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Balrampur Sugar Co. Ltd. v. Commissioner Of Income-Tax, West Bengal-Iii.
Structured Summary of the Opinion (Sabyasachi Mukharji, J.)
Factual and Procedural Background
This reference under s. 256(1) of the Income-tax Act, 1961 concerns assessment years 1972–73, 1973–74 and 1975–76. In the original assessments the Income-tax Officer (ITO) allowed the assessee-company a deduction for interest on arrears of cane purchase tax (under the U.P. Sugarcane (Purchase Tax) Act, 1961) in the amounts of Rs. 37,413; Rs. 67,362; and Rs. 9,603 respectively. The Commissioner of Income-tax considered the ITO's allowance erroneous and prejudicial to revenue, taking the view that the charge of interest on arrears under the Purchase Tax Act was penal in nature and therefore not allowable as a deduction in computing business profits. The Commissioner set aside the assessments and directed fresh assessments on the question of allowability of the interest. The assessee appealed to the Tribunal, which upheld the Commissioner’s view. Two questions were referred to this Court under s. 256(1) asking whether (1) the Tribunal was right in holding that the interest amounts were not deductible, and (2) the Tribunal was right in holding that the Commissioner’s direction that the ITO’s allowance was erroneous and prejudicial to revenue was correct.
Legal Issues Presented
- Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the interest on purchase tax amounting to Rs. 37,413, Rs. 67,362 and Rs. 9,603 was not deductible in computing the business income of the assessee for the assessment years 1972–73, 1973–74 and 1975–76, respectively?
- Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the direction of the Commissioner of Income-tax in so far as it held that the allowance of the interest on purchase tax by the Income-tax Officer was erroneous and prejudicial to the interest of revenue?
Arguments of the Parties
The opinion does not contain a detailed account of the parties' legal arguments.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| CIT v. Mahalaxmi Sugar Mills Ltd., [1972] 85 ITR 320 (Delhi High Court) | The Delhi High Court had held that interest payable under the U.P. Sugarcane Cess (Validation) Act, 1961 was of a penal nature and not an allowable expenditure in computation of business profits. | The opinion records that this Delhi High Court decision took the view that interest was 'penal interest'; that decision was the subject-matter of an appeal to the Supreme Court which reversed the Delhi High Court. The Court discusses this earlier decision only to show the line of authority that was considered and subsequently overturned by the Supreme Court. |
| Mahalakshmi Sugar Mills Co. v. CIT, [1980] 123 ITR 429 (Supreme Court) | The Supreme Court held that interest payable under s.3(3) of the U.P. Sugarcane Cess Act, 1956 is not a penalty; it is an accretion to the cess (a part of the liability), in the nature of compensation for delay, and therefore allowable as a deduction under the relevant provision of the Income-tax Act (as applicable in that earlier statute). | The Court relied on the ratio of this Supreme Court decision. It analysed the Cess Act provisions as explained by the Supreme Court and found that the reasoning there — that interest on arrears is not penal but an accretion/compensation — was applicable by parity of reasoning to the Purchase Tax Act. The opinion applies this precedent to conclude the interest under the Purchase Tax Act is deductible. |
| Kamlapat Motilal v. CIT, [1976] 104 ITR 783 (Allahabad High Court) | Referenced by the Tribunal among other authorities; specific rule or principle from this decision is not elaborated in the provided opinion. | The Court notes the Tribunal referred to this decision, but the opinion does not describe any distinct role or direct application of Kamlapat Motilal in the Court’s ultimate reasoning. |
| Saraya Sugar Mills (P.) Ltd. v. CIT, [1979] 116 ITR 387 (Allahabad Full Bench) | The Full Bench had held that payment of interest under s.3(3) of the U.P. Sugarcane (Purchase Tax) Act, 1961 was a penal liability accruing on an infraction of the law. | The opinion considers this Full Bench decision and explicitly disagrees with its reasoning on the point that interest is for infraction of law. The Court finds the Full Bench slightly in error, holds that the interest is for default in time (a compensation/damage for delay) and therefore not a penalty; consequently the Saraya Full Bench view does not control the present reference. |
| Vishnu Sugar Mills Ltd. v. CIT, [1978] 113 ITR 583 (Calcutta High Court) | Referenced by the Tribunal; the opinion does not specify the precise rule from this decision within the text provided. | Referenced by the Tribunal as part of the array of authorities, but the Court’s opinion does not elaborate how this decision was applied to its reasoning. |
Court's Reasoning and Analysis
The Court proceeded by focusing on the essential legal character of the interest charged under the U.P. Sugarcane (Purchase Tax) Act, 1961, and on whether that interest is penal (and therefore not deductible) or an accretion to the tax liability (and thus deductible).
