JUDGMENT

PATHAK, J. :— This appeal by certificate granted by the Delhi High Court raises the question whether interest paid on arrears of cess under section 3 (3) of the U.P. Sugarcane Cess Act, 1956 is a permissible deduction under Sec. 10 (2) (xv) of the Indian Income Tax Act, 1922.

2. The assessee is a public limited company engaged in the business of the manufacture and sale of sugar. In its income-tax return for the assessment year 1959-60 (the previous year being the period ending 30th June. 1958) the assesses claimed a deduction of Rs. 1,20,859/- paid as interest on arrears of cess due under the U.P. Sugarcane Cess Act, 1956. The Income-tax Officer disallowed the claim,but the Appellate Assistant Commissioner held that the payment of interest constituted a permissible deduction and this view was affirmed by the Income Tax Appellate Tribunal. For the next assessment year 1960-61, (the previous year ending 30th June, 1959), the assessee claimed a sum of Rs. 1,85,731/- paid by way of interest on the arrears of cess. The claim met with the same fortune, disallowed by the Income Tax Officer but upheld by the Appellate Assistant Commissioner and the Appellate Tribunal. At the instance of the Revenue, the Appellate Tribunal referred the following question of law to the Delhi High Court in respect of the assessment years 1959-60 and 1960-61:

"Whether, on the facts and in the circumstances of the case, the Tribunal was justified in allowing the interest of Rs. 1,20,859/- and Rs. 1,83,731/-, paid by the assessee on the arears of cess in the assessment years 1959-60 and 1960-61 respectively, as revenue expenditure?"

3. For the assessment year 1961-62 also the previous year of which ended 30th June, 1960, the assessee claimed a deduction of Rs, 2,00,439/- on account of interest paid by it on arrears of cess. This claim also was rejected by the Income Tax Officer but allowed by the Appellate Assistant Commissioner and the Appellate Tribunal. The Revenue obtained a reference to the High Court on the question :

Whether, on the facts and in the circumstances of the case, the Tribunal was justified in allowing the interest of Rs. 2,00,439/-, paid by the assessee on the arrears of cess, as revenue expenditure?"

4. The references were disposed of by the High Court by its judgment dated 25th October, 1971. The questions were answered in the negative. The High Court took the view that the claim of the assessee did not satisfy the provisions of section 10 (2) (iii) of the Indian Income-tax Act, 1922 because it was not interest paid on borrowed capital, and it did not fall within the scope of Sec. 10 (2) (xv) of the Act because it was paid by way of penalty for an infringement of the Act. The High Court then certified under section 66 (A) (2) of the Act that the cases were fit for appeal to this Court.

5. Learned counsel for the assessee has made no attempt to justify the claim under Section 10 (2) (iii) and we are, therefore relieved of the necessity of examining the validity of the claim by reference to that provision. The case has been argued before us on the basis that it falls under Section 10 (2) (xv).

6. The validity of the U. P. Sugrance Cess Act, 1956, (the "Cess Act") was challenged by the assessee and several other sugar manufacturing companies by petitions under Article 226 of the Constitution in the Allahabad High Court. The High Court admitted the writ petitions and granted an order suspending the operation of the Act. The High Court, on final hearing, dismissed the writ petitions. But subsequently on appeal this Court declared the Cess Act ultra virus on the ground that the Act fell beyond the competence of the State Legislature.

7. Thereafter, on 31st January, 1961, the president promulgated the U.P. Sugarcane Cess (Validation) Ordinance, 1961, validating the cess imposed, assessed or collected by the Government of Uttar Pradesh during the period 26th January, 1950, to the date of the commencement of the Ordinance (3rd February, 1961)