CIT vs Gujarat State Financial Corporation

Revenue is in appeal against the judgment of the income tax Appellate Tribunal (''the Tribunal'' for short) dated 5-10-2012 raising following question for our consideration:-

Whether the Tribunal is right in law and on facts in deleting the disallowance of penal interest paid to Government of Gujarat amounting to Rs. 51,14,787 without appreciating the fact that levy of penal interest @ 2% p.m. cannot be called a compensatory payment for delay in payment of instalment. Such late payment is hence against public policy and the amount paid for the same cannot be allowed as deductible expenses u/s 37(1) in view of the Explanation to section 37(1) of the Act?

Short issue is whether the Revenue is right in contending that the sum of Rs. 51.14 lakhs (rounded off) paid by the respondent assessee by way of interest on delayed payment of instalments can be treated to be in the nature of penalty and therefore not leviable by way of deduction u/s 37(1) of the Act. Admitted facts are that the respondent assessee had paid the said sum of Rs. 51.14 lakhs to the Government of Gujarat on loans and advances made to the respondent assessee towards interest on delayed payment of instalments. The respondent assessee itself is a public sector undertaking. Having taken loan from the Government it also agreed to a repayment schedule. The terms of agreement provided that delayed payment would incur interest at the rate of 2% per month. When the assessee expended the sum of Rs. 15.14 lakhs towards such liability and claimed deduction thereof u/s 37(1) of the Act, the Revenue contested the claim on the terms that such interest is penal in nature and the same cannot be permitted deduction of.

Commissioner (Appeals) held in favour of the Revenue. Thereupon, the assessee approached the Tribunal. The Tribunal reversed the decision of Commissioner (Appeals) making following observations:-

We have considered rival submissions. We find that a perusal of the Resolution No. JNV-1099-2023-A of the Govt., of Gujarat (supra) makes it clear that the Govt., of Gujarat has prescribed rates of interest on loans for the public sector undertaking, which is clearly in the nature of ''penal interest'' and not in the nature of penalty. The assessee is in the business of finance and interest was paid by the assessee-company on account of late payment of amount payable to the State Government. There is no infringement of law and there is no Act on the part of the assessee which can be said to be against the public policy. The assessee had advanced finance by way of term loans, leave finance etc. for the industrial units in the State of Gujarat during the relevant period and has earned interest thereon. The penal interest in the nature of finance charges for late payment of instalment/amount could not be equated with penalty imposable due to some infringement of law. The use of the word ''penal interest'' as a nomenclature does not mean any penalty for infringement of law. We find that the observations of the CIT (Appeals) that such late payment is against the public policy and amount paid by the same could not be allowed as deductible expenses u/s 37(1A) in view of Explanation to section 37(1), is not sustainable in law. The interest charged at the rate of 2% per month for delayed payment of instalment by the assessee-company could not be equated with payment made against the public policy or payment made in contravention of law. We are of the considered view that the interest paid by the assessee on delayed payment of instalment to the State of Gujarat is in the nature of financial charged for late payment of instalment. In view of the matter, we hold that no case of disallowance by holding the payment of penal interest as against the public policy could be made out by the department, and accordingly, the issue is decided in favour of the assessee and the grounds of the appeal of the assessee are allowed.

From the decision of the Tribunal and other documents on record, it emerges that the payment in question concerned interest for delayed payment of instalments. Though the agreement referred to as penal interest, the same was rightly not treated by the Tribunal as penalty. Merely because the agreement referred to such interest as a penal interest, any such payment would not partake the character of penalty. It is not even the case of the Revenue that the sum expended by the assessee was for payment of penalty. It was simpliciter liability of interest on delayed payment of instalments.

In the result, no question of law arises. Tax Appeal is dismissed.