Deepak Gupta, J.@mdashThe aforesaid appeals are being disposed of by a common judgement since similar questions of law are involved in all the three appeals. In ITA No. 21 of 2003 the questions of law are as follows:
1. That the disallowances made on account of interest on belated payment of sales tax is not penal in nature but is compensatory despite the stipulation in Clause 18 G of the lease agreement.
2. That the disallowance on account of interest paid on belated payment of royalty to Raja of Kutlehar crystallised during the year.
3. That the disallowances made on account of interest on interest on belated payment of royalty expense tantamounts to compound interest and is compensatory in nature instead of being penal interest. Further this liability crystallised only during the year and not earlier.
4. That the learned ITAT has misconstrued and misinterpreted the material on record as well as the law.
2. In ITA No. 25 and 26 of 2004 two questions of law have been framed which are virtually identical to questions No. 1 and 4 quoted here-in-above.
3. Briefly stated the facts of the case are that the H.P. Forest Corporation is an undertaking of the H.P. Government. The main business of the Corporation is to extract timber and resin and sell the same. The trees to be felled are handed over by the Forest Department to the Forest Corporation. The Corporation pays royalty to the State Government at rates which are finalised by the Pricing Committee constituted by the State Government. The Corporation is liable to pay interest on belated payment of royalty and other amounts payable to the Corporation.
4. The Forest Department is liable to pay sales tax on royalty but in actual fact this amount is actually deposited by the Forest Corporation on behalf of the Forest Department. A lease is executed by the Forest Department in favour of the Corporation. The assessee claimed deduction of the amounts paid as interest on royalty, sales tax, etc. The Assessing Officer rejected the claim of the assessee. The CIT upheld the order of the Assessing Officer and the learned Tribunal allowed the appeal filed by the assessee and hence the present appeals which have given rise to the questions mentioned above.
5. To appreciate the rival contention of the parties, it would be pertinent to refer to Section 37(1) of the Income Tax Act, 1961, which reads as under:
37(1). Any expenditure (not being expenditure of the nature described in Sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head ''Profits and gains of business or profession''.
6. Clause 18(G) of the lease deed by which the assessee was made liable to pay interest on delayed payment of sales tax, reads as follows:
18 (G). That the lessee whether registered sales tax assessee in H.P. or not shall pay sales tax as leviable under the relevant sales tax laws of the State on the sale value of lot in addition alongwith the royalty installment prorata. It is, however, made clear that the lessee will have to pay the sales tax on the due date as provided in the agreement deed irrespective of the fact whether the period of payment of any installments is extended by the competent authority or not. In case of his failure to do so, he shall have to pay a penalty at the rate of 18% per annum for the period of belated payment of sales tax from the due date.
7. Payment of sales tax is governed by the H.P. General Sales Tax Act, 1968. u/s 17-A(1) an assessee is liable to pay interest on the delayed payment of sales tax. The provision reads as follows:
17-A. Payment of interest.- (1) If any dealer fails to pay the amount of tax due from him as required by Sub-section (4) of Section 12 he shall, in addition to the amount of tax, be liable to pay simple interest on the amount of tax due from him at the rate of one percentum per month from the date immediately following the last date for the submission of the return under Sub-section (3) of that section, for a period of one month and thereafter at the rate of one and a half percentum per month till the default continues.
8. A bare perusal of Section 37 of the Income Tax Act shows that when an expenditure is laid out wholly and exclusively for the purpose of business it can be deducted in computing the income under the head of profits and gains business. However, expenditure incurred by the assessee for any purpose, which is an offence or prohibited by law is not deemed to be income for the purpose of business. The general principle is that portion of interest paid on delayed payment which is compensatory in nature is allowed to be deducted and that portion which is penal cannot be deducted.
9. In the present case one factor which has to be noted is that the Corporation was paying the royalty to the State after deducting the sales tax and the sales tax was being deposited with the sales tax authorities on behalf of the State. In case of delayed payment interest paid u/s 17-A(1) was also being deducted. The question is whether such deduction is permissible or not. Both sides have referred to a number of decisions at the bar.
10. In
Now the interest payable on an arrear of cess u/s 3(3) is in reality part and parcel of the liability to pay cess. It is an accretion to the cess. The arrear of cess "carries" interest; if the cess is not paid within the prescribed period a larger sum will become payable as cess. The enlargement of the cess liability is automatic u/s 3(3). No specific order is necessary in order that the obligation to pay interest should accrue. The liability to pay interest is as certain as the liability to pay cess. As soon as the prescribed date is crossed without payment of the cess, interest begins to accrue. It is not a penalty for which provision has been separately made by Section 3(5). Nor is it a penalty within the meaning of Section 4, which provides for a criminal liability and a criminal prosecution. The penalty payable u/s 3(5) lies in the discretion of the collecting officer or authority.
11. In the result, it was held that the interest paid for the delayed payment of the cess is an expenditure laid out wholly for the purpose of business and hence deductible.
