Martin and Harris (P.) Ltd. vs Commissioner of Income Tax

Ajit K. Sengupta, J.—In this reference u/s 256(1) of the Income- tax Act, 1961 (''the Act'') for the assessment year 1977-78, the following question of law has been referred to this Court:

Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the interest for delayed payment of tax deducted on salary of the employees amounting to Rs. 35,769 charged u/s 201(1A) of the income tax Act, 1961, was not deductible in computing the business income of the assessee for the assessment year 1977-78 ?

Shortly stated, the facts are during the assessment year under reference the assessee-company claimed deduction of a sum of Rs. 35,769 being the expenditure incurred for the payment of interest u/s 201(1A) of the Act on the amount of tax which was not deposited within the time after deducting from salary paid to its employees. The IAC disallowed the said sum of Rs. 35,769 being the interest claimed by the assessee-company as deduction on account of interest paid u/s 201(1A) for delay in payment of income tax deducted u/s 192 of the Act holding, inter alia, that the income tax being disallowable item, interest on income tax could not be allowed and it was also in the nature of a penalty for infraction of law.

The assessee preferred an appeal against the order of IAC. It was contended before the Commissioner (Appeals) that interest is in the nature of compensation for the delay in deducting tax from the employees'' salary and paying it to the Government in time and as such was allowable deduction. In support of the said argument, the Supreme Court judgment in the case of Mahalaxmi Sugar Mills Co. Vs. Commissioner of Income Tax , Delhi, was cited. The Commissioner (Appeals) rejected the contentions of the assessee holding, inter alia, that the interest was calculated on the income tax deducted at source on the salary payable to the employees, and the said income tax was not an admissible expense in the hands of the assessee. The Commissioner (Appeals) following the Supreme Court judgment referred to hereinbefore observed that the interest can be taken to be additional tax which is paid by the assessee-company for not complying with the statutory provisions u/s 201(1) and, therefore, such additional tax is not admissible expense in any view of the matter.

On further appeal to the Tribunal it was argued that the interest was not really paid on the income tax but on the portion of salary which had been deducted from the payment made to its employees and ultimately deposited to the credit of the Government. It was also argued that since salary was an allowable expenditure, the interest payable thereon for delayed deposit with the Government should be allowed. On behalf of the revenue it was argued that the liability u/s 201(1A) was in the nature of income tax liability since the assessee was to be treated as an assessee-in-default and, therefore, any interest payable thereon was in no way different from interest paid under any other provision of the Act. In support of the said contentions the decision of the Calcutta High Court in National Engineering Industries Ltd. Vs. Commissioner of Income Tax (Central), was cited. The assessee also relied on a decision of the Calcutta High Court in Balrampur Sugar Co. Ltd. Vs. Commissioner of Income Tax, . The Tribunal rejected the contentions made on behalf of the assessee holding, inter alia, that the assessee being treated as an assessee-in-default and method of recovery being the same as in case of other taxes and penalties payable under the Act, it cannot be considered to be a part of the salary if the deduction has not been made. The Tribunal observed that the point of course is fine but upon the word used in section 201(1A) the ground was held having been rejected.

At the hearing Mr. Anil Roy Choudhury, the learned counsel for the assessee, has seriously contended that since payment of interest does not come within the purview of section 40(a)(i) or 40(a)(ii) of the Act, the assessee is entitled to claim the said deduction u/s 37 of the Act. It is his contention that the assessee has utilised part of the salary which was deducted for payment of tax on behalf of the employees and as such the assessee is entitled to this deduction. Had the assessee obtained loan from outside sources, interest on such loan would have been allowed as a deduction being the interest on the capital borrowed for the purpose of business.

We are unable to accept this contention of the learned counsel. It is not only illogical but also fallacious. Section 201 provides for the consequences of failure to deduct or pay tax. It provides that where a person defaults in fulfilment of the obligation to deduct tax at source and to pay it to the credit of the Central Government within the prescribed time, he will be treated as an assessee-in-default in respect of the tax. Section 201(1A) provides that such defaulter, i.e., a person who either does not deduct or after deducting fails to pay tax as required by or under the Act, shall be liable to pay simple interest at the prescribed rate on the amount of the tax from the date on which such tax was deductible to the date on which such tax is actually paid to the credit of the Central Government.

