Act are applicable thereto.
(Emphasis added)
6.5 As against the above decision of the Rajasthan High Court, the ratio of which appears to go in favour of the Revenue on the point at issue, it appears that there are quite a few decisions rendered by the very same Rajasthan High Court, deciding this issue in favour of the assessee.
6.6 For that matter, one such decision was referred to in that case 260 ITR 218 itself. That is in the case of CIT v. Udaipur Distillery (1986) 160 ITR 444, wherein it was held as follows-
The liability to pay interest on the failure of an assessee (dealer) to pay tax fee or penalty or on his failure to pay the amount of tax within the period allowed under Section 11B of the Rajasthan Sales Tax Act, 1954, or within the period specified in the notice of demand is a statutory obligation. The liability is automatic. No specific order is required for payment of interest. The rates of interest have also been provided in the Act. Hence, it is a part of sales tax and as sales tax is paid by a dealer for the purpose of carrying on business the amount of interest will, for all purposes, be considered to be an amount spent wholly and exclusively for the purpose of business. If is well settled that neither necessity nor motive nor reasonableness is the test for allowing deduction of expenditure spent wholly and exclusively for the purpose of business under Section 37 of the Income-tax Act, 1961. Therefore, the liability to pay interest is an allowable deduction.
6.7 Further, the very same Rajasthan High Court-Jaipur Bench, in the case of CIT v. Western Indian State Motors, cited supra and relied upon by the assessee has held, following the still earlier decision of the Rajasthan High Court in the case of Rajasthan Central Stores (P) Ltd. v. CIT 156 ITR 90 and after referring to the decision of Apex Court in the case of Mahalakshmi Sugar Mills Co. v. CIT 123 ITR 429 that the interest paid by the assessee to the Sales Tax Department on arrears of sales tax is an admissible deduction under Section 37 of the Income-tax Act, 1961.
6.8 The subsequent decision of the Rajasthan High Court again in the case of CIT v. Western Indian State Motors, cited supra relied upon by the assessee is also to the same effect. It has also referred to the Apex Court decision in the case of Mahalakshmi Sugar Mills, cited supra, besides the Rajasthan High Court decision in the case of that very assessee 167 ITR 395.
6.9 Similarly, in the case of CIT v. Pheros and Co. (P) Ltd., cited supra, Gauhati High Court, considering allowability of interest paid for delay in payment of sales tax under Section 37(1) of the Act, following the decision of the Apex Court in the case of Mahalakshmi Sugar Mills Co. v. CIT, cited supra, held that where interest is levied on account of deprivation of the benefit of the tax for the period during which it has remained unpaid, the same is compensatory in nature, and is not imposed by way of penalty.
6.10 Further, Hon’ble Calcutta High Court, in the case of CIT v. Orient Beverages Ltd., cited supra, considering the nature of interest payable for outstanding municipal taxes and allowability of deduction in respect thereof, applying the ratio of the decisions of the Apex Court in Mahalakshmi Sugar Mills Co. v. CIT, cited supra and of the Calcutta High Court in Russel Properties (P)Ltd. v. CIT 137 ITR 358, held that interest payable for arrears of municipal taxes is really compensatory in nature and not a penalty or tax.
6.11 As may be seen from the foregoing discussion, there appears at the most some divergence of judicial opinion on the nature of interest levied on the delayed payment of sales tax liability, which is akin to repayment of sales tax loan in the instant case. While the only decision of the Rajasthan High Court in the case of Mewar Motors v. CIT, cited supra, relied upon by the lower authorities in the orders impugned herein as well as by the learned Departmental Representative before me, is in favour of the Revenue, in all other cases discussed above, out of which we have noted four decisions rendered by the Rajasthan High Court itself, including two of them cited by the assessee only, which decided the issue in favour of the assessee.
6.12 In all the above cases, reliance is placed on the decision of the Apex Court in the case of Mahalakshmi Sugar Mills, cited supra, wherein considering allowability of interest on cess, it was held that interest for which liability to pay has accrued as soon as the prescribed date for payment of the cess has been crossed, is only compensatory in nature. The Apex Court has brought out the distinctive features between payments of penal nature and payments of compensatory nature, as per the relevant portion of the head note, reads as under-
Interest payable on an arrear of cess under Section 3(3) is in reality part and parcel of the liability to pay cess. It is an accretion to the cess. The arrears of cess “carries” interest; if the cess is not paid within the prescribed period a larger sum will become payable as cess. The enlargement of the cess liability is automatic under Section 3(3). No specific order is necessary in order that the obligation to pay interest should accrue. The liability to pay interest is as certain as the liability to pay cess. As soon as the prescribed date is crossed without payment of the cess, interest begins to accrue. It is not a penalty, for which provision has been separately made by Section 3(5). Nor is it a penalty within the meaning of Section 4, which provides for a criminal liability and criminal prosecution. The penalty payable under Section 3(5) lies in the discretion of the collecting officer or authority. In the case of the penalty under Section 4, no prosecution can be instituted unless, under Section 5(1), a complaint is made by or under the authority of the Cane Commissioner of the District Magistrate. In truth, the interest provided for under Section 3(3) is in the nature of compensation paid to the Government for delay in the payment of cess.
6.13 On a careful consideration of totality of the facts and entirety of the circumstances of the instant case, in the light of the ratio decidendi of the aforesaid case-laws, I am of the considered opinion that the interest payment in the instant case is only of compensatory nature. Just because the Sales Tax Joan itself is interest free, it cannot be said, as contended by the Revenue, that payment of interest in the event of default in payment of instalment of loan is penal in nature. On the other hand, examining the matter in the light of the distinctive features between an impost of, penal nature and an impost of compensatory nature well brought out by the Apex Court in the case of Mahalakshmi Sugar Mills, the relevant portion of the head note of which decision is extracted above, I am of the considered view that since the interest in the event of default in the payment of instalment of Sales Tax loan in the instant case is automatic and such additional liability to pay interest is well within the knowledge of the assessee as well, and since charging or otherwise of such interest is not within the discretion of any authority as the default in the payment of instalment is not an act of penal nature, the obvious conclusion is that the interest payable in the event of default in the payment of instalment of sales tax loan is only compensatory in nature.
6.14 In this view of the matter, the disallowance made by the Assessing Officer and sustained by the GIT(A) by his order impugned herein is deleted hereby, accepting the contentions of the assessee in this appeal.
7. In the result, appeal of the assessee is allowed hereby.