The Judgment of the Court was delivered by
R. Jayasimha Babu, J.:— The question of law referred at the instance of the Revenue is as to whether the Tribunal was right in law in holding that the interest under section 201(1A) paid by the assessee was an expenditure incidental to the business and allowed as a deduction from the profits and gains of the business for the assessment year 1981-82.
2. The assessee had, in the course of assessment proceedings for the assessment year 1981-82, claimed deduction of Rs. 10,542 which amount had been paid by it to the lncome tax Department as interest under section 201(1A) of the Income-tax Act, 1961. The claim so made was rejected by the Income-tax Officer and that rejection affirmed in appeal by the Commissioner of Income-tax. The Income-tax Appellate Tribunal, however, on a further appeal by the assessee, held that the interest so paid was incidental to the business of the assessee and allowed the amount as deduction under section 37 of the Income-tax Act. Learned counsel for the Revenue submitted before us that the deduction so permitted by the Tribunal is contrary to the scheme of the Income-tax Act.
3. Section 201 of the Act deals with the consequences of the failure to deduct the amount of tax which is required to be deducted by an assessee from the payments made by it to the extent required under the Act. The deduction at source is required to be made on salary under section 192, on interest paid on securities under section 193, on dividends under section 194, on interest other than interest on securities under section 194A, and the other payments referred to in section 195.’ Section 198 of the Act provides that tax so deducted is to be shown for the purpose of computing the income of the recipient of the amount in respect of which the tax has been deducted, as the income of such recipient, and credit for the amount of the tax so deducted is to be given to such recipient under section 199 of the Act.
4. Section 200 of the Act imposes a duty on the person deducting tax to pay within the prescribed time, the sum so deducted to the credit of the Central Government or as the Board directs.
5. The consequences of failure to deduct or failure to remit the amount deducted as required under the Act are set out in section 201.
6. If the payer does not deduct or remit the tax, he would be deemed to be an assessee in default in respect of the tax. Such person, however, is not liable to a penalty under section 221, if the Income-tax Officer is satisfied that the failure to deduct or remit was for good and sufficient reasons. Sub-section (1A) of section 201 without prejudice to the provisions of subsection (1) provides the person who fails to deduct or remit the amount of deduction in the manner required under the Act is liable to pay interest at the rates specified in that sub-section from the date on which tax was deductible to the date on which such tax is actually paid.
7. The liability for deduction of tax arises by reason of the provisions of the Act. Under section 201, the consequence of failure to comply with the same renders that person liable to be deemed as an assessee in default with all the consequences attached thereto. The liability to pay interest on the amount not deducted or deducted but not paid is directly related to the failure to deduct or remit the amount. The amount required to be deducted is the amount payable as income-tax. The interest paid for the period of delay takes colour from the nature of the principal amount required to be paid, but not paid within time. The principal amount here would be the income-tax and the interest payable for delayed payment is the consequence of failure to pay the tax and in the circumstances, in the nature of a penalty though not described as such in Sub-section (1A) of section 201 of the Act. The fact that the income-tax required to be remitted was not income-tax payable by the assessee, but is ultimately for the benefit of and to the credit of the recipient of the income on whose behalf that tax is payable does not in any manner alter the character of the payment, namely, its character as income tax.
8. Learned counsel for the Revenue submitted placing strong reliance on the recent decision of the Supreme Court in the case of Bharat Commerce and Industries Ltd. v. CIT, [1998] 230 ITR 733, that payments required to be made by way of income-tax under the Income-tax Act are not deductible as expenditure and the further amounts which a person may be required to pay by a reason of failure to comply with the provisions requiring the payments of the tax are also amounts which cannot be regarded as deductible expenditure under section 37 of the Act.
9. In that case the question considered was as to whether interest paid on delayed payment of income-tax and surtax by way of instalments, on income voluntarily disclosed under the Voluntary Disclosure of Income and Wealth Act, 1976, is not in any way an expense incurred wholly or exclusively for the purpose of the assessee's business. The court held that (headnote): “When interest is paid for committing a default in respect of the statutory liability to pay advance tax, the amount paid and the expenditure incurred in that connection is not in any way connected with preserving or promoting the business of the assessee… The liability in the case of payment of income-tax and interest for delayed payment of income-tax or advance tax arises on the computation of the profits and gains of business”. The court further held that (headnote): “Under the Income-tax Act, the payment of such interest is inextricably connected with the assessee's tax liability. If income-tax itself is not a permissible deduction under section 37, any interest payable for default committed by the assessee in discharging his statutory obligation under the Income-tax Act, which is calculated with reference to the tax on income, cannot be allowed as deduction”.
