Jagannatha Shetty, J.:—
This is a reference under Section 256(1) of the Income Tax Act 1961. The question referred is:
“Whether on the facts and in the circumstances of the case, the Appellate Tribunal is right in law in holding that an amount of Rs. 52,944/- paid by the assessee as penalty for non-payment of sales-tax is an allowable deduction in computing its business income?”
2. The assessee is a public limited company. The assessment year is 1972-1973, the relevant previous year being the year ending June 30, 1971. Under the Karnataka Sales Tax Act, 1957 the assessee was a defaulter in payment of tax. Consequently, it had to pay a penalty of Rs. 52,944/- under Section 13(2) of the Karnataka Sales Tax Act. The said amount was claimed as allowable deduction under Section 37(1) of the Income Tax Act, 1961. The I.T.O disallowed that claim on the ground that it was not a business expenditure. The assessee appealed to the Appellate Assistant Commissioner, who also upheld the order of the I.T.O
3. The assessee next appealed to the Tribunal. There it was urged that the penalty collected under Section 13(2) of the Sales Tax Act should not be construed as penalty levied for any infraction of law and it represented only damages paid to the Government for the belated payment of tax due. That contention was accepted by the Tribunal and directed the deletion of the addition of Rs. 52,944/- from the taxable income.
The answer to the question raised turns on the nature of the penalty leviable under Section 13(2) of the Sales Tax Act.
5. In Sterling Construction and Trading Co. v. The Commercial Tax Officer, X Circle, Seshadripuram, Bangalore . 32 STC 235. a Bench of this Court held that under Section 13(2) the amount payable by the assessee is a statutory liability and it is not for the infraction of any law. The Act gives no discretion to the authorities to waive or reduce that penalty. Obligation is cast on the defaulting assessee to make payment of the penalty computed in the manner provided by Section 13(2).
6. In Mahalakshmi Sugar Mills Co. v. Commissioner of Income-tax, Delhi . 123 ITR 429. the Supreme Court while examining the scope of Section 3(3) of the U.P Sugarcane Cess Act, 1956, providing for interest payable on arrears of cess, held that such interest should be allowed as business expenditure, since it is an accretion to cess and not a penalty payable for infrignment of any law. The provisions of Section 3(3) of the U.P Sugarcane Cess Act, 1956 are similar to the provisions of Section 13(2) of the Karnataka Sales Tax Act, 1957. The ratio of the decision of the Supreme Court is, therefore, applicable to the facts of the case on hand.
7. In view of this enunciation, it must be held that the penalty paid under Section 13(2) of the Sales Tax Act was not a penalty in the real sense of the term and it is only a compensation for delay in payment of the tax due. Clearly, therefore, it must be allowed as a deduction under Section 37(1) of the Income-tax Act, 1961.
8. In the result, we answer the question in the affirmative and against the Revenue.