ORDER
Moksh Mahajan, Accountant Member
1. The sole contention raised in this appeal is whether the claim of the assessee at Rs. 1,5.0,563 in respect of interest and penalty on late payment of Sales-tax is allowable under Section 37(1) of the Act or not.
2. According to the learned AR Shri D.C. Jain, the sales-tax assessments for the years 1981-82 and 1982-83 were finalised on 11-1-1983 and 27-10-1983 respectively. As per the assessment orders for the assessment years 1981-82 and 1982-83 the interest was charged at Rs. 35,018 and Rs. 86,834 respectively. The aforesaid amount of Rs. 1,21,857 was included in the claim of Rs. 1,50,541 filed by the assessee and disallowed by the revenue authorities. The difference was on account of penalty as well tax charged at Rs. 24,250 and Rs. 4,434 respectively. The interest was paid on account of delayed payment of the sales-tax becoming due on the quarterly returns filed by the assessee. The interest so charged was of compensatory nature and hence was. allowable under Section 37(1) of the Act. This is as held in various decisions of both the Supreme Court as well the High Courts. To name a few they are :-
(1) Mahalakshmi Sugar Mills Co. v. CIT [1980] 123 ITR 429 (SC);
(2) G.G. Sanghi v. CIT [1985] 156 ITR 95 (Raj.);
(3) Prakash Cotton Mills (P.) Ltd. v. CIT [1993] 201 ITR 684 (SC) ;
(4) CIT v. Udaipur Distillery [1986] 160 ITR 444 (Raj.).
3. According to the learned Departmental Representative on the other hand, the allowability of interest, fines and penalty under Section 37 of the Act in such cases Ls dependent on the nature of the payment whether compensatory or penal. Their Lordships of Supreme Court in the case of Standard Batteries Ltd. v. CIT[ 1995] 211 ITR 444 have reiterated their earlier stand as taken in the case of Prakash Cotton Mills (P.) Ltd. (supra) which is that “The deduction under Section 37(1) of the Income-tax Act is allowable in case it is found that the same is of purely compensatory in nature. However, where such impost is found to be a composite nature, i.e., partly of compensatory nature and partly of penal nature, the same have to be bifurcated and the deduction is to be allowed in respect of component which is of compensatory in nature”. Thus, in the case of the assessee, the issue has to be decided on examination of the scheme of the Act under which the impost was levied.
4. We have been careful consideration to the submissions as made before us. As held by their Lordships of Supreme Court in the case of Prakash Cotton Mills (P.) Ltd. (supra), the allowability of statutory impost under Section 37(1) whether by way of damages or penalty or interest is to be considered on examination of the scheme of the provisions of the relevant statute providing for the payment of such impost. In this respect we find that the interest and the penalty have been levied under the Central Sales-tax Act for both the assessment years 1981-82 and 1982-83. These are as under:
Assessment Year 1981-82
Interest:
———————————————————————-
Quarter Tax due Late by Amount Interest
-----------------------------
Rs. Rs.
----------------------------------------------------------------------
1st 31-7-1981 18 months 5,741 1,537
2nd 30-10-1981 15 months 8,400 1,848
3rd 31-12-1981 12 months 18,400 3,220
4th 30-4-1982 9 months 2,18,548.61 28,418
Penalty under Section 9(2) of the Act - 3,000
Assessment Year 1982-83
Interest for first quarterly payment 22,365
Interest for second quarterly payment 31,490
Interest for third quarterly payment 30,966
Interest for fourth quarterly payment (Rs. 13+40) 53
Interest for not making payment during
February for January 1983 560
Interest for not making payment during March
for February 1983 810
Interest for not making payment during April for
March 1983 560
Penalty under Section 9(2) of the Act 20,000
Thus it is clear that both the interest and the penalty have been levied under Section 9(2) of the Central Sales-tax Act. Sections 9(2) and (2A) of the Central Sales-tax Act as these were there at relevant period, read as under:-
9(2) Subject to the other provisions of this Act and the rules made there under, the authorities for the time being empowered to assess, re-assess, collect and enforce payment of any tax under the general sales tax law of the appropriate State shall, on behalf of the Government of India, assess, re-assess, collect and enforce payment of tax, including any penalty, payable by a dealer under this Act as if the tax or penalty payable by “such a dealer, under this Act is a tax or penalty payable under the General sales tax law of the State; and for this purpose they may exercise all or any of the powers they have under the general sales tax law of the State; and the provisions of such law, including provisions relating to returns, provisional assessment, advance payment of tax, registration of the transferee of any business, imposition of the tax liability of a person carrying on business on the transferee of, or successor to , such business, transfer of liability of any firm or Hindu undivided family to pay tax in the event of the dissolution of such firm or partition of such family, recovery of tax from third parties, appeals, reviews, revisions, references, [refunds, rebates, penalties,] [charging or payment of interest,] compounding of offences and treatment of documents furnished by a dealer as confidential shall apply accordingly :
Provided that if in any State or part thereof there is no general sales tax law in force, the Central Government” may, by rules made in this behalf make necessary provision for all or any of the matters specified in this sub-section.
