Federal Bank Ltd. vs Commissioner of Income Tax

Paripoornan, J.—At the instance of the assessee, the Income Tax Appellate Tribunal has referred the following question of law for the decision of this court:

"Whether the Income Tax Appellate Tribunal was right in holding that the interest levied on delayed payment of Income Tax was not an item of expenditure allowable u/s 37(1) of the Income Tax Act, 1961 ?"

The assessee is a banking company. The respondent is the Revenue. For the assessment year 1978-79 (year ending December 31, 1977), amongst others, the assessee claimed a sum of Rs. 28,308 as interest paid for delayed payment of Income Tax due as deduction. The income tax Officer rejected the claim. He held that the said interest is not an expenditure laid out wholly and exclusively for the purpose of the business. It was confirmed, in appeal, by the Commissioner of Income Tax (Appeals). In second appeal, the Appellate Tribunal held that the payment of interest by the assessee was not made in the character of a trader. The interest was paid only as an assessee and nothing more. The plea for deduction was negatived. Thereafter, at the instance of the assessee, the Income Tax Appellate Tribunal has referred the question of law formulated herein above for the decision of this court.

We heard counsel for the assessee applicant, Mr. Balachandran, as also counsel for the respondent/Revenue, Mr. P. K. R. Menon. Counsel for the assessee submitted that the interest of Rs. 28,308 was levied by the Income Tax Officer u/s 217 of the Income Tax Act. It was submitted that the assessee is a bank and by non-payment of the Income Tax, the amount was available to the bank as circulating capital and the amount so withheld from being paid to the State was available to the trading activity of the assessee and so the corresponding expenditure by way of payment of interest for such use should be considered to be an expenditure incurred for the purpose of the business of the assessee. Counsel for the Revenue contended that the decisions of courts are uniform in holding that the payment of interest made for delayed payment of Income Tax is not a permissible deduction.

We considered the rival contentions of the parties. The Appellate Tribunal has positively found that the payment of interest by the assessee was not in the character of a trader, but only as an assessee to Income Tax. This finding has not been challenged by framing an appropriate question in that regard. The interest paid for delayed payment of tax would also be part and parcel of the liability to pay Income Tax. It is conceded that amounts paid by way of Income Tax are not permissible deductions u/s 40(a)(ii) of the Income Tax Act. If any sum paid on account of any Income Tax levied on the assessee is not a permissible deduction, the interest payable for non-payment of such tax would also assume the same role or character. It will have the same colour and content of the original amount which is liable to be paid as Income Tax. In this view of the matter, we are of the view that interest levied or paid due to delay in payment of Income Tax can never be a permissible deduction u/s 37(1) of the Income Tax Act.

We are concerned with the assessment year 1978-79. Counsel for the assessee laid stress on Section 80V of the Income Tax Act which was inserted by the Taxation Laws (Amendment) Act, 1975, and which was in force till the passing of the Finance Act, 1985. As per Section 80V of the Income Tax Act, 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 the Act. Counsel for the assessee submitted that if, for paying Income Tax, amounts were borrowed and interest paid on such amounts was a permissible deduction, there is no reason why, by way of analogy, the same concession should not be extended to a case where instead of borrowing amounts to pay the Income Tax, amounts which could be paid as Income Tax were utilised by the assessee and by delaying the payment interest became payable. We are unable to accept the said plea. By Section 80V of the Income Tax Act, deduction of interest on moneys borrowed to pay taxes was allowed, in order to enable the assessee to remit Income Tax. It was provided as an incentive to pay the legitimate tax due. In the instant case, the deduction by way of interest is asked for as an incentive for nonpayment of legitimate tax due. We are of the view that it is not open to the assessee to place reliance on Section 80V of the Income Tax Act to plead that the interest paid on the delayed payment of Income Tax should be allowed as deduction. We are fortified in this view by a Bench decision of the Delhi High Court in Bharat Commerce and Industries Ltd. Vs. The Commissioner of Income Tax, . There are earlier decisions, on this subject, of the Karnataka High Court in Commissioner of Income Tax, Karnataka Vs. International Instruments (P) Ltd., , the Calcutta High Court in National Engineering Industries Ltd. Vs. Commissioner of Income Tax (Central), and the Punjab and Haryana High Court in Commissioner of Income Tax Vs. Oriental Carpet Manufacturers (India) P. Ltd., We concur with the aforesaid decisions.

In the above view of the matter, we hold that the Appellate Tribunal was justified in holding that the interest paid on delayed payment of Income Tax was not an item of expenditure allowable u/s 37(1) of the Income Tax Act.

We answer the question referred to us in the affirmative, against the assessee and in favour of the Revenue.

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, as required by law.