Commissioner of Income Tax vs Travancore Cochin Chemicals Ltd.

K.S. Paripoornan, J.—At the instance of the Revenue, the Income Tax Appellate Tribunal has referred the following two questions of law for the decision of this court :

"1. Whether, on the facts and in the circumstances of the case, and also in view of the statutory provision contained in Rule 27F of the Regulations framed under the Electricity (Supply) Act, the Tribunal is right in law and fact in holding that there was no infraction of law and this was not any penal interest ?

Whether, on the facts and in the circumstances of the case and also in view of the decision of the Supreme Court in Indian Aluminium Co. Ltd. Vs. Commissioner of Income Tax, West Bengal I, the asses-see is entitled to the claim of deduction for the ''interest'' paid or payable ?"

The respondent is a public limited company. It is engaged in the business of manufacture and sale of chemicals. We are concerned with the assessment year 1975-76, for which the accounting period ended on March 31, 1975. The assessee claimed deduction of a sum of Rs. 15,455 being the amount paid as interest to the Kerala State Electricity Board during the relevant accounting period for belated payment of the bills. The Income Tax Officer held that it is penal interest and so not a permissible deduction. The order is dated October 31, 1977. In appeal, the Appellate Assistant Commissioner, by order dated May 24, 1978, held that the interest was paid to the Electricity Board for not paying the bills in time, that there has been no violation of any law and the interest paid is not a penalty. The Appellate Assistant Commissioner took the view that if the assessee had borrowed the amount and paid the bills, the interest would be allowed as a deduction. Since this is a case where the interest was paid on overdue bills, it is a permissible deduction. The Revenue took up the matter in appeal before the Income Tax Appellate Tribunal. The Appellate Tribunal, by its order dated October 8, 1980, held that the interest was paid for late payment of bills to the Kerala State Electricity Board, that there is no infraction of law and so the interest paid is not a penal interest. Placing reliance on the decision of the Supreme Court in Mahalaxmi Sugar Mills Co. Vs. Commissioner of Income Tax , Delhi, , the plea of the Revenue to disallow deduction of the interest was rejected. It is thereafter, at the instance of the Revenue, that the questions of law formulated hereinabove have been referred for the decision of this court.

We heard counsel for the Revenue, Mr. P. K. R. Menon, as also counsel for the respondent/assessee. It is not evident, either from the order passed by the Appellate Assistant Commissioner or the Income Tax Appellate Tribunal, under what statutory provision the assessee rendered itself liable to pay interest for not paying the bills in time. Even before us, counsel appearing on both sides were not able to place the relevant provisions of law. Counsel for the assessee laid stress on the Bench decision of this court in CIT v. T. M. Chacko and Partners [1978] 115 ITR 40 and another unreported decision rendered by a Bench of this court in I. T. R. No. 352 of 1985- Commissioner of Income Tax Vs. K. Natarajan, , to hold that the payment of interest is not for infraction of any law and so it is a permissible deduction. As stated, we have not been shown the exact provision of law under which the assessee was obliged to pay interest for not paying their bills in time. The Income Tax Appellate Tribunal has referred to Rule 27F of the Regulations framed under the Electricity (Supply) Act, in the questions referred to this court, suggesting that it is the said provision which obliges the assessee to pay interest for not paying their bills in time. Even the said rule was not placed before us.

In the above circumstances, we are not in a position to answer the questions of law referred to this court satisfactorily. We decline to answer the questions referred to us. At the same time, we direct the Income Tax Appellate Tribunal to restore the appeal to file and decide this aspect of the matter, regarding the question whether the assessee is entitled to deduction of the interest paid for not paying the bills in time.

The reference is disposed of as above.

A copy of this judgment under the seal of this court and the signature of the Registrar shall be forwarded to the Income Tax Appellate Tribunal, Cochin Bench.