The Court first reviewed the Supreme Court's detailed analysis in Mahalakshmi Sugar Mills Co. v. CIT concerning s.3(3) of the U.P. Sugarcane Cess Act, 1956. The Supreme Court's analysis (as set out in the opinion) held that:
- Section 3(3) of the Cess Act makes any arrear of cess carry interest automatically from the prescribed date until payment; this interest is an accretion to the cess and part of the liability.
- Section 3(5) (a separate provision) provided for a penalty recoverable in addition to arrears and interest, and s.4 provided for criminal penalties; these provisions are distinct and demonstrate that interest under s.3(3) is not a penalty.
- The mechanism of recovery under s.3(6) describes arrears "including interest", indicating the interest is treated as part of the arrear rather than as a distinct penalty; the interest functions as compensation for delay and not as a punitive sanction.
Having set out the Supreme Court's reasoning, the Court then examined the Purchase Tax Act's provisions (notably s.3(3) of the Purchase Tax Act and related penalty and recovery provisions). It compared the textual scheme of the Purchase Tax Act with that of the Cess Act. The Court acknowledged that there are procedural differences in the manner of imposition and enforcement of interest under the two Acts, but concluded that those procedural differences do not change the substantive nature of the liability.
The Court explicitly addressed the Full Bench of the Allahabad High Court (Saraya) which had treated the Purchase Tax Act interest as penal. The Court considered the Full Bench's formulation that "Penalty is a civil sanction. So is interest," but disagreed with the Full Bench's core premise that interest under the Purchase Tax Act arises as a sanction for infraction. Instead, the Court reasoned that:
- The interest under the Purchase Tax Act arises from default in timely payment and serves as compensation (damages) for delay in performance of an obligation.
- The substance of the two statutory schemes (Cess Act and Purchase Tax Act) is in pari materia for the purpose of characterizing the interest; consequently, the Supreme Court's ratio in Mahalakshmi (that interest under s.3(3) of the Cess Act is not penal) applies.
- Therefore, the interest under the Purchase Tax Act is not a penalty but an accretion to the tax liability and so falls within the category of expenditure that can be treated as part of the business liability for tax computation purposes (as per the reasoning applied from the Supreme Court decision).
On this basis the Court concluded that the Commissioner erred in treating the interest as penal and in setting aside the ITO's allowance; the Tribunal's upholding of the Commissioner on this point was therefore incorrect.
Holding and Implications
HOLDING: Both questions referred under s. 256(1) are answered in the negative and both answers are made in favour of the assessee. Concretely, the Court held that the interest payable under the U.P. Sugarcane (Purchase Tax) Act, 1961 (s.3(3)) is not a penal charge but an accretion/compensation for delayed payment and therefore was deductible in computing the assessee's business income for the assessment years in question. The Court observed that the Commissioner was in error in the view he took, and the Tribunal's upholding of that view was not sustained.
Implications:
- The immediate practical effect is that the interest amounts allowed by the ITO should be treated as deductible in computing business income for the assessment years 1972–73, 1973–74 and 1975–76, and the Commissioner’s direction to set aside the assessments on this ground was incorrect.
- The Court applied the Supreme Court's ratio in Mahalakshmi Sugar Mills Co. v. CIT to the Purchase Tax Act after determining the schemes are in pari materia; thus the decision confirms the non-penal character of interest under the Purchase Tax Act in the present facts.
