Commerce 7 Industries Ltd. Vs. The Commissioner of Income Tax, Central II  INSC 153 (5 March 1998)
V.Manohar, D.P. Wadhwa Mrs. Sujata v. Manohar, J.
[With C.A. Nos. 3355-56/1993]
No. 5509 of 1985 The following question was referred to the High Court of Delhi
under Section 256(1) of the Income tax Act, 1961 at the instance of the assessee
:- "Whether on the facts and in the circumstances of the case the claim
for deduction of interest levied under Section 139 to the extent of Rs.11,470/-
and interest levied under Section 215 to the extent of Rs. 1,04,339/- was
rightly rejected as not allowable under Section 37 of the Income-Tax Act, 1961
for the assessment year 1972-73?" The High Court has answered the question
in the affirmative and in favour of the revenue. The question pertains to
assessment year 1972-73. The assessee is a limited company manufacturing yarn.
It also does some other business activities. The Income Tax Officer at the time
of completing the assessment for assessment year 1972-73 levied interest under
Section 139 to the extent of Rs. 11,470/- and interest under Section 215 of the
Income Tax Act, 1961 to the extent of Rs. 1,04, 399/-. The assessee claimed
deduction of these amounts of interest under Section 37 of the Income Tax Act,
1961 in computing its business income. This claim has been rejected.
contends that the taxes which were payable were delayed and to that extent the assessee's
financial resources increased. these increased resources became available for
business purposes. Hence the interest which is paid to the Government under
Section 139 and 215 represent, in effect, interest on capital that would have
been borrowed by the assessee otherwise. Hence these amount should be allowed as
deduction under Section 37 as expenses incurred wholly and exclusively for the
purpose of its business.
was required to pay advance tax under Section 212 on the basis of his own
estimate. Under Section 215, it the tax so paid is less then 75% of the
assessed tax, interest as prescribed therein, is payable . it is difficult to
see how the interest so paid for not paying the requisite amount of advance tax
as prescribed can be considered as expenditure laid out wholly and exclusively
for the purpose of business. In the case of Smt. Padmavati Jaikrishna V.
Additional Commissioner of Income-Tax, Gujarat ( 166 ITR 176) the assessee borrowed money for the purpose of
discharge of her liabilities for the payment of income-tax, wealth-tax and annuity
deposit. She paid interest on this borrowed amount. The income earned by the assessee
was income from other sources. hence the allowable deduction would have been
under Section 57(3). In respect of the payment of annuity deposit this Court
said that the dominant purpose of making the annuity deposit was not to earn
income but to meet the statutory liability of making the deposit. The liability
for payment of income-tax and wealth-tax was a statutory liability. Therefore,
the expenditure in the form of interest which was paid was not expenditure
wholly or exclusively for the purpose of earning income. Hence it could not allowed
as a deduction under Section 57(3) of the Income Tax Act, 1961. In the case of
East India Pharmaceutical Works Ltd. V. Commissioner of Income-Tax ( 224
ITR 627) this court held that interest on an overdraft for payment of
income-tax was not expenditure wholly and exclusively incurred for the purpose
of business and was not deductible under Section 37 of the Income Tax Act. This
Court affirmed the decision in the case of Smt. Padmavati Jaikrishna (supra).
similar view has been taken by a number of High Courts in earlier decision. In
the case of Aruna Mills Limited v. Commissioner of Income-Tax Ahmedabad (
31 ITR 153) the Bombay High Court was concerned with a similar question. It
held that the interest which an assessee had to pay under sub-section 7 of
Section 18A of the India Income- Tax Act, 1922 for having under-estimated the
tax payable by him by way of advance tax, cannot be claimed as business
expenditure under Section 10(2) (xv) of the said Act. The Court observed that
it was difficult to understand how, when a business man commits default in
discharging his statutory obligation, the consequences of that default could
constitute an expenditure exclusively incurred for the purpose of his business.
The same view was taken in the case of orient General Industries Limited v.
Commissioner of Income-Tax ( 209 ITR 490), where the Calcutta High has
held that interest paid for delay in filing the income-tax return has no
connection with the business of the assessee.
does not pay the interest for the purpose of business or for carrying on of
business activity. Hence it is not deductible in computing the income of the assessee.
