COMMISSIONER OF INCOME TAX vs PADMAVATI RAJE COTTON MILLS LTD.

By the Court:

By this reference application at the instance of the assessee and at the instance of the Revenue the following questions, set out at pp. 10 and 11 of the paper book, are referred for our opinion

"Whether, on the facts and in the circumstances of the case, the Tribunal is right in holding that the payment of market fees to Market Committee, Sirsa, amounting to Rs. 35,384 is hit by section 40A(3) of the Income Tax Act, 1961, and hence not allowable as business expenditure in the computation of the assessee''s business income for the assessment year 1984-85 ?"

"Whether, on facts and in the circumstances of the case, the Tribunal was justified in upholding the order of Commissioner (Appeals) to the effect that provision in respect of liability toward interest amounting to Rs. 41,666 payable to the Government of Haryana on arrears of purchase-tax for assessment year 1984-85 is not hit by the provisions of section 43B of the Act, 1961?"

The assessee is a company carrying on business in the purchase and sale of cotton and cotton sheets. It also derives income from interest, dividend and capital gains. The assessment year is 1984-85 and previous year ending is on 31-3-1984. While completing the assessment Income Tax Officer has disallowed the payment of market fees where the payments are made in cash to Market Committee, Sirsa (Haryana) by invoking the provisions of section 40A(3) of the Act.

The view taken by the Income Tax Officer has been upheld by the Commissioner (Appeals) as well as by Tribunal. The concurrent finding of the three authorities that the payment which is more than Rs. 2,500 to the Market Committee was in cash. Section 40A(3) provides that where the assessee incurs any expenditure in respect of which payment is made, as may be specified in this behalf by the Central Government by a notification in the Official Gazette a sum exceeding Rs. 2,500 otherwise than by crossed cheque drawn on a bank or by a crossed bank draft such expenditure would not be allowed as a deduction. However, in cases having regard to the nature and extent of banking facilities available consideration of business expediency and other relevant factors if the assessee made the payment in cash, in that case the deduction shall be allowed. In para 6 of the Tribunal''s order, Tribunal found that in this case assessee has not satisfied the conditions laid down in the rules. When assessee has not established his case that there was unavoidable circumstances in the locality, bank facilities were not available or the payment of cheque was not accepted in business, the claim of the assessee is hit by the provisions of section 40A(3) of the Act.

Mr. Khaitan further brought to our notice that Tribunal has not considered the letter given by the Marketing Committee to the effect that the committee was not prepared to accept the payment by cheque. The assessee moved the application before the Tribunal. That certificate issued by the committee has been considered by the Tribunal in miscellaneous application and found that the certificate issued by the Marketing Committee is afterthought. In view of this finding of the fact, no interference is called for in the order of the Tribunal.

The question proposed by the Revenue pertaining to interest amounting to Rs. 41,666 payable to the Government of Haryana whether that claim is hit by the provisions of section 43B of the Act. Learned counsel for the assessee brought to our notice the decision of this court in the case of Hindustan Motors Limited Vs. Commissioner of Income Tax, : . The issue before this court was whether interest formed the part of the customs duty. There was difference of opinion between the Hon''ble Chief Justice K.C. Agarwal and the Hon''ble Justice Ruma Pal. The matter was referred to Third Judge Justice Prabir Kumar Majurridar. Majority view in this case is that interest does not form the part of duty.

The Hon''ble Justice Prabir Kumar Majumdar agreeing with the view of the Hon''ble Justice Ruma Pal observed as follows :

"As I have stated above, on an examination of the relevant provisions of the Customs Act, it cannot be said that the interest payable for keeping the imported goods in the customs warehouse beyond the statutory period is part and parcel of the duty payable on importation of the goods. The word "duty" cannot be treated as including within itself the element of "interest" payable on account of warehousing beyond the statutory period. The levy of duty on importation of the goods and the levy of interest on account of warehoused goods are two distinct and separate liabilities arising in two different events.

I am afraid, I do not feel inclined to agree with the answer put by the Hon''ble Chief Justice, I accept and agree with the answer proposed by the Hon''ble Justice Ruma Pal."

Now the limited question which remains for our consideration is whether in view of the provisions of sub section (2) of section 59 of the Haryana General ST Act, 1978 interest be treated as tax. While reading provision of sub-section (2) of section 59 of the Act, we cannot construe that interest which is treated for the limited purpose as a tax. The interest under that sub-section treated tax that is deemed tax, only for the purpose of collection and recovery of the tax that is a deeming provision. Here the interest which has been treated as deemed tax at no stretch of imagination can be said to be a tax under the Income Tax Act. But it is very common in legislation to give a specific meaning to a particular ward to achieve the object of the Act, in spite of the fact that meaning is not known in the common parlance.

Shri Ramchandra, the learned counsel for the Revenue, submits that the ratio of the decision relied upon by Mr. Khaitan is not applicable in this case. As in the case in hand interest payable to Haryana Government is treated as tax under sub-section (2) of section 59 of the Haryana General ST Act, 1973, which reads as under :

"The interest payable under this section shall be deemed to be tax under this Act for purposes of collection and recovery".

Shri Khaitan, the learned counsel for the assessee, in counter submits that there is a difference between tax and deemed tax. The tax referred in section 43B does not include the deemed tax and when there is no reference of the deemed tax u/s 43B, the deemed tax referred in sub-section (2) of Haryana State Tax Act, 1973, should not be treated as tax, as referred in section 43B. He placed reliance on the decision of Karnataka High Court in Somaiya Sugar Works Vs. Union of India and Others, .

One of the disputes before the Karnataka High Court in CIT v. Syndicate Bank (supra) was the interest paid u/s 214(1A) of the Act and part of that interest was treated as tax payable, to that extent shall be deemed as tax payable by the assessee. The High Court has taken the view the deeming or declaration made in section 214(1A) of the Act is only to facilitate its recovery under the Act but that cannot and does not make that a tax levied on income under the Act. The relevant provision of section 214(1A) reads as under :

''Where on completion of the regular assessment the amount on which interest was paid under sub-section (1) has been reduced, the interest shall be reduced accordingly and the excess, if any, paid shah be deemed to be tax payable by the assessee and the provisions of this Act shall apply accordingly."

After quoting part of that order the Karnataka High Court has taken the view as under :

"We are of the view that these principles are apposite in construing the true scope and ambit of section 214(1A) of the Act. When we apply these principles, it is clear that the excess interest paid to the assessee earlier and later repayable by him is not really tax levied under the Act on income but is treated as tax for purposes of the Act. The deeming or declaration made in section 214(1A) of the Act is only to facilitate its recovery under the Act, but that cannot and does not make that a tax levied on income under the Act. We see no merit in this alternative contention urged by Sri Kumar to concur with the view expressed by the Tribunal."

Following majority the view taken by this court in the case of Hindustan Motors Ltd. (supra) we are of the view that interest cannot be treated as tax u/s 43B of the Act.

While the interest is neither a tax under the Income Tax Act, nor it is known as tax in the common parlance it cannot be treated as tax, specially for the purpose of section 43B of the Act, we find no force in the submission of Shri Ramchandran that once the interest is treated as deemed tax that interest is hit by the provision of section 43B of the Act.

In the result, we answer the question No. 1 in affirmative i.e., in favour of the revenue and against the assessee. Similarly, we answer question No. 2 also in affirmative i.e., in favour of the assessee and against the revenue.

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