Satish Chandra, C.J:— One of the questions referred by the Income-tax Appellate Tribunal for the assessment year 1971-72, at the instance of the Revenue was whether interest paid on the delay in paying the sugarcane purchase tax under the U.P Sugarcane Purchase Tax Act, 1961, was an allowable deduction under the I.T Act, 1961.

2. At the hearing of this reference, the Revenue placed reliance upon a Full Bench decision of this court in Saraya Sugar Mills P. Ltd. v. CIT, [1979] 116 ITR 387. On behalf of the assessee it was submitted that the decision of the Full Bench in Saraya Sugar Mills case is no longer good law, because the Supreme Court in Mahalaxmi Sugar Mills Co. v. Cit, Delhi., [1980] 123 ITR 429, had virtually overruled it. In support, reliance was placed upon a decision of the Calcutta High Court in Balrampur Sugar Co. Ltd. v. CIT, [1982] 132 ITR 227.

3. The Division Bench, hearing the reference, referred the following question for decision by a Full Bench of five judges:

“Whether the Full Bench decision in Saraya Sugar Mills case, [1979] 116 ITR 389 (All), lays down the correct law?”

4. In Saraya Sugar Mills case, a three-judge Full Bench of this court considered a Division Bench decision of this court in Kamlapat Motilal v. CIT, [1976] 104 ITR 783, and overruled it. In Kamlapal Motilal, two propositions were laid down (pp. 388-89 of 116 ITR):

“1. The U.P Sugarcane Purchase Tax Act did not call interest as penalty. It made provision for interest, as well as penalty separately, and it also made independent provisions for their recovery. Interest was not penalty. In carrying on a business an assessee may not be able to discharge his financial commitments in time, and as a result may become liable to pay damages or interest. Such a situation is a normal incident of business, and any loss incurred by an assessee under such circumstances is deductible under section 37(1).

(2) Payment, of purchase tax was a statutory exaction and so was interest payable thereon. If the principal (i.e, purchase tax) is a permissible deduction, the interest payable thereon would also be equally permissible, because principal and interest together constitute the assessee's liability, and so interest, like the principal, represented a loss incidental to the carrying on of business and deductible while computing the assessable profits under section 28(1).”

5. For the reasons mentioned, the Full Bench did not approve of these two propositions.

6. In Mahalakhshmi Sugar Mills, [1980] 123 ITR 429, the Supreme Court considered the provisions of the U.P Sugarcane Cess Act. After analysing its various provisions, the court held (p. 433):

“It is apparent that s. 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 arrear 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”.

7. The court then held (p. 433):

“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. It is not a penalty for which provision 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.”

8. The court then went on to consider s. 3(6), which provides that the officer is empowered to forward to the Collector a certificate specifying the amount of arrears including interest, and held that this shows that interest was part of the arrears of cess.

9. The Supreme Court held that s. 3(3) of the U.P Sugarcane Purchase Tax Act does seem to be in pari materia with s. 3(3) of the Cess Act, but the court observed (p. 435):

“But we think we should resist the blandishment to sit in judgment over that decision when it is not in appeal before us.”

10. The matter came up before the Calcutta High Court in the Balrampur Sugar Co.'s case, [1982] 135 ITR 227. It was held that the provisions of the U.P Sugarcane Purchase Tax Act and those of the U.P Sugarcane Cess Act being in pari materia, the decision of the Supreme Court in Mahalakshmi Sugar Mills, [1980] 123 ITR 429, on the nature of interest payable on arrears of sugarcane cess are applicable to interest payable on arrears of sugarcane purchase tax. It held that the decision of the Supreme Court in Mahalakshmi Sugar Mills overrules the decision of this court in Saraya Sugar Mills case, [1979] 116 ITR 387 (All) [FB]. This decision gives in detail the various provisions of the two Acts and comes to the conclusion that they are in pari materia.

11. We are of opinion that the provisions of the U.P Sugarcane Cess Act, 1956, are in substance in pari materia with the U.P Sugarcane Purchase Tax Act, 1961, at least in so far as the accrual of liability and payment of interest is concerned. The view taken by the Supreme Court in Mahalakshmi Sugar Mills case, [1980] 123 ITR 429, is applicable to the provisions of the U P. Sugarcane Purchase Tax Act on the question of accrual of liability to interest on arrears of sugarcane purchase tax. It is thus apparent that interest payable on arrears of sugarcane purchase tax is in reality part and parcel of the liability of purchase tax. It is not penalty paid for an infraction of the law. In this view it is evident that it will be deductible in the same way as the purchase tax itself. That is to say, it will be a revenue expenditure and the payment of interest would, in the circumstances, represent expenditure laid out wholly or exclusively for the purpose of the business.

12. Learned counsel for the Revenue emphasized that in Mahalakshmi Sugar Mills case, [1980] 123 ITR 429, the Supreme Court at one place had observed (p. 434):

“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.”

13. He urged that this was not an expenditure laid out wholly or exclusively for the purpose of the business.

14. The argument has to be stated to be rejected. Once it is held that interest was part and parcel of the liability to pay the purchase tax, no distinction can be made between the two from the point of view of either that it is revenue expenditure or that it is an expenditure laid out wholly or exclusively for the purpose of the business. Learned counsel for the Revenue did not even suggest that payment of the purchase tax was not a revenue expenditure or that it was not an expenditure laid out wholly or exclusively for the purpose of the business. The payment of interest will hence be of the same nature. It is thus clear that the decision of the Full Bench of this court in Saraya Sugar Mills case, [1979] 116 ITR 387, does not lay down the correct law. The correct law was laid down in the Division Bench decision of this court in Kamlapat Motilal's case, [1976] 104 ITR 783.

15. Let the papers be laid before the concerned Bench with this opinion and answer.