Interest received by the assessee company under section 18A(5) is taxable and interest paid by the assessee under section 18A(6) and (7) is not deductible.

1. This reference raises the question with regard to the liability of the assessee company to pay tax on interest received by to in respect of advance payment of at. Under section 18A (5) the assessee company received interest in the sum of Rs. 7,519 in respect of advance payment of tax. Under section 18A the assessee company, which is under a statutory obligation to make this advanced payment, received interest which is calculated at the rate mentioned in sub-section (5) from the date of payment till the date of assessment, and this amount aggregated to Rs. 7,519. There is also provision under sub-section (6) and (7) for payment of interest by the assessee if under sub-section (6) it fails to pay advance tax which is less than 80 per cent. of the tax which it is ultimately assessed to pay, and if under sub-section (7) it fails to pay the tax in proportion to the installment in which the tax is payable; and a liability arose the assessee company to pay interest at 6 per cent. it having committed default under sub-section (7) of section 18A and the amount of this liability was assessed at Rs. 4,554. In the assessment year 1952-53 the Taxing Department brought the sum of Rs. 7,519 to tax as the income of the assessee company. The assessee company did not contest the position taken to that this amount represented the income of the assessee company and was liable to tax, but the contention put forward was that this sum should be reduced by the sum of Rs. 4,554 which was the interest which the assessee company was liable to pay and which it had paid. What was argued was that in substance the assessee company had only received Rs. 7,519 less Rs. 4,554, that that was the real income of the assessee, and the assessee was liable to pay tax on this amount of about Rs. 3,000. This contention was rejected by the tribunal and the assessee company has now before us on this reference.

2. Now, if we consider these two amounts separately, then the assessee company has to satisfy us that the sum of Rs. 4,554 was a permissible deduction under the Income-tax Act. Mr. Palkhivala released the difficulty of putting forward his clients case from this aspect and therefore the first arguments advanced by him was that we must look at the payment of interest by the assessee company and the receipt of the interest by the assessee company as a single indivisible transaction and when we look at it from that point of view the transaction resulted in the assessee company receiving a sum of about Rs. 3,000 which alone is liable to tax. He said it is not proper to sever this transaction, to tax Rs. 7,519 and not to allow any credit to the assessee company for the amount of Rs. 4,554 which it has paid by way of interest. In our opinion, there is no relationship whatever between the receipt of interest by the assessee company under the provisions of section 18A and the payment of interest by the assessee under the provisions of that section. When we look at the scheme of section 18A it becomes apartment that the Legislature enacting that section has made a very vital departure from the scheme of the Income-tax Act. As is well known, under the Income-tax Act an assessee pays tax on the income of his previous year. What section 18A does is not provide for payment of tax in respect of the current year, and therefore the Legislature looked upon this provision as a statutory advance by the taxpayer of the tax which ordinary he would have been liable to pay after the end of the year. Inasmuch as this obligation was cast upon the assessee to make this advances payment, the Legislature provided that he should receive interest at 2 per cent. originally and now at 4 per cent. The Legislature had also to provide that this advance tax was paid by taxpayers all over the country and as in inducement it was provided that if the assessee failed to pay this advance tax, he would be liable to pay interest at the rate of 6 per cent. therefore, the liability to pay interest