1. This appeal is filed by the assessee, challenging the order dated 7-1-2005 passed by the CIT(Appeals)-IV, Hyderabad, as erroneous.

2.1 Facts of the case in brief are that : The assessee , is a company engaged in the business of manufacture and sale of industrial gases. While framing the assessment for the assessment year 2002-03, the Assessing Officer noticed that the assessee claimed interest expenditure of Rs. 2,04,230 representing interest on Interest-free Sales Tax Loan. The Government of Andhra Pradesh sanctioned an amount of Rs. 90.50 lakhs as loan to the assessee to be repaid. Since the loan amount was not paid, penal interest was charged as per proceedings No. 20/A11/87, dated 19-3-2001. The Assessing Officer held that the loan granted is with reference to sales tax payable and the repayment of loan partakes the character of sales tax. The Assessing Officer held that the assessee defaulted in repayment of loan and the interest is charged for non-payment of sales tax within the time allowed. He further held that the interest charged on non-payment of the loan is also in the nature of sales tax as held by the Rajasthan High Court in the case of Mewar Motors v. CIT [2003] 260 ITR218. He further held that payment of interest is covered by the provisions of section 43B of the Act and the amount claimed is therefore not allowable. He, therefore, concluded that the interest charged by the Government of Andhra Pradesh is penal and not compensatory in nature and as such not allowable, in view of the decision of the Supreme Court in the case of Swedeshi Cotton Mills Co. Ltd. v. CIT [1998] 233 ITR 199.

2.2 Aggrieved, inter alia, by the disallowance thus made by the Assessing Officer, assessee preferred appeal before the CIT(A), who, concurring with the reasoning given by the Assessing Officer upheld the disallowance made by the Assessing Officer in terms of section 43B of the Act. Hence, assessee is in second appeal before this Tribunal.

3. The learned counsel for the assessee submitted that : The Appellate Commissioner erred in sustaining the disallowance of interest of Rs. 2,04,250 payable by the assessee to Government of Andhra Pradesh on the delay in payment of instalments of sales tax loan, stating that interest payable for non-payment of sales tax is either in the nature of sales tax and thus attracts the provisions of section 43B or is in the nature of penal interest. As per the terms or sanction of interest-free sales tax loan, interest is payable if there is delay in repayment of such loan and, therefore, the interest payable on such loan is for delayed payment and therefore, cannot be said to be in the nature of sales tax and thus the provisions of section 43B are not attracted. The Appellate Commissioner ought to have seen that the interest payable is not penal in nature but only compensatory and, therefore, there is no justification for disallowing the same. Interest payable on account of delayed repayment of loan cannot be treated as sales tax, since interest is different altogether. Reliance is placed on the decision of the Hon’ble Calcutta High Court in the case of CIT v. Padmavati Raje Cotton Mills Ltd. [1999] 239 ITR 355. Such interest is also not covered by any of the items listed under the provisions of section 43B of the Act. Reliance is placed on the following decisions:—

(1)CIT v. Western Indian State Motors [1987] 167 ITR 395¹ (Raj.);

(2)CIT v. Western State Motors [1988] 174 ITR 116 (Raj.);

(3)CIT v. Pheros & Co. (P.) Ltd. [1989] 178 ITR 472² (Gau.);

(4)CIT v. Orient Beverages Ltd. [2001] 247 ITR 230³ (Cal.).

4. On the other hand, the learned representative for the revenue countered to say in brief by defending the order impugned, besides submitting that interest is penal in nature because loan itself is interest-free, and interest was levied only because of the default committed by the assessee. Reliance is placed on the decisions following :

(a)Mewar Motor’s case (supra)

(b)Swedeshi Cotton Mills Co.