JUDGMENT
Sudhindra Mohan Guha, J.
1. In the present reference under Section 256(1) of the Income-tax Act, 1961, a very short point calls for our determination, namely, ” whether the delayed payment of cess is allowable as business expenditure ? ”
2. This reference relates to the assessment years 1967-68 and 1969-70 and the corresponding accounting period ended on 30th September, 1966, and 30th September, 1968, respectively. The assessee carries on the business of manufacture and sale of sugar. The sugar factory is situated at Harknua in the district of Saran, North Bihar.
3. Since the assessee did not pay the cess within the due date, the Bihar Government charged interest for the delayed payment of cess. The assessee-company claimed such interest amounting to Rs. 45,102 in the assessment year 1967-68. It also claimed Rs. 66,000 in the assessment year 1969-70 as admissible deductions before the Income-tax Officer. It was, however, held by the Income-tax Officer that the delayed payment of cess could not be treated as normal incident to the assessee’s business and the levy of interest for irregular payment of cess was in the nature of penal measure. The claims preferred by the assessee for the assessment years 1967-68 and 1969-70 were disallowed.
4. The assessee preferred appeals before the Appellate Assistant Commissioner who sustained the disallowance of Rs. 46,102 for the assessment year 1967-68 but the claim in the assessment year 1969-70 preferred by the assessee was allowed.
5. As a result, the assessee preferred an appeal before the Tribunal for the assessment year 1967-68 and the department preferred an appeal for the assessment year 1969-70. It was urged on behalf of the assessee that the interest paid for the delayed payment of cess was an admissible deduction and the payment was not in the nature of a penalty. It was further contended that if the assessee had to borrow money for the payment of cess, the assessee would have paid a high interest on such loans and it was cheaper to pay interest to the Bihar Government as it was at a lesser rate. The revenue, however, contended that the interest paid for the delayed payment of cess was in the nature of penalty and could not be allowed as a deduction. According to the department, the interest paid could not be allowed either under Section 36(1)(iii) or under Section 28(1) or under Section 37(1) of the Income-tax Act, 1961.
6. The Tribunal held that the penal interest paid for the delayed payment of cess could not be said to be incidental to the carrying on of the business or arising out of the business, nor could it be said that the same was paid wholly and exclusively for the purpose of business. For nonpayment of cess within the prescribed date penal interest was leviable due to infraction of law and so the interest paid could not be allowed, in the opinion of the Tribunal, as a business expenditure. The Tribunal relied on the decision of the Supreme Court in the case of Haji Aziz and Abdul Shakoor Bros. v. Commissioner of Income-tax [1961] 41 ITR 350. The Tribunal also relied on the decision of the Delhi High Court in the case of Commissioner of Income-tax v, Mahalaxmi Sugar Mills Ltd. [1972] 85 ITR 320, wherein it was held that the interest paid for the delayed payment of cess could not be said to be incidental to the carrying on of the business and as such could not be allowed as a deduction. The Tribunal also referred to the decision of this court in Deoria Sugar Mills Ltd. v. Commissioner of Income-tax , wherein it was held that the penalty paid under Section 3(5) of the U. P. Sugarcane Cess Act could not be said to arise out of the carrying on of the business of the assessee or to be incidental to it and it was not allowable as a business expenditure.
7. In the result, the Tribunal upheld the disallowance of Rs. 46,102 in the assessment” year 1967-68 and the order of the Appellate Assistant Commissioner for the assessment year 1969-70 allowing the sum of Rs. 66,000 was set aside and the addition of that amount was restored.
8. On the above facts, the following question was referred to this court under Section 256(1) of the Income-tax Act, 1961, for opinion :
“Whether, on the facts and in the circumstances of the case, the interest paid for the delayed payment of cess is allowable as business expenditure ? ”
9. It is argued on behalf of the assessee that the authorities below have erred in disallowing the claim of interest amounting to Rs. 48,102 and Rs. 66,000 for the assessment years 1967-68 and 1969-70, respectively. The interest was said to have been paid for default in payment of cess within the due date fixed by the Bihar Government. This delayed payment of cess, according to the assessee, was an admissible deduction and the payment, in no way, can be said to be in the nature of penalty.
10. The learned counsel for the revenue relies on the decision of the Delhi High Court in Commissioner of Income-tax v. Mahalaxmi Sugar Mills Ltd. [1972] 85 ITR 320. It was held therein that, as the penal interest was paid by the assessee as penalty for omission on the part of the assessee to deposit the cess in time, the amount could not be treated as a legitimate business expense either under Section 10(1) or under Section 10(2)(xv) of the Indian Income-tax Act, 1922. It was further held that the interest paid by the assessee could not be deducted under Section 10(2)(iii) as no capital was borrowed by the assessee and no relationship of creditor and debtor came into existence whereby the assessee undertook to pay interest to the creditor.
11. The learned counsel for the revenue also refers to the decision of this court in Waldies Ltd. v. Commissioner of Income-tax . It was found therein that the payment of interest on the amounts utilised from the overdraft of a bank for payment of taxes was not an allowable deduction in computing the total income of the business of the assessee in the assessment year 1971-72, that is, before introduction of Section 80V in the Income-tax Act, 1961.
12. The Supreme Court in Haji Aziz and Abdul Shakoor Bros. v. Commissioner of Income-tax [1961] 41 ITR 350 has laid down the law on the point. An expenditure cannot be allowed for deduction unless it is a commercial loss in trade and a penalty imposed for breach of the law during the course of trade cannot be a business loss. If a sum is paid by an assessee conducting his business, because in conducting it he has acted in a manner which has rendered him liable to penalty, it cannot be claimed as a deductible expense. It must be a commercial loss and in its nature must be contemplable as such. Their Lordships were pleased to observe that infraction of the law is not a normal incident of business and, therefore, only such disbursements can be deducted as are really incidental to the business itself.
13. In the premises, we overrule the contentions made on behalf of the assessee and answer the question in the negative and against the assessee.
14. The parties will pay and bear their respective costs.
Deb, J.
15. I agree.
