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Triveni Engineering Works Ltd. v. Commissioner Of Income-Tax, Delhi-Ii.

Allahabad High Court

Oct 6, 1983

Judgment

Subsequent
References

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Structured Summary of the Opinion (Satish Chandra, C.J.)

Factual and Procedural Background

The Income-tax Appellate Tribunal referred a question (for the assessment year 1971–72) at the instance of the Revenue: whether interest paid for delay in paying sugarcane purchase tax under the U.P. Sugarcane Purchase Tax Act, 1961, is an allowable deduction under the Income-tax Act, 1961.

At the hearing of the reference, the Revenue relied on a Full Bench decision of this Court in Saraya Sugar Mills P. Ltd. v. CIT, [1979] 116 ITR 387. The assessee contended that Saraya was no longer good law because the Supreme Court in Mahalaxmi Sugar Mills Co. v. CIT, [1980] 123 ITR 429, had virtually overruled it; the assessee also relied on a Calcutta High Court decision in Balrampur Sugar Co. Ltd. v. CIT.

The Division Bench hearing the reference formulated and referred to a five-judge Full Bench the specific question: “Whether the Full Bench decision in Saraya Sugar Mills case, [1979] 116 ITR 389 (All), lays down the correct law?”

Legal Issues Presented

Whether interest paid on delay in paying sugarcane purchase tax under the U.P. Sugarcane Purchase Tax Act, 1961, is an allowable deduction under the Income-tax Act, 1961 (this is the substantive tax question originally referred by the Tribunal).
Whether the Full Bench decision in Saraya Sugar Mills P. Ltd. v. CIT, [1979] 116 ITR 387 (All) — which had considered and overruled the earlier Division Bench decision in Kamlapat Motilal v. CIT, [1976] 104 ITR 783 — lays down the correct law (the question the Division Bench itself referred to a five-judge Full Bench).

Arguments of the Parties

Revenue's Arguments

The Revenue placed reliance upon the Full Bench decision of this Court in Saraya Sugar Mills P. Ltd. v. CIT, [1979] 116 ITR 387, in support of the view that interest on delayed payment of purchase tax was not deductible in the manner urged by the assessee (the opinion records the Revenue's reliance on Saraya).
Learned counsel for the Revenue emphasized a passage in the Supreme Court decision in Mahalaxmi Sugar Mills, stating that “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.” From this, the Revenue urged that such interest was not an expenditure laid out wholly or exclusively for the purpose of business and therefore should not be deductible under the Income-tax Act.

Assessee's Arguments

The assessee submitted that the Full Bench decision in Saraya Sugar Mills was no longer good law because the Supreme Court in Mahalaxmi Sugar Mills Co. v. CIT, [1980] 123 ITR 429, had virtually overruled Saraya.
The assessee relied on the Calcutta High Court decision in Balrampur Sugar Co. Ltd. v. CIT (cited in the opinion) which held that the provisions of the U.P. Sugarcane Purchase Tax Act and those of the U.P. Sugarcane Cess Act were in pari materia and that the Supreme Court’s decision in Mahalaxmi (on cess) applied to the purchase tax, effectively treating interest as part of the tax liability rather than as a penalty.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Saraya Sugar Mills P. Ltd. v. CIT, [1979] 116 ITR 387 (All) (Full Bench)	Full Bench decision of this Court which had overruled the earlier Division Bench in Kamlapat Motilal; in Saraya two propositions were set out: (1) interest under the U.P. Sugarcane Purchase Tax Act was not penalty and could be deductible under s. 37(1); (2) if principal (purchase tax) was deductible, interest payable thereon would also be permissible as revenue expenditure (these propositions are described in the opinion).	The present opinion holds that the Saraya Full Bench decision “does not lay down the correct law.” The Court concludes Saraya is incorrect in light of the Supreme Court decision in Mahalaxmi and the pari materia analysis.
Kamlapat Motilal v. CIT, [1976] 104 ITR 783 (Division Bench)	Division Bench decision earlier laying down the two propositions later considered and overruled by Saraya (as quoted in the opinion): interest is not penalty and interest payable on purchase tax is deductible as part of business loss.	The present opinion concludes that the correct law was laid down in the Division Bench decision in Kamlapat Motilal's case and expressly states that the correct law is that laid down in Kamlapat (i.e., the Full Bench in Saraya was wrong to overrule Kamlapat).
Mahalaxmi Sugar Mills Co. v. CIT, [1980] 123 ITR 429 (Supreme Court)	Supreme Court analysis of the U.P. Sugarcane Cess Act: held that interest under s. 3(3) on arrears of cess is an accretion to the cess (part and parcel of the liability), not a penalty; interest accrues automatically and is as certain as the cess; penalty provisions are separate (s.3(5) and s.4).	The Court applied the reasoning and holdings of Mahalaxmi to the U.P. Sugarcane Purchase Tax Act, concluding the provisions are in pari materia so that interest on arrears of purchase tax must likewise be regarded as part of the tax liability and not a penalty; this led to the conclusion that interest is deductible as revenue expenditure in the same manner as the purchase tax.
Balrampur Sugar Co. Ltd. v. CIT, [1982] (cited in opinion as [1982] 132 ITR 227 and later referenced as [1982] 135 ITR 227)	Calcutta High Court decision that held the U.P. Sugarcane Purchase Tax Act and the U.P. Sugarcane Cess Act were in pari materia and that the Supreme Court’s decision in Mahalaxmi applied to interest on arrears of sugarcane purchase tax; it concluded Mahalaxmi overruled Saraya.	The present opinion records and agrees with the conclusion that the provisions are in pari materia and that Mahalaxmi's analysis applies; it treats Balrampur as consistent with this view and relies on the same reasoning to disapprove Saraya.