12. In
13. The Apex Court again considered this question in
Therefore, whenever any statutory impost paid by an assessee by way of damages or penalty or interest is claimed as an allowable expenditure u/s 37(1) of the Income Tax Act, the assessing authority is required to examine the scheme of the provisions of the relevant statute providing for payment of such impost notwithstanding the nomenclature of the impost as given by the statute, to find whether it is compensatory or penal in nature. The authority has to allow deduction u/s 37(1) of the Income Tax Act, wherever such examination reveals the concerned impost to be purely compensatory in nature. Wherever such impost is found to be a composite nature, that is, partly of compensatory nature and partly of penal nature, the authorities are obligated to bifurcate the two components of the impost and give deduction to that component which is compensatory in nature and refuse to give deduction to that component which is penal in nature.
14. This principle enunciated in Prakash Cotton Mills Pvt. Ltd. case supra has stood the test of time and is now the law of the land. The same principle has been followed by the Bombay High Court in New Mahalaxmi Silk Mills Pvt. Ltd. v. Commissioner of Income Tax 206 ITR 302 and
15. Shri Vinay Kuthiala, learned Counsel for the Revenue, contends that Clause 18(G) of the lease deed clearly lays down that in case the Corporation does not pay the sales tax on the due date it shall be liable to pay the penalty @ 18% per annum. He submits that since in the agreement the payment is described as penalty the same cannot be held to be compensatory in nature and must be held to be penal in nature.
16. We are not in agreement with this submission of Shri Vinay Kuthiala, learned Counsel for the revenue. In Prakash Cotton Mills Pvt. Ltd.''s case (supra) the Apex Court approved the law laid down by the Division Bench of Andhra Pradesh High Court in
17. There can be no manner of doubt that in view of the decisions of the Apex Court quoted here-in-above interest payable for delayed payment of tax is deductible u/s 37. Taxing statutes normally have two impost for delayed payment. One is the imposition of interest, which is automatic, the second is the imposition of penalty for which not only notice is required but where assessee gives valid reasons for not depositing the tax in time penalty need not be imposed. Where the payment of interest is automatic for the delayed period, the imposition is compensatory in nature. In the present case, no doubt, the word penalty has been used in Clause 18(G) but if we read the entire lease deed and the provisions of the H.P. General Sales tax Act together, it is apparent that the parties to the lease deed decided that though the sales tax in fact was to be deposited by the State it would be deposited on its behalf by the assessee Forest Corporation. In case the amount of sales tax was not paid in terms of Section 17-A the State being the dealer became liable to pay simple interest @ 12% per annum for delay of one month and thereafter 18% per annum till the default continues.
18. We have been informed at the bar that though in Clause 18(G) of the lease deed the penalty fixed is @ 18% per annum but the amount claimed by the assessee is strictly in accordance with Section 17-A. It is more than obvious that this interest was not payable by way of penalty but by way of compensation to compensate the State for the interest which it would have been liable to pay u/s 17-A. We are, therefore, of the considered view that question No. 1 has to be answered in favour of the assessee and against the revenue.
19. Questions No. 2 and 3 in Income Tax Appeal No. 21 of 2003 are similar. The question is on which date the payments made crystalised. We are of the opinion that these questions are in fact not substantial questions of law but questions of fact. Whether a particular payment crystallized in one year or the other may at the best be a mixed question of law and fact but cannot be a substantial question of law. Even otherwise, we find that as far as the question No. 2 is concerned the finding of the learned Tribunal that the payment was settled as crystallized on 22.1.1996 i.e. during the assessment year 1996-97 is the correct position. No doubt, the Pricing Committee in its meeting held on 16.5.1988 decided what royalty and interest was to be charged from the assessee with regard to the payment to be made to the Raja of Kutlehar. However, a dispute arose with regard to the amount payable. This dispute was finally settled by the H.P. High Court vide order dated 10.1.1996 wherein the assessee was directed to make payment of the interest. This was the date on which dispute was settled and crystallized. Therefore, this question is also answered in favour of the assessee and against the revenue.
20. As far as question No. 3 is concerned, it relates to the payment of interest on interest on belated payment of royalty. In this case the stand of the revenue is that the interest on interest did not become payable in one year but should have been spread over the entire period. According to the revenue, the Principal Chief Conservator of Forest in his letter dated 4.12.1995 has clearly indicated that the Government had directed the assessee to pay interest on interest amounting to Rs. 68,19,325. This should have been held to be a payment payable on 4.12.1995. The Tribunal has held that the interest on delayed payment of royalty and the payment of interest upon interest is not penal in nature but is mere charging of compound interest. We are in agreement with this finding. The interest on interest relates to the period 1.4.1983 to 31.3.1990 but the same was paid by the assessee only during the assessment year 1996-97. The dispute got finally settled and crystallized on receipt of the letter dated 6.12.1995 and was paid during the assessment year 1996-97. Since the assessee follows the mercantile system of accounts this deduction was allowable. We are in total agreement with the findings of the learned Tribunal. Question No. 3 is also answered in favour of the assessee and against the revenue.
21. As far as question No. 4 is concerned, it is not at all a substantial question of law.
22. All the appeals are disposed of in the aforesaid terms. No order as to costs.