- No broader new precedent beyond applying and extending the Supreme Court’s reasoning to the Purchase Tax Act is asserted in the opinion; the Court answered only the referred questions and directed that the parties bear their own costs.
Order and costs: The parties will pay and bear their own costs. Judge Sudhindra Mohan Guha agreed with this opinion.
Sabyasachi Mukharji, J.:— This reference under s. 256(1) of the I.T Act, 1961, relates to the assessment years 1972–73, 1973–74 and 1975–76. While making the assessments for the years involved, the ITO had allowed the claim of the assessee-company in respect of interest on arrears of cane purchase tax, properly called U.P Sugarcane (Purchase Tax) Act, 1961, at Rs. 37,413, Rs. 67,362 and Rs. 9,603, respectively. The Commissioner of Income-tax was, however, of the view that the orders of the ITO allowing the claim of the assessee were erroneous in so far as these were prejudicial to the interest of revenue as the charge of interest on arrears under the U.P Sugarcane (Purchase Tax) Act, 1961, was of a penal nature levied for a contravention of law. He was, therefore, of the view that the same was not eligible for deduction in the computation of the business profit. According to the Commissioner, the facts of the present case were similar to the facts in the case of CIT v. Mahalaxmi Sugar Mills Ltd., [1972] 85 ITR 320, wherein the Delhi High Court had held that the interest payable under the U.P Sugarcane Cess (Validation) Act, 1961, was of a penal nature and was not an allowable expenditure in the computation of business profits for income-tax purposes. The Commissioner, therefore, set aside the assessments for the three years on the said grounds and certain other points which are not relevant for our present purpose and directed the ITO to make fresh assessments after carefully examining the question of allowability of the interest (paid under the) U.P Sugarcane (Purchase Tax) Act, 1961.
2. There was an appeal preferred by the assessee-company before the Tribunal and the Tribunal dealing with those contentions and after referring to the several decisions, viz., the decision of the Allahabad High Court in the case of Kamlapat Motilal v. CIT, [1976] 104 ITR 783, the decision of the Delhi High Court in the case of CIT v. Mahalaxmi Sugar Mills, [1972] 85 ITR 320 and the decision of the Allahabad Full Bench in the case of Saraya Sugar Mills (P.) Ltd. v. CIT, [1979] 116 ITR 387 as well as the decision of the Calcutta High Court in the case of Vishnu Sugar Mills Ltd. v. CIT, [1978] 113 ITR 583 was of the view that so far as the interest under the Sugarcane (Purchase Tax) Act was concerned, the finding and the directions of the Commissioner were very clear and he was justified in holding that the allowance of this claim by the TTO was prejudicial to the interest of the revenue and he had, therefore, based his findings on the decision of the Supreme Court in the case of Mahalakshmi Sugar Mills Co. v. CIT, [1980] 123 ITR 429 as that decision was applicable to this case. The Tribunal was of the view that the view taken by the Commissioner was legal and tenable and, therefore, according to the Tribunal, it did not call for any interference by the Tribunal. In this view of the matter, the assessee's contention on this aspect of the matter was rejected. Out of these facts, the following two questions have been referred to this court under s. 256(1) of the I.T Act, 1961:
“1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the interest on purchase tax amounting to Rs. 37,413, Rs. 67,362 and Rs. 9,603 was not deductible in computing the business income of the assessee for the assessment years 1972–73, 1973–74 and 1975–76, respectively?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the direction of the Commissioner of Income-tax in so far as it held that the allowance of the interest on purchase tax by the Income-tax Officer was erroneous and prejudicial to the interest of revenue?”