Court's Reasoning and Analysis

The Court's analysis proceeds from statutory comparison and authoritative precedent:

The Supreme Court in Mahalaxmi Sugar Mills analysed the U.P. Sugarcane Cess Act and concluded that interest under s. 3(3) is an automatic accrual and an accretion to the cess — it is part of the cess liability, not a penalty. The opinion quotes the Supreme Court’s passages explaining that interest begins to accrue automatically from the prescribed date and is not the same as the separate penalty provision.
The Court considered whether that reasoning under the Cess Act is applicable to the U.P. Sugarcane Purchase Tax Act. It held that, in substance and at least insofar as accrual of liability and payment of interest are concerned, the provisions of the two Acts are in pari materia (i.e., they are sufficiently similar that the same legal principles apply).
Applying Mahalaxmi’s reasoning to the Purchase Tax Act, the Court concluded that interest payable on arrears of sugarcane purchase tax is likewise part and parcel of the purchase tax liability. It is not a penalty for infraction and accrues as an enlargement of the tax liability automatically when payment is delayed.
From that legal characterization followed the tax treatment: if the purchase tax itself is a revenue expenditure and is an expenditure laid out wholly or exclusively for the purpose of business (a proposition the Revenue did not challenge), then the interest that is part of the tax liability must be of the same nature and therefore deductible in the same manner.
The Court explicitly rejected the Revenue’s contention (based on the Mahalaxmi passage calling interest “in the nature of compensation”) that the interest was not an expenditure laid out wholly or exclusively for business. The Court reasoned that once interest is characterized as part of the tax liability, no distinction can be made between the tax and the interest for the purposes of revenue/deductibility analysis.
Consequently, the Court held that the Saraya Full Bench decision does not lay down the correct law; the correct law, the Court states, was laid down earlier in the Division Bench decision in Kamlapat Motilal v. CIT, [1976] 104 ITR 783.

Holding and Implications

Core Holding: The Court holds that the Full Bench decision in Saraya Sugar Mills P. Ltd. v. CIT, [1979] 116 ITR 387, "does not lay down the correct law." The Court applies the Supreme Court's reasoning in Mahalaxmi Sugar Mills to the U.P. Sugarcane Purchase Tax Act and concludes that interest on arrears of purchase tax is part of the tax liability and not a penalty.

Implications:

Direct effect on the issue referred: Interest payable on arrears of sugarcane purchase tax is to be treated as part and parcel of the purchase tax liability and therefore, being similar in character to the purchase tax itself, is deductible as revenue expenditure (i.e., an expenditure laid out wholly or exclusively for the purpose of the business) for the purposes of computing taxable income.
The Court explicitly rejects the Revenue's contention that such interest is merely “compensation” and therefore not an expenditure wholly or exclusively for business. Once the interest is treated as part of the tax liability, it follows the same tax-deductibility treatment as the principal tax.
The opinion identifies the Division Bench decision in Kamlapat Motilal, [1976] 104 ITR 783, as stating the correct law (contrary to Saraya which had overruled Kamlapat); the Full Bench therefore disapproves Saraya and endorses Kamlapat's approach.
The opinion directs that the papers be laid before the concerned Bench with this opinion and answer, indicating further procedural steps to give effect to this conclusion.

Note: The opinion does not purport to create an entirely new principle beyond applying the Supreme Court’s Mahalaxmi reasoning to the Purchase Tax Act; it resolves the referred question by aligning the Purchase Tax Act's treatment of interest with the Cess Act as interpreted in Mahalaxmi and by concluding that Saraya was not correct on this point.

Show all summary ...

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.