10. Before holding so, the court considered the decision of the apex court in the case of Mahalaxmi Sugar Mills Co. v. Cit, Delhi., [1980] 123 ITR 429, a decision rendered by three learned judges of the apex court and held that the ratio of that judgment had no application to the case before it in the case of Bharat Commerce and Industries Ltd. v. CIT, [1998] 230 ITR 733. The assessee in the case of Mahalakshmi Sugar Mills Co., [1980] 123 ITR 429 (SC), had claimed deduction of interest paid on arrears of sugarcane cess. The payment of sugarcane cess, as it was observed by the court in the case of Bharat Commerce and Industries, [1998] 230 ITR 733 (SC), is very much a part of the assessee's business expense and any interest on arrears of cess would, therefore, take colour from the cess which is payable, that it was an indirect tax which had to be paid in the course of carrying on business.
11. Learned counsel for the assessee placed reliance on the judgment of the apex court in the case of Mahalakshmi Sugar Mills Co., [1980] 123 ITR 429. As pointed out by the apex court in its later judgment in the case of Bharat Commerce and Industries, [1998] 230 ITR 733, the cess which was considered in the case of Mahalakshmi Sugar Mills Go., [1980] 123 ITR 429 was an indirect tax payable in the course of the business of the assessee and the interest paid on the arrears of the cess took colour from the cess which was paid.
12. Learned counsel for the Revenue also referred to the decisions of the Bombay High Court in the case of Ferro Alloys Corporation Ltd. v. Commissioner Of Income-Tax, [1992] 196 ITR 406 and the decision of the Calcutta High Court in the case of Martin and Harris Pvt. Ltd. v. CIT, [1994] 73 Taxman 555. It was held in those cases that the interest paid under section 201(1A) of the Act was not deductible as business expenditure under section 37 of the Act.
13. As already noticed the payment of interest takes colour from the nature of the levy with reference to which such interest is paid and the tax required to be but not paid in time, which rendered the assessee liable for payment of interest was in the nature of a direct tax and similar to the income-tax payable under the Income-tax Act. The interest paid under section 201(1A) of the Act, therefore, would not assume the character of business expenditure and cannot be regarded as a compensatory payment as contended by learned counsel for the assessee.
14. Counsel for the assessee in support of his submission that the interest paid by the assessee was merely compensatory in character besides relying on the case of Mahalakshmi Sugar Mills Co., [1980] 123 ITR 429 (SC) also relied on the decision of the apex court in the cases of Prakash Cotton Mills Pvt. Ltd. v. CIT, [1993] 201 ITR 684; Malwa Vanaspati & Chemical Co. v. Commissioner Of Income Tax, [1997] 225 ITR 383 and CIT v. Ahmedabad Cotton Manufacturing Co. Ltd., [1994] 205 ITR 163. In all these cases, the court was concerned with an indirect tax payable by the assessee in the course of its business and admissible as business expenditure. Further liability for interest which had been incurred by the assessee therein was regarded as compensatory in nature and allowable as business expenditure. The ratio of those cases is not applicable here. Income-tax is not allowable as business expenditure. The amount deducted as tax is not an item of expenditure. The amount not deducted and remitted has the character of tax and has to be remitted to the State and cannot be utilised by the assessee for its own business. The Supreme Court in the case of Bharat Commerce and Industries, [1998] 230 ITR 733, rejected the argument advanced by the assessee that retention of money payable to the State as tax or income-tax would augment the capital of the assessee and the expenditure incurred, namely, interest paid for the period of such retention would assume character of business expenditure. The court held that an assessee could not possibly claim that it was borrowing from the State, the amounts payable by if as income-tax, and utilising the same as capital in its business, to contend that the interest paid for the period of delay in payment of tax amounted to a business expenditure.
15. The question referred to us, therefore, is required to be and is answered in the negative, in favour of the Revenue and against the assessee. The Revenue shall be entitled to costs in the sum of Rs. 1,000.