We need not in detail discuss the several authorities, to some of which our attention was drawn, which have been referred by the Tribunal. The point came up before the Supreme Court in appeal from the decision of the Delhi High Court in the case of CIT v. Mahalaxmi Sugar Mills Ltd., [1972] 85 ITR 320 and the decision of the Supreme Court is reported in [1980] 123 ITR 429 (Mahalakshmi Sugar Mills Co. v. CIT). There, the Supreme Court analysed the U.P Sugarcane Cess Act, 1956, and was of the view that the interest was paid by the assessee-company, engaged in the business of manufacture and sale of sugar, under s. 3(3) of the U.P Sugarcane Cess Act, 1956, on arrears of cess payable on the entry of cane into the premises of a factory for use either for consumption or sale thereof. The Tribunal in that case had held that interest on the arrears of cess constituted a permissible deduction but the High Court on a reference, inter alia, held that the interest did not fall within the scope of s. 10(2)(xv) of the Indian I.T Act, 1922, as it was applicable in that year, because it was paid by way of penalty for an infringement of the Cess Act. There was an appeal preferred by the assessee before the Supreme Court. The revenue did not dispute that the payment of cess represented expenditure laid out wholly and exclusively for the purpose of business and that it was in the nature of revenue expenditure. It was held by the Supreme Court reversing the decision of the Delhi High Court that the interest paid under s. 3(3) of the Cess Act was not a penalty paid for an infringement of law and was an allowable deduction under s. 10(2)(xv) of the Indian I.T Act, 1922. The Supreme Court was of the view that the interest payable on arrear of cess under s. 3(3) was in reality a part and parcel of the liability to pay tax. It was an accretion to the cess. The arrear of cess carried interest. If the cess was not paid within a prescribed period, a larger sum became payable as cess. The enlargement of cess liability was automatic under s. 3(3). No specific order was necessary in order that the obligation to pay interest could accrue. The liability to pay interest was as certain as the liability to pay cess. As soon as the prescribed date would cross without payment of cess, interest begins to accrue. It was not a penalty for which provision had been separately made under s. 3(5) of the said Act. Nor was it a penalty within the meaning of s. 4 which provided for a criminal liability and a criminal prosecution. The penalty payable under s. 3(5) lay in the discretion of the collecting officer or the authority. In the case of the penalty under s. 4, no prosecution could be instituted unless, under s. 5(1), a complaint was made by or under the authority of the Cane Commissioner or the District Magistrate. In truth, interest provided under S-. 3(3) was in the nature of compensation paid to the Government for delay in the payment of cess. Therefore, the basic question that has to be considered is whether the interest in the present case which was claimed to have been paid was really a compensation for delayed payment, or it was in the nature of penalty imposed for the infraction of law. The Supreme Court analysed the different provisions of s. 3 of the U.P Sugarcane Cess Act, 1956. It will be relevant in this connection to refer to the material portions of the provisions of the U.P Sugarcane Cess Act, 1956, along with the U.P Sugarcane (Purchase Tax) Act, 1961, with which we are concerned, which read as follows:
The Sugarcane Cess Act, 1956
“3. Imposition of cess.—
(1) The State Government may by notification in the Official Gazette impose a cess not exceeding four annas per maund on the entry of the cane into the premises of a factory for use, consumption or sale therein……….
(2) The cess imposed under sub-section (1) shall be payable by the owner of the factory and shall be paid on such date and at such place as may be prescribed.
(3) Any arrear of cess not paid on the date prescribed under subsection (2) shall carry interest at 6 per cent. per annum from such date to the date of payment……
(5) Where any person is in default in making the payment of the cess, the officer or authority empowered to collect the cess may direct that in addition to the amount of the arrears and interest, a sum not exceeding 10 per cent thereof shall by way of penalty be recovered from the person liable to pay the cess.
(6) The officer or authority empowered to collect the cess may forward to the Collector a certificate under his signature specifying the amount of arrears including interest due from any person, and on receipt of such certificate the Collector shall proceed to recover the amount specified from such person as if it were an arrear of land revenue.
(7) Any sum imposed by way of penalty under sub-section (5) shall be recoverable in the manner provided in sub-section (6) for the recovery of the arrear of cess.
4. Penalties.—If any person defaults in the payment of cess imposed under sub-section (1) of section 3, or contravenes any provision of any rule made under this Act, he shall without prejudice to his liability therefor under sub-section (5) of section 3, be liable to imprisonment up to six months or to a fine not exceeding rupees five thousand or both and in the case of continuing contravention to a further fine not exceeding rupees one thousand for each day during which the contravention continues.”