(2A) All the provisions relating to offences and penalties (including provisions relating to penalties in lieu of prosecution for an offence or in addition to the penalties or punishment for an offence but excluding the provisions relating to matters provided for in Sections 10 and 10A) of the general sale tax law of each State shall, with necessary modifications, apply in relation to the assessment, re-assessment, collection and the enforcement of payment of any tax required to be collected under this Act in such State or in relation to any process connected with such assessment, re-assessment, collection or enforcement of payment as if the tax under this Act were a tax under such sales tax law.
As per the provisions, the State authorities are to assess, re-assess, collect and enforce payment of tax including any penalty payable under the Act as it is a tax or penalty payable under the General Sales-tax Law of the State. For this they may exercise all powers they have under the General Sales-tax Law of the State. This includes power to impose penalty along with other powers namely, review, revision, reference and compounding of offences, etc. Thus Section 9(2) of the Central Sales-tax Act adopts the State procedural law. In the case of assessee it is the Haryana General Sales-tax Act. Under Section 25 of the aforesaid Act, every registered dealer is to submit return along with the payment to tax on such dates as are prescribed. In the rules, quarterly returns have been prescribed. Every return is to be submitted within 30 days of the close of the quarter along with the proof of payment of tax. In case of failure to pay tax, simple interest is chargeable at the rate of 1 % for the first month and 1 ¥2% per month thereafter. These provisions have been made applicable to Central Sales-tax Act retrospectively by Act No. 103 of 1976. Thus statutory rate of interest has been provided as well the period for which a person is required to pay interest. No discretion is left with the Assessing Officer with any of these matters. The levy of interest is automatic and is by operation of law. The question is whether the impost under these provisions which are by way of recovery procedure, could be held as compensatory in nature or to be deemed as penal in character.
5. For this reference is made to Section 9(2A) of the Central Sales-tax Act. The provisions of Section 9(2A) bring the commission or omission constituting offences and penalties of the general sales tax law of each State so as to constitute offences and penalties under the Central Sales-tax Act, 1956. In addition to interest charged, penalty for late payment of tax has been imposed.
Thus both interest and penalty have been levied by virtue of Section 9(2) of the Central Sales-tax Act. In the circumstances it cannot be said that two penalties have been prescribed for the same Act. As is evident from the order, the Sales-tax authority has exercised his discretion in imposing penalty at Rs. 20,000 which is stated to be a token one. While doing so, he has also considered the explanation of the assessee in regard to nonavailability of funds. Neither the same is found to be automatic nor chargeable at fixed rate. The assessee has also been provided with an opportunity of being heard before levy of the same. Hence, it has characteristic of being penal in nature and thus not allowable.
6. On the other hand the interest chargeable is at a fixed rate which is automatic. There is no need to examine whether there is any reasonable cause for delay. Hence it cannot be termed as penal one as distinguished from wilful default. It is compensatory in nature, the same having been provided for speedy and prompt collection of revenue. For this we would rely on decisions of the various Courts. In the case of Associated Cement Co. Ltd. v. CTO[1 981] 48 STC 466, their Lordships of Supreme Court have held that such interest is compensatory in character and not penal.
Furthermore in case of CIT v. Udaipur Distillery [1986] 63 STC 126 (as given at p. 1.274 in the Commentary of the General Sales-tax Law in Haryana (1989) 3rd Edition by B.L. Gulati) it was held by Rajasthan High Court, “the liability of interest on delayed payment of sales tax is a statutory obligation of the dealer and is automatic, and no specific order is required. Thus, it is a part of sales tax and as the 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. A particular amount is an allowable deduction, if it is spent wholly and exclusively for the purposes of business. It 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 amount of interest paid on the sales tax is an allowable deduction under Section 37 of the Income-tax Act. Haji Lal Mohd. Biri Works v. State of U.P. [1973] 32 STC 496 (SC) was followed”. Similarly in the case of G.G. Sang hi(supra), the Hon’ble Rajasthan High Court have held that interest payable under Section 11B of the Rajashtan Sales-tax Act, 1954 on delayed payment of sales tax is not a penalty but revenue expenditure deductible under Section 37(1) of the Act. In similar circumstances, their Lordships of Supreme Court in the case of Mahalakshmi Sugar Mills Co. (supra) have held, “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 arrear 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 with the meaning of Section 4, which provides for a criminal liability and a 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 under the authority of the Cane Commissioner or the District Magistrate. In truth, the interest provided for under Section 3(3) is in the nature of compensation paid to the Govt. for delay in the payment of cess”.
7. Thus on examination of the statutory provisions of Section 9(2) of the Central Sales-tax Act, we are of the considered view that the interest claimed at Rs. 1,21,857 is compensatory in nature and is hence allowable as a deduction under Section 37(1) of the Act. The penalty however is not allowable.
8. In the result, the appeal is partly allowed.