Interest on delayed payment of tax is not deductible if the tax itself is not an allowable deduction.

Harisankar V. Menon, J.

This appeal, at the instance of the assessee, seeks to challenge the order dated 19.05.2020 of the Income Appellate Tribunal, Cochin Bench in I.T.A. No.128/Coch/2017, as regards the assessment year 2012-13.

2. While processing the return of income filed by the assessee under Section 143 (3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’), the Assessing Officer (AO) noticed that interest was paid by the assessee on Agricultural Income Tax (AIT) dues at Rs.94,00,179/- and disallowed the claim made by the assessee invoking the provisions of Section 40 (a)(ii) of the Act, read with Rule 7A of the Income Tax Rules, 1962 (hereinafter referred to as ‘the Rules’) adding back 35% of the interest paid as above, amounting to Rs.32,90,063/-. The first appellate authority, while disposing of the appeal filed against the afore assessment, took the view that disallowance ought not to have been with reference to (a)(ii) and it ought to have been with reference to Section 37 of the Act.

The AO was, therefore, directed to verify whether the amount of Rs.94,00,179/- was towards the delayed payment of AIT and if so, to disallow the said amount in its entirety. The assessee filed a further appeal to the Tribunal, and by the impugned order, the Tribunal concurred with the findings of the first appellate authority and dismissed the appeal. It is in the afore circumstances that the appellant has preferred the captioned appeal under Section 260A of the Act.

3. Heard Sri.Raja Kannan, learned counsel for the appellant-assessee and Sri.Jose Joseph, learned Standing counsel for the revenue.

4. The following question of law - as reframed - arises for our consideration:

i. Whether, on the facts and in the circumstances of the case, is not the interest paid on account of the delayed payment of Agricultural Income Tax, an eligible deduction under Section 37 of the Income Tax Act, 1961 ?

5. Sri.Raja Kannan, the learned counsel for the appellant, would contend that the scheme of the Kerala Agricultural Income Tax Act,1991 (hereinafter referred to as ‘AIT Act’) was not noticed while passing the impugned order. According to him, on a perusal of the scheme under the AIT Act, the fact that only simple interest is being levied would show that the interest levied is “compensatory in nature” and hence eligible for the deduction under Section 37 of the Act. He would rely onPratibha Processors and Others v. Union of India and Others [ (1996) 11 SCC 101 ],M/s. Mahalaxmi Sugar Mills Co. v. C.I.T., Delhi [ (1980) 3 SCC 475 ] Consolidated Coffee Ltd. v. Agricultural Income Tax Officer, Madikeri and Others [ (2001) 1 SCC 278 ],M/s. Prakash Cotton Mills Pvt. Ltd. v. Commissioner of Income Tax (Central), Bombay [ (1993) 3 SCC 452 ] and Commissioner of Income Tax v. Dhanalakshmi Bank Ltd.

[2003 (2) KLT 1076] , in support of the above contentions.

6. Per contra, Sri.Jose Joseph, learned Standing Counsel for the revenue, would submit that the question as to whether the interest satisfied is “compensatory”, or not, need not be considered at all, since what was disallowed was the interest on AIT dues satisfied, which was not an eligible deduction under the provisions of the Act. Therefore, when the AIT itself was not taxable under the Act, interest paid on AIT also is not deductible.

7. We have considered the rival contentions as well as the connected records.

8. It is not in dispute that the interest which is now disallowed under Section 37 of the Act is with reference to the delayed payment of AIT. With reference to the provisions of Section 10(1) of the Act, the agricultural income of an assessee is not includable in his total income. Such being the position, it cann