The U.P Sugarcane (Purchase Tax) Act, 1961:
“3. (1) There shall be levied, and collected in such manner as may be prescribed a tax on the purchase of sugarcane by the owner of:
(a) a factory at the rate of sixty-seven naye paise per quintal of sugarcane; and
(b) a unit at the rate of sixteen naye paise per quintal of sugarcane.
(2) The tax levied under sub-section (1) shall be payable by the owner of the factory or the owner of the unit, as the case may be, and shall be paid on such date, at such place and in such instalments as may be prescribed.
(3) Any tax payable under this Act, if not paid by the date prescribed for payment thereof, shall carry interest at the rate of six per cent per annum from such date till the date of payment.
(4) Where any tax payable under this Act, or interest thereon or both, as the case may be, remains unpaid for a period exceeding fifteen days beyond the date prescribed for payment thereof, the person liable to pay the same shall, in addition to the amount of arrears of tax and interest thereon, be also liable to pay, by way of penalty, a further sum, not exceeding ten per cent of the total sum payable, calculated at such rate or rates as may be prescribed.
(5) Any person aggrieved by an order of assessment made under this Act, or by the imposition of interest under sub-section (3) or penalty under sub-section (4) may, within thirty days of the intimation of the order, or imposition, as the case may be, prefer an appeal to the Cane Commissioner.
(6) Without prejudice to the right to effect recovery of the tax payable under this Act by any other method, the tax, interest or penalty, as the case may be, may be realised by adjustment out of any sum payable by the State Government to the person by whom the tax, interest or penalty is payable.
(8) The officer or authority empowered to collect the tax may forward to the Collector of the district where the factory or the unit, as the case may be, is situate, a certificate under his signature specifying the amount of arrears of tax and interest, if any, due from any person, and on receipt of such certificate the Collector shall proceed to recover the amount specified from such person as if it were an arrear of land revenue.
(9) Any sum imposed by way of penalty under sub-section (5) may also be recovered in the manner provided in sub-section (8).
8. If any person defaults in the payment of tax levied under subsection (1) of section 3, or contravenes any of the provisions of this Act, or of the rules made thereunder, he shall, without prejudice to his liability for the payment of interest or penalty, or both, as the case may be, under sub-section (3) or sub-section (4), of section 3, be liable, upon prosecution and conviction by a court of competent jurisdiction, to imprisonment up to six months, or to a fine not exceeding rupees five thousand, or both, and in the case of continuing contravention to a further fine not exceeding rupees one thousand for each day during which the contravention continues.”
3. The Supreme Court in analysing s. 3(2) of the Cess Act observed that the cess was payable on the date prescribed under the Rules. It was further observed by the Supreme Court that if any arrear of cess was not paid within the specified date then under s. 3(3) it would carry interest at 6 per cent per annum from the specified date to the date of payment. Section 3(5), according to the Supreme Court, was a very different provision. It did not deal with interest paid on arrear of cess but provided for an additional sum recoverable by way of penalty from a person who made default in making payment of the cess. It was a thing apart from an arrear of cess and the interest due thereon. The Supreme Court, further, observed that interest payable on an arrear of cess under s. 3(3) was in reality part and parcel of the liability to pay cess. It was an accretion to the cess.
