PETITIONER:
MAHALAXMI SUGAR MILLS CO. LTD.
Vs.
RESPONDENT:
COMMISSIONER OF INCOME-TAX, DELHI, NEW DELHI
DATE OF JUDGMENT09/04/1980
BENCH:
PATHAK, R.S.
BENCH:
PATHAK, R.S.
UNTWALIA, N.L.
VENKATARAMIAH, E.S. (J)
CITATION:
1980 AIR 754 1980 SCR (3) 421
1980 SCC (3) 475
CITATOR INFO :
R 1992 SC 847 (62)
ACT:
Indian Income Tax Act 1922-Section 10(2) (xv)-Interest
paid on arrears of sugarcane cess-Whether penalty-Interest
if a permissible deduction.
HEADNOTE:
Section 3(2) of the U.P. Sugarcane Cess Act, 1956
provides that the owner of a sugar factory shall pay cess on
sugarcane coming into the premises of a factory for use
therein, on such date and at such place as may be
prescribed. Sub-section (3) provides that if the cess is not
paid by the specified date, interest at six per cent per
annum is payable on the arrears from the specified date to
the date of payment. Where a person is in default in making
the payment of the cess, sub-section (5) provides that in
addition to the amount of the arrears and interest a sum not
exceeding ten per cent shall be recoverable by way of
penalty from the person liable to pay the cess.
In respect of three assessment years the appellant-
assessee, a manufacturer of sugar, in its income tax returns
claimed deduction of certain sums paid by it by way of
interest on arrears of cess due under the U.P. Sugarcane
Cess Act, 1956. The Income Tax Officer disallowed the claim.
The Appellant Assistant Commissioner, whose view was upheld
by the Appellate Tribunal, held that the payment of interest
constituted a permissible deduction.
On reference the High Court held that the interest paid
on the arrears did not fall within the scope of s. 10(2)
(xv) of the Indian Income Tax Act, 1922 for the reason that
it was paid by way of penalty for an infringement of the
law.
Allowing the appeal,
^
HELD : The interest paid under s. 3(3) of the Cess Act
cannot be described as a penalty paid for an infringement of
the law. The assessee is entitled to claim the sum as a
deduction under section 10(2) (xv) of the 1922 Act as
expenditure laid out wholly or exclusively for the purpose
of the business. [427E]
(a) The interest payable on arrears of cess under s.
3(3) is in reality part and parcel of the liability to pay
cess. It is an accretion to the cess. Under s. 3(3) this
enlargement of the cess liability is automatic and no
specific order is necessary in order that the obligation to
pay interest under this sub-section should accrue. The
liability to pay interest is as certain as the liability to
pay the cess. The interest payable is in the nature of
compensation paid to the Government for delay in the payment
of cess. It is not by way of penalty. [425G-H]
422
(b) Interest on arrears of cess is not a penalty
because provision for imposing penalty has been made
separately by s. 3(5). It is also not a penalty within the
meaning of s. 4 which provides for criminal liability and
criminal prosecution. The penalty payable under s. 3(5) lies
in the discretion of the collecting officer or authority.
For imposing penalty under s. 4 no prosecution can be
instituted unless a complaint is made by or under the
authority of the Cane Commissioner under s. 5(1) of the Cess
Act. [426A-B]
(c) The procedure for collecting interest on arrears is
different from the procedure for recovering penalty imposed
under s. 3(5). The Collector proceeds to recover the arrear
of cess as if it were an arrear of land revenue on receipt
from the authority concerned of a certificate under s. 3(6)
specifying the amount of arrears including interest due. The
words "specifying the amount of arrears including interest"
show that the interest is part of the arrears of cess. In
the case of penalty imposed under s. 3(5) a separate
provision for recovery has been made under s. 3(7). Although
the manner of recovery of penalty provided by s. 3(7) is the
same as the manner for recovery provided by s. 3(6) the
Legislature has dealt with it as some thing distinct from
the recovery of arrears of cess including interest. [426C-E]
JUDGMENT:
CIVIL APPELLATE JURISDICTION : Civil Appeal Nos. 2440-
2442 of 1972.
