Interest paid for delayed payment of cess is in the nature of a penalty and cannot be allowed as a deduction.

( 1 ) IN the present reference under Section 256 (1) of the Income-tax Act, 1961, a very short point calls for our determination, namely, " whether the delayed payment of cess is allowable as business expenditure ? "

( 2 ) THIS reference relates to the assessment years 1967-68 and 1969-70 and the corresponding accounting period ended on 30th September, 1966, and 30th September, 1968, respectively. The assessee carries on the business of manufacture and sale of sugar. The sugar factory is situated at Harknua in the district of Saran, North Bihar.

( 3 ) SINCE the assessee did not pay the cess within the due date, the Bihar Government charged interest for the delayed payment of cess. The assessee-company claimed such interest amounting to Rs. 45,102 in the assessment year 1967-68. It also claimed Rs. 66,000 in the assessment year 1969-70 as admissible deductions before the Income-tax Officer. It was, however, held by the Income-tax Officer that the delayed payment of cess could not be treated as normal incident to the assessee's business and the levy of interest for irregular payment of cess was in the nature of penal measure. The claims preferred by the assessee for the assessment years 1967-68 and 1969-70 were disallowed.

( 4 ) THE assessee preferred appeals before the Appellate Assistant Commissioner who sustained the disallowance of Rs. 46,102 for the assessment year 1967-68 but the claim in the assessment year 1969-70 preferred by the assessee was allowed.

( 5 ) AS a result, the assessee preferred an appeal before the Tribunal for the assessment year 1967-68 and the department preferred an appeal for the assessment year 1969-70. It was urged on behalf of the assessee that the interest paid for the delayed payment of cess was an admissible deduction and the payment was not in the nature of a penalty. It was further contended that if the assessee had to borrow money for the payment of cess, the assessee would have paid a high interest on such loans and it was cheaper to pay interest to the Bihar Government as it was at a lesser rate. The revenue, however, contended that the interest paid for the delayed payment of cess was in the nature of penalty and could not be allowed as a deduction. According to the department, the interest paid could not be allowed either under Section 36 (1) (iii) or under Section 28 (1) or under Section 37 (1) of the Income-tax Act, 1961.

( 6 ) THE Tribunal held that the penal interest paid for the delayed payment of cess could not be said to be incidental to the carrying on of the business or arising out of the business, nor could it be said that the same was paid wholly and exclusively for the purpose of business. For nonpayment of cess within the prescribed date penal interest was leviable due to infraction of law and so the interest paid could not be allowed, in the opinion of the Tribunal, as a business expenditure. The Tribunal relied on the decision of the Supreme Court in the case of Haji Aziz and Abdul Shakoor Bros. v. Commissioner of Income-tax [1961] 41 ITR 350. The Tribunal also relied on the decision of the Delhi High Court in the case of Commissioner of Income-tax v, Mahalaxmi Sugar Mills Ltd. [1972] 85 ITR 320, wherein it was held that the interest paid for the delayed payment of cess could not be said to be incidental to the carrying on of the business and as such could not be allowed as a deduction. The Tribunal also referred to the decision of this court in Deoria Sugar Mills Ltd. v. Commissioner of Income-tax , wherein it was held that the penalty paid under Section 3 (5) of the U. P. Sugarcane Cess Act could not be said to arise out of the carrying on of the business of the assessee or to be incidental to it and it was not allowable as a business expenditure.

( 7 ) IN the result, the Tribunal upheld the disallowance of Rs. 46,102 in the assessment" year 1967-68 and the order of the Appellate Assistant Commissioner for the assessment year 1969-70 allowi