ORDER
Per Shri Pradeep Parikh, AM. – This is an appeal by the revenue arising out of the order of the ld. CIT (Appeals) dated 23-4-1990. It pertains to assessment year 1988-89 and the only ground raised is as follows :
“On the facts and in the circumstances of the case the, CIT (Appeals) has erred in deleting addition of Rs. 79,003 made by disallowing the claim of interest for which only provisions was made and the liability of even the original demands or electricity charge amounting to Rs. 66,952 was not accepted but contested by the assessee.”
2. The facts, briefly stated, are that the State Electricity Board had raised a demand on the assessee, pertaining to some earlier years. The fact that it was a statutory liability is not in dispute. The assessee contested this levy but the held against the assessee. However, the assessee took some time to pay the demand so crystallised and hence was charged interest of Rs. 79,003 for the delayed payment. The interest remained unpaid at the year end made a provision thereof in the accounts and debited the sum of electricity power account. As the same had not been paid in the accounting year relevant to the assessment year under appeal, the Assessing Officer disallowed the same and added the entire sum of Rs. 79,003 to the income.
3. Being aggrieved by this action of the Assessing Officer, the assessee preferred an appeal. The ld. CIT (Appeals) deleted the addition on the ground that as the demand had cropped up during this year and as the ground followed the mercantile system of accounting, it was entitled to deduction.
4. The department is aggrieved with the view taken by the first appellate authority and is, therefore, in appeal before us.
5. The ld. Department Representative strongly opposed the order of the ld. CIT (Appeals) and vehemently pleaded for the restoration of the order of the Assessing Officer.
6. The ld. counsel, by relying on certain judicial pronouncements pleaded that the interest levied by Electricity Board was a liability in praesenti and hence ought to have been allowed. Further, it was pleaded that the assessee has been consistently following the mercantile system of accounting according to which the expenses have to be allowed on accrual basis. The final limb of his argument was that the Assessing Officer erred in invoking the provisions of section 43B as interest payment did not fall within the purview of section 43B. It was wrong on the part of the Assessing Officer, the ld. counsel contended, to equate the impugned interest with that of any tax, duty, cess, etc., as it was a usual expenditure and that it was compensatory in nature. He, therefore, pleaded that the order of the ld. CIT (Appeals) be confirmed.
7. At the very first instance, we are unable to agree with the contentions made on behalf of the assessee. The jurisdictional High Court, in the case of CIT v. Udaipur Distillery [1986] 160 ITR 444 (Raj.) has clearly held that the liability of interest on delayed payment of sales-tax is a statutory obligation of the dealer and hence is a part of sales-tax. The Honble High Court had based its decision following the rulings of the Honble Supreme Court in several cases and in particular in the case of Mahalakshmi Sugar Mills Co. v. CIT [1980] 123 ITR 429 and that in the case of Haji Lal Mohd. Biri Works v. State of U.P. [1973] 32 STC 496.
8. At this juncture, it would be interesting to note that Shri Kalia also relied on the judgment of the Honble Supreme Court in the case of Mahalakshmi Sugar Mills Co. (supra). His stress was on the following observation made in the said judgment :
“In truth, the interest provided for …. is in the nature of compensation paid to the Government for delay in the payment of cess.”
9. By laying stress on the above observation, the ld. counsel wanted to drive home the point interest on delayed payment of any tax, duty or cess was distinct from the said tax, duty or cess and since it was merely compensatory in nature, it had to be allowed as a deduction as per the system of accounting followed by the assessee, without invoking the provisions 43B.
10. In our opinion, the ld. counsel did not read the above observation in the context in which it was required to be read. The Honble Supreme Court made the above observation to distinguish such interest from penalty. In the immediate next sentence, the Supreme Court concluded its discussion by saying “It is not by way of penalty”. In the earlier part of its discussion also, the Supreme Court has observed that interest payable on an arrear of cess is in reality part and parcel of the liability to pay cess and is an accretion to the cess.
11. What the Supreme Court concluded in the said case was that interest on delayed payment of a statutory liability is part of that statutory liability and if that statutory liability is an allowable business expenditure, such interest shall also be an allowable expenditure. Hence, the reliance of the ld. counsel on this decision was not well-founded.
12. On the same analogy it follows that when a statutory liability has to be allowed as a deduction only on actual payment, the interest thereon for delayed payment of the liability also will have to be allowed on actual payment only.
13. The analogy so drawn sounds to be logical and, in our opinion, fits into the philosophy behind the provisions of section 43B. Some assessees used to provide for the liability and claim deduction, though actual payment may not have been made, thereby depriving the Government of its revenue from both the sides. When a statutory liability is not paid in time, interest would follow. This interest, is no doubt compensatory in nature. But the moot question is : Is the Government really compensated by merely making a provision ? First, the assessee deprived the revenue by not making the statutory payment in time. Interest followed which was supposed to be a compensation. But the assessee claimed deduction thereof without actually compensating the Government.
14. Hence, the plea of the assessee cannot be accepted. In our opinion, the ld. CIT (Appeals) erred in allowing the deduction of Rs. 79,003 and hence direct the restoration of the Assessing Officer on this issue.
15. In the result, the appeal is allowed.