4. The arrear of cess carried interest; if the cess was not paid within the prescribed period a larger sum would become payable as cess. The enlargement of the cess liability was automatic under s. 3(3). No specific order was necessary in order that the obligation to pay interest should accrue. The liability to pay interest was as certain as the liability to pay cess. As soon as the prescribed date was crossed without payment of the cess, interest began to accrue. It was not a penalty for which provision had been separately made by s. 3(5). The Supreme Court observed, inter alia, as follows (p. 434):
“Nor is it a penalty within the meaning of s. 4, which provides for a criminal liability and a criminal prosecution. The penalty payable under s. 3(5) lies in the discretion of the collecting officer or authority. In the case of the penalty under s. 4, no prosecution can be instituted unless, under s. 5(1), a complaint is made by or under the authority of the Cane Commissioner or the District Magistrate. There is another consideration distinguishing the interest payable under s. 3(3) from the penalty imposed under s. 3(5). Section 3(6) provides that the officer or authority empowered to collect the cess may forward to the Collector a certificate under his signature specifying the amount of arrears including interest due from any person, and on receipt of such certificate the Collector is required to proceed to recover the amount specified from such person as if it were an arrear of land revenue. The words used in s. 3(6) are ‘specifying the amount of arrears including interest’, that is to say, that the interest is part of the arrear of cess. In the case of a penalty imposed under s. 3(5), a separate provision for recovery has been made under s. 3(7). Although the manner of recovery of a penalty provided by s. 3(7) is the same as the manner for recovery provided by s. 3(6) of the arrears of cess, the Legislature dealt with it as something distinct from the recovery of the arrears of cess including interest. 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. The provision for penalty as a civil liability has been made under s. 3(5) and for penalty as a criminal offence under s. 4. The Delhi High Court proceeded entirely on the basis that the interest bore the character of a penalty. It was, according to the learned judges, ‘penal interest’. The learned judges failed to notice s. 3(5) and s. 4 and the other provisions of the Cess Act.”
5. Reference was made to the several other decisions before the Supreme Court and also to the decision of the Full Bench of Allahabad High Court in the case of Saraya Sugar Mills (P.) Ltd., [1979] 116 ITR 387, where a Full Bench of the Allahabad High Court held that the payment of interest under s. 3(3) of the U.P Sugarcane (Purchase Tax) Act, 1961, was a penal liability which accrued on an infraction of the law. The Supreme Court went on to say that although s. 3(3) of the Sugarcane (Purchase Tax) Act, 1961, did seem to be in pari materia with s. 3(3) of the Cess Act, their Lordships refrained from expressing any final opinion on this aspect.
6. It has now fallen to us to consider whether these in fact in essence are in pari materia.
7. On an analysis we find that the liability to pay interest arises under the U.P Sugarcane (Purchase Tax) Act on delay in payment of cess. It is a payment of damages for delayed payment though the method of imposition and the method of enforcement are slightly procedurally different, but that procedural difference, in our opinion, does not affect the liability which is in the nature of damages for delayed payment.
8. Our attention was drawn to sub-s. (5) of s. 3 of the U.P Sugarcane Cess Act, 1956, as well as sub-s. (5) of s. 3 of the U.P Sugarcane (Purchase Tax) Act, 1961, in aid of the proposition that a separate order was necessary and the imposition of interest did not follow automatically on delayed payment. On a closer analysis, however, we find that only the method of its imposition is differently prescribed. Our attention was also drawn to s. 4 of the Sugarcane Cess Act, 1956, and it was argued that unlike s. 8 of the U.P Sugarcane (Purchase Tax) Act it was for the contravention of any provision of the Rules. We, however, do not find any substance in this difference.
9. Our attention was also drawn to the Full Bench decision of the Allahabad High Court, in the case of Saraya Sugar Mills (P.) Ltd. v. CIT, [1979] 116 ITR 387, 391, There, the Allahabad High Court Full Bench, inter alia, observed as follows:
“Penalty is a civil sanction. So is interest. The object of both is to render evasion or infraction of the law unprofitable, and to secure to the State compensation for damages caused by attempted evasion. Prosecution resulting in fine and/or imprisonment is a criminal sanction.”
10. But there, in our opinion the Full Bench of the Allahabad High Court, with very great respect, was in slight error because the interest is not for an infraction of law as such but it is for the default in time which is a kind of damage in default in the performance of an obligation. In that view of the matter, in our opinion, the provisions of these two Acts are in pari materia. Therefore, the ratio of the decision of the Supreme Court in the case of Mahalakshmi Sugar Mills Co., [1980] 123 ITR 429 would be applicable in the facts and circumstances of the case; if that is the position in law, the sums were deductible, then the Commissioner was obviously in error in the view he took. In the aforesaid view of the matter, we will answer the first question in the negative and as a consequence the second question must also be answered in the negative. Both the questions are answered in favour of the assessee. The parties will pay and bear their own costs.
Sudhindra Mohan Guha, J.:— I agree.
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