Admittedly, the assessee deducted tax from the salary of the employees and thereafter failed to deposit the tax so deducted within the time prescribed by statute and the rules made thereunder. Because of this infraction of law the assessee was treated as an assessee-in-default and the procedure for recovery contemplated under the Act was invoked. Section 201 enacts a three-fold punishment for a person including a company bound to deduct tax at source and defaulting to deduct tax and defaulting to so deduct tax or after having deducted, defaulting in making payment thereof to the credit of the Central Government. Firstly, the defaulter is treated as an assessee in default and one of the consequences flowing therefrom is that the assessee-in-default is liable to pay a penalty u/s 221 of the Act. Secondly, he is liable to pay interest at the prescribed rate on the amount of such tax from the date on which such tax was deductible to the date when such tax is actually paid. The third consequence is that it creates a statutory charge upon all the assets of the defaulter for the amount of tax deducted and not paid plus the amount of interest leviable u/s 201(1A) : Therefore, it is not a part of the salary of the employees which was withheld. It was tax on salary of the employees which was deducted but not paid. Had it not been deducted by the employer, the employees would have paid the tax themselves. The assessee knowing fully well that it had deducted the tax payable on the salary of the employees failed to pay the tax so deducted within the prescribed period.

Further, u/s 203 of the Act every person deducting tax in accordance with the provisions of the relevant section of the Act is required to furnish a certificate, inter alia, to the effect to the concerned person that tax has been deducted and specifying the amount so deducted, and the rate at which tax has been deducted at source. Therefore what has been deducted is tax and it does not retain the character of salary although such deduction has been made from the salary.

In our view the character and quality of interest payable for non- compliance with the provisions of the Act would be the same, whether it is levied for non-submission of return in time or non-payment of tax within the prescribed time or for any other reason. In National Engg. Industries Ltd. ''s case (supra) this Court held that interest paid u/s 220(2) of the Act for delayed payment of taxes was not allowable as deduction in computation of the total income.

Mr. Roy Choudhury has drawn our attention to a decision of this Court in Balrampur Sugar Co. Ltd.'' s case (supra) where this Court held that the liability to pay interest u/s 3(3) of the U.P. Sugarcane (Purchase Tax) Act, 1961 which arises for delayed payment of case, is a compensation for the delayed payment and not in the nature of a penalty imposed for an infraction of law and, therefore, the interest is an allowable deduction in computing the business income of an assessee, who carried on the business of manufacture and the sale of sugar. This case has no application to the facts of this case. There is no dispute that in that case the payment of cess represented expenditure laid out wholly and exclusively for the purpose of business and that it was in the nature of revenue expenditure. The interest payable on arrear of cess was in reality a part and parcel of the liability to pay cess. It was an accretion to the cess. The arrear of cess carried interest. If the cess was not paid within the prescribed period, a larger sum became payable as cess. The enlargement of cess liability was automatic. It was in the nature of compensation paid to the Government for delay in the payment of cess. It was not an infraction of law. This is not the case here. income tax is not allowable as deduction in computing the business income; tax that is sought to be imposed on income cannot be a deduction from the very income which is being subjected to tax. Therefore, if the tax itself is not allowable as a deduction, any payment by way of interest on such tax, whether compensatory or not, cannot be allowed as deduction.

Our attention has been drawn to the decision of this Court in UNION DRUG CO. LTD. Vs. COMMISSIONER OF Income Tax, WEST BENGAL-III, CALCUTTA., In that case, the question was whether interest payable under the Bengal Public Demands Recovery Act, 1913 for failure to make contribution under the Employees Provident Fund Act was allowable as deduction. It was held that interest payable u/s 16 of the said Act was due to delay in making payment of certificated debt. It was not a penalty. This case has also no application to the facts of the instant case.

In our view whenever interest is charged under the Act, whether for delayed payment of tax or filing under estimate of tax or for non- submission of the estimate or return or for default in filing return within the time or delay in making payment of tax, it cannot be allowed as deduction in computing total income as essentially interest in such a case for non-compliance with the provisions of the Act is inextricably connected with the amount of income tax. Where income tax itself is not a deductible amount, be it compensation or be it penalty, payable in addition to the tax cannot be allowed as a deduction in computing total income.

We, therefore, answer the question in this reference in the affirmative and in favour of the revenue and against the assessee. The assessee shall pay cost of this reference.

Banerjee, J.

I agree.