Interest payable on arrears of sugarcane purchase tax under the U.P. Sugarcane (Purchase Tax) Act, 1961, is not a penalty but is in the nature of compensation paid to the Government for delay in payment and is therefore deductible in computing the business income of the assessee.

( 1 ) THIS reference under Section 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 Lid. [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 arid directed the ITO to make fresh assessments after carefully examining the question of allow-ability 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 , 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 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 ITO 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 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.

( 3 ) OUT of these facts, the following two questions have been referred to this court under Section 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 ?"

( 4 ) 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