From the Judgment and Order dated 25-10-1971 of the
Delhi High Court in Income Tax Reference Nos. 40 & 41 of
1970.
A. K. Sen and Mr. Bishamber Lal for the Appellant.
P. G. Ghokhale and Miss A. Subhashini for the
Respondent.
The Judgment of the Court was delivered by
PATHAK, J.-This appeal by certificate granted by the
Delhi High Court raises the question whether interest paid
on arrears of cess under s. 3 (3) of the U.P. Sugarcane Cess
Act, 1956 is a permissible deduction under s. 10 (2) (xv) of
the Indian Income Tax Act, 1922.
The assessee is a public limited company engaged in the
business of the manufacture and sale of sugar. In its
income-tax return for the assessment year 1959-60 (the
previous year being the period ending 30th June, 1958) the
assessee claimed a deduction of Rs. 1,20,859/- paid as
interest on arrears of cess due under the U.P. Sugarcane
Cess Act, 1956. The Income-tax Officer disallowed the claim,
but the Appellate Assistant Commissioner held that the
payment of interest constitute a permissible deduction and
this view was affirmed by the Income Tax Appellate Tribunal.
For the next assessment year 1960-61, (the previous year
ending 30th June, 1959), the assessee claimed a sum of Rs.
1,83,731/- paid by way of interest on the arrears of cess.
The claim met with the same fortune, disallowed by the
Income Tax Officer but upheld by the Appellate Assistant
Commissioner and the Appellate Tribunal. At the instance of
423
the Revenue, the Appellate Tribunal referred the following
question of law to the Delhi High Court in respect of the
assessment years 1959-60 and 1960-61:
“Whether, on the facts and in the circumstances of
the case, the Tribunal was justified in allowing the
interest of Rs. 1,20,859/- and Rs. 1,83,731/-, paid by
the assessee on the arrears of cess in the assessment
years 1959-60 and 1960-61 respectively, as revenue
expenditure ?”
For the assessment year 1961-62 also the previous year
of which ended 30th June, 1960 the assessee claimed a
deduction of Rs. 2,00,439/- on account of interest paid by
it on arrears of cess. This claim also was rejected by the
Income Tax Officer but allowed by the Appellate Assistant
Commissioner and the Appellate Tribunal. The Revenue
obtained a reference to the High Court on the question:
“Whether, on the facts and in the circumstances of
the case, the Tribunal was justified in allowing the
interest of Rs. 2,00,439/-, paid by the assessee on the
arrears of cess, as revenue expenditure?”
The references were disposed of by the High Court by
its judgment dated 25th October 1971. The questions were
answered in the negative. The High Court took the view that
the claim of the assessee did not satisfy the provisions of
s. 10 (2) (iii) of the Indian Income Tax Act, 1922 because
it was not interest paid on borrowed capital, and it did not
fall within the scope of s.10 (2) (xv) of the Act because it
was paid by way of penalty for an infringement of the Act.
The High Court than certified under s. 66 (A) (2) of the Act
that the cases were fit for appeal to this Court.
Learned counsel for the assessee has made no attempt to
justify the claim under s. 10 (2) (iii) and we are,
therefore, relieved of the necessity of examining the
validity of the claim by reference to that provision. The
case has been argued before us on the basis that it falls
under s. 10 (2) (xv).
The validity of the U. P. Sugarcane Cess Act, 1956 (the
“Cess Act”) was challenged by the assessee and several other
sugar manufacturing companies by petitions under Article 226
of the Constitution in the Allahabad High Court. The High
Court admitted the writ petitions and granted an order
suspending the operation of the Act. The High Court, on
final hearing, dismissed the writ petitions. But
subsequently on appeal this Court declared the Cess Act
ultra vires on
424
the ground that the Act fell beyond the competence of the
State Legislature.