Calcutta High Court reaffirmed in this case its earlier judgment in Balmer Lawrie
and Co. Ltd. v. Commissioner of Income-Tax, Calcutta ( 39 ITR 751). The
Punjab and Haryana High Court has also taken the same view in the Commissioner
of Income-Tax v. Oriental Carpet Manufacturers (India) P. Ltd. ( 90 ITR
373) by holding that interest on payment of delayed tax takes colour from the
principle amount payable and hence is not deductible. The madras High Court has
also held in Commissioner of Income-Tax, Madras V. Sundaram & Company
Private Ltd. ( 52 ITR 763) that interest money borrowed to pay advance
tax is not deductible as business expenditure. This view has been affirmed by
this Court in Smt. Padmavati Jaikrishna's case (supra) as well as in East India
Pharmacutical's case (supra).
however, has placed reliance upon a decision of this court in commissioner of
Income-Tax, West Bengal I V. Birla Cotton Spinning and Weaving Mills Ltd. (
82 ITR 166). The assessee in that case had spent money towards expenses in
engaging lawyers and conducting proceedings before the Investigation Commission
for its case relating to certain assessment years and had also incurred such
expenses in courts where the vires of the statute under which the Commission
was constituted were challenged. The Court allowed the expenses so incurred in
connection with the proceedings before the Investigation commission as
deductible expenses while computing the profits of the assessee's business. On
the facts of that case the Court came to the conclusion that the expenses so
incurred were for protection of the assessee's business from any process or
proceedings which would have affected its income and profits. Even otherwise
the expenditure was incidental to the business and was necessitated or
justified by commercial expediency.
expenses in that case were incurred for a very different purpose from the
purpose for which the assessee has paid interest in the present case. When
interest is paid for committing a default in respect of a statutory liability
to pay advance tax, the amount paid and the expenditure incurred in that
connection is in no way connected with preserving or promoting the business of
the assessee. this is not expenditure which is incurred and which has to be
taken into account before the profits of the business are calculated. The
liability in the case of payment of income- tax and interest for delayed
payment of income-tax of advance tax arises on the computation of the profits
and gains of business. The tax which is payable is on the assessee's income
after the income is determined. This cannot, therefore, be considered as an
expenditure for the purpose of earning any income or profits. The ratio or Biral
Cotton Mills case (supra) is not applicable in the present case.
Counsel for the assessee also relied upon a decision of this Court in Mahalakshmi
Sugar Mill Co. V. Commissioner of Income-TAx, Delhi ( 123 ITR 429). The assessee
in that case had claimed deduction of interest paid on arrears of sugarcane cess.
this was held by this Court as a part of the assessee's liability to pay cess
and was held to be deductible. The ratio of this judgment also can have no
application here. The payment of sugarcane cess is very much a part of the assessee's
business expense. Any interest on arrears of cess would, therefore, take colour
from cess which is payable. it is an indirect tax which has to be paid in the
course of carrying on business. It is required to be deducted in order to
arrive at the net profits of the assessee for the relevant assessment year. We
are here not concerned with the payment of any indirect tax which the assessee
may have to pay in the course of his business. We are concerned with the tax
with was required to be paid after the ascertainment of the net income of the assessee
for the relevant assessment year. Interest which is paid for delayed payment of
advance tax on such income cannot be considered as expenditure wholly and
exclusively for the purpose of business. Under the Income Tax act the payment
of such interest is inextricably connected with the assessee's tax liability.
If income-tax itself is not a permissible deduction under Section 37, any
interest payable for default committed by the assessee in discharging his
statutory obligation under the Income Tax Act, which is calculated with
reference to the tax on income cannot be allowed as a deduction.
present case section 80V of the income Tax Act is not attracted because Section
80V was inserted in the Income Tax Act only with effect from 1st of April,
premises the High Court has rightly answered the question in favour of the
revenue and against the assessee.
appeal is, therefore, dismissed with costs.
Nos. 3355-56/1993 These appeals relate to assessment years 1977-78 and 1978-79.
