Interest paid on sugarcane purchase tax is not a deductible expense under income tax as it is a consequence of violating statutory obligations, not part of normal business activities.

1. One of the questions which arose in this reference was whether interest paid on arrears of sugarcane purchase tax was an allowable deduction. At the hearing of this reference learned counsel for the assessee placed reliance on M/s. Kamlapat Moti Lal v. Commr. of Income - tax , 1975 UPTC 408 : (1975 Tax LR 1036) in support of his submission that interest so paid was a deductible expenditure.

2. The Bench hearing this reference felt that M/s. Kamlapat Moti Lal' s case (1975 Tax LR 1036) (All) requires reconsideration. It hence referred the case to a Full Bench. That is how the matter has come up before us.

3. In Kamlapat's case (1975 Tax LR 1036) this Court laid down two main propositions. -
(1) The U. P. Sugarcane Purchase Tax Act did not call interest as penalty. It made provision for interest as well as penalty separately, and it also made independent provisions for their recovery. Interest was not penalty. In carrying on a business an assessee may not be able to discharge his financial commitments in time, and as a result may become liable to pay damages or interest. Such a situation is a normal incident of business, and any loss incurred by an assessee under such circumstances is deductible under S. 37 (1).
(2) Payment of purchase tax was a statutory exaction and so was interest payable thereon. If the principal (i. e., purchase tax) is a permissible deduction, the interest payable thereon would also be equally permissible, because principal and interest together constitute the assessee' s liability, and so interest like the principal, represented a loss incidental to the carrying on the business and deductible while computing the assessable profits under S. 28 (1).

4. The first question which requires consideration is as to the true nature and character of interest and penalty chargeable under the U. P. Sugarcane (Purchase Tax) Act, 1961.

5. S.3 of the U. P. Sugarcane (Purchase Tax) Act, 1961, imposes on every sugar factory a tax on the purchase of sugarcane at the prescribed rates. Under sub-sec. (2) of S. 3 the tax is payable on such dates and at such place and in such instalments as may be prescribed. Sub-section (3) provides -
"(3) Any tax payable under this Act, if not paid by the date prescribed for payment thereof, shall carry interest at the rate of six per cent from such date till the date of payment" .

6. U. P. Act No. 1 of 1971, which came into force on 11-8-1970 raised the rate of interest to twelve per cent. Sub-sec. (4) provides for levy of penalty, if the tax or the interest payable under the Act remains unpaid for a period exceeding fifteen days beyond the prescribed date, at prescribed rates.

7. S.8 provides for imprisonment up to one year or with fine which may extend to five thousand rupees or with both on conviction of a person for, inter alia, contravening any provision of the Act or the rules.

8. Under S. 9 a court of Magistrate of first class alone is competent to try an offence punishable under that Act. To these proceedings the Criminal P. C., 1898 has been made applicable - vide S. 9 (3).

9. Under R. 8 (1) of the rules framed under this Act interest is payable on the first day of the month next following the month in respect of which such interest is due. R.8 (2) provides that where any tax or interest payable under the Act remains unpaid for period exceeding fifteen days beyond the date mentioned in R. 4 or sub-r. (1), as the case may be, for the payment thereof, the owner of the factory shall, in addition to the amount due as tax and interest thereon, pay a penalty, which, for the first two months, shall be calculated at the rate of one per cent, for the next two months at the rate of four per cent, and for the further