Thereafter, on 31st January, 1961, the President
promulgated the U.P. Sugarcane Cess (Validation) Ordinance,
1961 validating the cess imposed, assessed or collected by
the Government of Uttar Pradesh during the period 26th
January, 1950 to the date of the commencement of the
Ordinance (3rd February, 1961). The ordinance was replaced
by the U.P. Sugarcane Cess (Validation) Act, 1961 (the
“Validation Act”).
The question whether the interest paid by the assessee
under s. 3(3) of the Sugarcane Cess Act, 1956 can be allowed
under s. 10(2) (xv) of the Income Tax Act requires us to
examine the relevant provisions of the Cess Act. The Act, as
its long title states, is “an Act to amend and consolidate
the law relating to the imposition of cess on sugarcane
intended for use, consumption in or sale to a factory”. The
relevant provisions of s.3 declare:
“3. Imposition of cess-(1) The State Government
may by notification in the official Gazette impose a
cess not exceeding four annas per maund on the entry of
the cane into the premises of a factory for use,
consumption or sale therein. .. .. .. ..
(2) The cess imposed under sub-section (1) shall
be payable by the owner of the factory and shall be
paid on such date and at such place as may be
prescribed.
(3) Any arrear of cess not paid on the date
prescribed under sub-section (2) shall carry interest
at 6 per cent per annum from such date to date of
payment.
(4) The State Government may, for the purpose of
assessment and collection of the cess, appoint officers
and authorities and may also prescribe the manner in
which the cess shall be assessed and collected.
(5) Where any person is in default in making the
payment of the cess, the officer or authority empowered
to collect the cess may direct that in addition to the
amount of the arrears and interest a sum not exceeding
10 per cent thereof shall by way of penalty be
recovered from the person liable to pay the cess.
(6) The officer or authority empowered to collect
the cess may forward to the Collector a certificate
under his signature specifying the amount of arrears
including inte-
425
rest due from any person, and on receipt of such
certificate the Collector shall proceed to recover the
amount specified from such person as if it were an
arrear of land revenue.
(7) Any sum imposed by way of penalty under sub-
section (5) shall be recoverable in the manner provided
in sub-section (6) for the recovery of the arrear of
cess”.
Then follows s.4 and it provides:
“4. Penalties-If any person defaults in the
payment of cess imposed under sub-section (1) of See.3,
or, contravenes any provision of any rule made under
this Act, he shall without prejudice to his liability
therefor under sub-section (5) of Sec.3 be liable to
imprisonment up to six months or to a fine not
exceeding rupees five thousand or both and in the case
of continuing contravention to a further fine not
exceeding rupees one thousand for each day during which
the contravention continues”.
It is apparent that section 3(2) requires the payment
of cess on the date prescribed under the rules. Rule 4 of
the U.P. Sugarcane Cess Rules, 1956 provides that the cess
due on the sugarcane entering into the premises during the
first fortnight of each calendar year must be deposited in
the Government treasury by the twenty second day of that
month and the cess due for the remainder of the month must
be deposited before the seventh day of the next following
month. If the cess is not paid by the specified date, then
by virtue of s.3(3) the arrear of cess will carry interest
at the rate of six per cent per annum from the specified
date to the date of payment. Section 3(5) is a very
different provision. It does not deal with the interest paid
on the arrears of cess but provides for an additional sum
recoverable by way of penalty from a person who defaults in
making payment of cess. It is a thing apart from an arrear
of cess and the interest due thereon.
Now the interest payable on an arrear of cess under s.
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 s.
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.