The following question was referred to the High Court under Section 256(1) of
the Income Tax Act, 1961 at the instance of the revenue:- "Whether on
facts and circumstances of the case and in law the Tribunal was right in
holding that the assessee was not entitled to the deduction of Rs. 2,94,082 in
assessment year 1977-78 and Rs.43,142/- assessment year 1978-79 being the
interest payable on account of additional liability for income-tax and sur-tax
on account of the disclosure of income made under the Voluntary Disclosure of
Income and Wealth Act, 1976 u/s 37 or 36(1) (iii) of the Income-tax Act,
1961?." The assessee disclosed certain income under the voluntary
Disclosure of Income and Wealth Act, 1976. As a result the assessee became
liable to pay income-tax and sur-tax. The assessee applied for payment of
income-tax and sur-tax by instalments under the provisions of the Voluntary
Disclosure of Income and Wealth Act, 1976. The assessee was granted these instalments.
The assessee was also required to pay interest under Section 6 of the said Act
for delayed payment of income-tax and sur-tax. The assessee paid by way of such
interest, a sum of Rs. 2,82,106/- in assessment year 1977-78 and a sum of Rs.
36,370/- in assessment year 1978-79. The claim of the assessee for deduction of
these amounts was rejected by the revenue authorities.
instance of the assessee the above question has been raised, The High Court has
also answered the question against the assessee. It is the contention of the assessee
that instead of taking a loan or withdrawing capital from his business for
payment of tax, the assessee obtained instalments for payment of tax and was,
therefore, required to pay interest. The payment of interest is, therefore, for
the purposes of assessee's business and hence should be allowed as a deduction.
The argument is similar to the argument advanced in C.A. No. 5509 of 1985
relating to Bharat Commerce & Industries Ltd. The main point of distinction
which the assessee has drawn is that the interest in his case is under the
Voluntary Disclosure of Income and Wealth Act, 1976 and hence it should be
treated as expenditure incurred for the purposes of the assessee's business.
Disclosure of Income and Wealth Act, 1976 [102 ITR page 49 (statutes)] is an
Act to provide for Voluntary Disclosure of Income and Wealth. Section 3 of the
Act provides that where any person makes, on or before the prescribed date, as
set out in the Section, a declaration in respect of any income chargeable to
tax under the Indian Income Tax Act for any assessment year for which he has
failed to furnish a return under Section 139 of the Income Tax; or has failed
to disclose in a return of income, the income so disclosed; or the assessee
makes a declaration of income which has escaped assessment by reason of the
omission or failure on the part of such person to make a return or to disclose
fully and truly all material facts necessary for his assessment or otherwise;
then on the income so disclosed and declared, income tax shall be charged at
the rates specified in the schedule to the said Act.
4 provides for the manner in which the declaration is to be made and
particulars which are to be furnished. Under Section 5 income-tax payable under
the Act in respect of the Voluntarily disclosed income is required to be paid
by the declarant before making the declaration and the declaration is required
to be accompanied by proof of payment of such tax. Sub-section (2), however,
provides that if the Commissioner is satisfied on an application made in this
behalf by the declarant, that the declarant is unable, for good and sufficient
reasons, to pay the full amount of income-tax in respect of the voluntarily
disclosed income in accordance with sub-section (1), he may extend the time for
payment of the amount which remains unpaid or allow payment of the amount which
remains unpaid of allow payment by instalments if the declarant furnishes
adequate security for the payment thereof. However, an amount which is not less
than one-half of the amount of income-tax payable in respect of the Voluntarily
disclosed income has to be paid on or before 31st of day of march. 1976, and
the remainder, on or before the 31st day of March, 1977.
Section 6, if the amount of income-tax is not paid on or before 31st of March,
1976 the declarant is liable to pay simple interest at 12 per cent per annum on
the amount remaining unpaid from 1st of April, 1976 to the date of payment and
"the rules made thereunder shall, so far as may be, apply as if the
interest payable under this section were interest payable under sub-section (2)
of Section 220 of that Act (i.e. Income Tax Act, 1961)". The interest,
therefore, which is payable for delayed payment of income-tax on the
voluntarily disclosed income is of the same nature as interest on income-tax
under the Income Tax Act. Payment of such interest cannot be considered as
expenditure incurred wholly or exclusively for the purposes of business of the assessee.
For the reasons which we have set out above in C.A. No. 5509 of 1985, in the
present case also the tax which is required to paid under the Voluntary
Disclosure of Income and Wealth Act, 1976 is a tax on the declared income of
the assessee which was not disclosed earlier and is disclosed under the said
Act. Income-tax is payable by virtue of the said Act. It is nevertheless a tax
on income and shares all characteristics of such tax. When the assessee is
liable to pay interest on delayed payment of such tax, it is on account of his
not paying income-tax within the prescribed period. We do not see any reason
why any distinction can be made between such interest and interest paid under
the Income Tax Act, 1961. Both payments do not have any nexus with the business
of the assessee.
are statutory liabilities in respect of the obligations of the assessee which
arise under the Income Tax Act and the Voluntary Disclosure of Income and
Wealth Act, 1976 after the income of the assessee is determined and/or declared
under the said Acts. They cannot be deducted before the determination of such
however, has drawn our attention to Section 80V of the Income Tax Act, 1961
which was in force during the assessment years with which we are concerned.
Section 80V, "In computing the total income of an assessee there shall be
allowed by way of deduction any interest paid by him in the previous year on
any money borrowed for the payment of any tax due from him under this
Act". Learned counsel for the respondent submitted that Section 80V will
apply only to the payment of any tax under the Income Tax Act of 1961. It will
not apply to payment of income-tax under the Voluntary Disclosure of Income and
Wealth Act, 1976. We need not dwell on this submission because, even it we
assume that Section 80V does apply it can apply only if the assessee has
borrowed any money for payment of any tax and has paid interest in the relevant
previous year on such borrowed money. In the present case, the assessee has not
borrowed any money for the purpose of paying tax; nor has he paid any interest
to any third party for such borrowing. The contention of the assessee seems to
be, that he had avoided borrowing money for payment of tax by obtaining instalments
from the department and paying interest. Therefore, the payment of interest
should be considered as equivalent to his paying interest on borrowed money for
payment of tax. The submission has to be stated to be rejected. Obtaining instalments
from the department and paying interest cannot be considered as equivalent to
borrowing money from a third party for payment of tax and paying interest on
such borrowed money. The assessee's argument, if taken to its logical
conclusion, would amount to saying that the assessee had, in effect, borrowed
money from the income tax department to pay tax for which he was paying
interest to the income tax department. Such is clearly not the case, as it
has placed reliance on a decision of the Andhra Pradesh High Court in the case
of Commissioner of Income-Tax V. Bakelite Hylam Ltd. ( 171 ITR 583). In
the case before the Andhra Pradesh High Court the assessee had taken certain
amount from his overdraft account to pay income tax. The interest payable on
the amount so withdrawn was held deductible under section 80V. This decision
has no application to the facts of the present case where the assessee has not
borrowed any moneys for payment of income tax. Section 80V is not attracted in
the present case.
has strongly relied upon a decision of the Gujarat High Court in the case of c.J.
Patel & co. v. Commissioner of Income-Tax ( 179 ITR 486). The case
before the Gujarat High Court was a case where the assessee had made a
disclosure under the Voluntary Disclosure scheme.
of making payment of tax a bank guarantee was furnished to the department and
commission was paid to the bank for obtaining the bank guarantee. A question
arose whether this commission which was paid to the bank by the assessee was
allowable as a deduction. The Gujarat High Court purported to distinguish the
earlier judgments where interest paid on delayed payment of tax was held as not
deductible. The Gujarat High Court said that payment of interest for delayed
payment of tax or payment of interest on moneys borrowed from third parties fro
payment of tax may be inadmissible. But such payments are not similar to the
payment which an assessee makes to the bank as commission for obtaining a bank
guarantee for securing the payment of tax. The Gujarat High has not held that
payment of interest on delayed payment of tax is n expense incurred wholly for
the purposes of the assessee's business. It has, however, distinguished
commission on bank guarantee from interest on money borrowed for payment of
tax. The above case does not, therefore, help the assessee in the present case.
We need not, therefore, help the assessee in the present case. We need not,
therefore, examine the correctness or otherwise of the judgment of the Gujarat
cannot be said, in the present case, that the payment of interest is in any way
an expense incurred wholly or exclusively for the purpose of assessee's
business. Nor s it a payment made for the purpose of preserving and protecting
the assessee's business as in the case of Birla Cotton Mills (supra).
from section 37, the assessee has also present into service Section 36(1) (iii)
which permits deduction in respect of the amount of interest paid in respect of
capital borrowed for the purposes of the assessee's business or profession. For
the reasons set out earlier, the claim for deduction under section 36(1)(iii)
is also misconceived just as the assessee's claim under section 37 is
premises, the question raised has to be answered in favour of the revenue and
against the assessee. The appeals are, therefore, dismissed with costs.