426
It is not a penalty, for which provisions has been
separately made by s.3(5). Nor is it a penalty within the
meaning of s.4, which provides for a criminal liability and
a criminal prosecution. The penalty payable under s.3(5)
lies in the discretion of the collecting officer or
authority. In the case of the penalty under s.4, no
prosecution can be instituted unless, under s.5(1), a
complaint is made by or under the authority of the Cane
Commissioner or the District Magistrate. There is another
consideration distinguishing the interest payable under
s.3(3) from the penalty imposed under s.3(5). Section 3(6)
provides that the officer or authority empowered to collect
the cess may forward to the Collector a certificate under
his signature specifying the amount of arrears including
interest due from any person, and on receipt of such
certificate the Collector is required to proceed to recover
the amount specified from such person as if it were an
arrear of land revenue. The words used in s.3(6) are
“specifying the amount of arrears including interest”, that
is to say that the interest is part of the arrear of cess.
In the case of a penalty imposed under s.3(5), a separate
provision for recovery has been made under s.3(7). Although
the manner of recovery of a penalty provided by s.3(7) is
the same as the manner for recovery provided by s.3(6) of
the arrears of cess, the Legislature dealt with it as
something distinct from the recovery of the arrears of cess
including interest. In truth, the interest provided for
under s.3(3) is in the nature of compensation paid to the
Government for delay in the payment of cess. It is not by
way of penalty. The provision for penalty as a civil
liability has been made under s.3(5) and for penalty as a
criminal offence under s.4. The Delhi High Court proceeded
entirely on the basis that the interest bore the character
of a penalty. It was, according to the learned Judges “penal
interest”. The learned Judges failed to notice s.3(5) and
s.4 and the other provisions of the Cess Act.
We have been referred by the Revenue to Mahabir Sugar
Mills (P) Ltd. v. Commissioner of Income Tax, U.P.(1) and
Commissioner of Income-Tax West Bengal v. A. K. Das,(2) but
in those two cases the Delhi High Court and the Calcutta
High Court respectively were concerned with a claim to
deduction on account of penalty paid under s.3(5) of the
Cess Act. Reliance was also placed on Commissioner of
Income-Tax v. Oriental Carpet Manufacturers (India) P.
Ltd.(3) In that case, the High Court of Punjab and Haryana
laid down that
427
interest paid by an assessee on account of delay in payment
of the provisional demand of tax is not a permissible
deduction under s.36 (1) (iii) and s.37 of the Income Tax
Act. The learned Judges observed that the liability to tax,
although arising out of a business activity, could not be
said to be a liability related to the assessee’s, business.
It is not necessary for us to express any opinion on the
decision. The case is distinguishable because we are
concerned with a particular statutory scheme enacted in ss.3
and 4 of the Cess Act before us. Our attention has also been
invited to Suraya Sugar Mills (P) Ltd. v. Commissioner of
Income-Tax,(1) where a Full Bench of the Allahabad High
Court has held that the payment of interest under s.3(3) of
the U.P. Sugarcane Purchase Tax Act, 1961 is a penal
liability which accrues on an infraction of the law. Section
3(3) of the U.P. Sugarcane Purchase Tax Act, 1961 does seem
to be in pari materia with s. 3(3) of the Cess Act. But we
think we. should resist the blandishment to sit in judgment
over that decision when it is not in appeal before us. We
are concerned solely with the nature of the liability to pay
interest under s.3(3) of the Cess Act. A court should be
slow to succumb to the temptation of deciding questions on
the construction of a statute not directly before it.
In our opinion, the interest paid under s.3(3) of the
Cess Act cannot be described as a penalty paid for an
infringement of the law. As that is the only ground on which
the Revenue resists the claim of the assessee to a deduction
of the interest under s.10(2)(xv) of the Income-Tax Act, the
assesee is entitled to succeed. There is no dispute that the
payment of interest represents expenditure laid out wholly
or exclusively for the purpose of the business. There is
also no dispute that it is in the nature of revenue
expenditure.
In the result, the appeal is allowed, the judgment
dated 25th October, 1971 of the Delhi High Court is set
aside and the question referred by the Income Tax Appellate
Tribunal are answered in the affirmative, in favour of the
assessee and against the Revenue. The assessee will be
entitled to its costs of these appeals.
P.B.R. Appeal allowed.
428