http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 1 of 7  

PETITIONER: BHARAT COMMERCE 7 INDUSTRIES LTD.

       Vs.

RESPONDENT: THE COMMISSIONER OF INCOME TAX, CENTRAL II

DATE OF JUDGMENT:       05/03/1998

BENCH: SUJATA V.MANOHAR, D.P. WADHWA

ACT:

HEADNOTE:

JUDGMENT:                [With C.A. Nos. 3355-56/1993]                       J U D G M E N T Mrs. Sujata v. Manohar, J. C.A. No. 5509 of 1985      The following  question was  referred to the High Court of Delhi under Section 256(1) of the Income tax Act, 1961 at the instance of the assessee :-      "Whether on  the facts  and in  the      circumstances of the case the claim      for deduction  of  interest  levied      under Section  139 to the extent of      Rs. 11,470/-   and  interest levied      under  Section 215 to the extent of      Rs. 1,04,339/- was rightly rejected      as not  allowable under  Section 37      of the Income-Tax Act, 1961 for the      assessment year 1972-73?" The High  Court has answered the question in the affirmative and in  favour of  the revenue.  The  question  pertains  to assessment year  1972-73. The  assessee is a limited company manufacturing  yarn.   It  also  does  some  other  business activities. The Income Tax Officer at the time of completing the assessment  for assessment year 1972-73 levied  interest under Section 139 to the extent of Rs. 11,470/- and interest under Section  215 of the Income Tax Act, 1961 to the extent of Rs.  1,04, 399/-. The assessee claimed deduction of these amounts of  interest under Section 37 of the Income Tax Act, 1961 in  computing its  business income. This claim has been rejected.      The assessee contends that the taxes which were payable were delayed  and to  that extent  the assessee’s  financial resources  increased.   these  increased   resources  became available for business purposes. Hence the interest which is paid to  the Government under Section 139 and 215 represent, in effect, interest on capital that would have been borrowed by the  assessee otherwise.  Hence these  amount  should  be allowed as  deduction under  Section 37 as expenses incurred wholly and exclusively for the purpose of its business.      The assessee  was required  to pay  advance  tax  under Section 212  on the basis of his own estimate. Under Section

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 2 of 7  

215, it  the tax  so paid  is less  then 75% of the assessed tax, interest  as prescribed  therein, is  payable .  it  is difficult to see how the interest so paid for not paying the requisite amount  of advance  tax  as  prescribed    can  be considered as  expenditure laid  out wholly  and exclusively for the  purpose of  business. In the case of Smt. Padmavati Jaikrishna V. Additional Commissioner of Income-Tax, Gujarat ([1987] 166  ITR 176)  the assessee  borrowed money  for the purpose of  discharge of  her liabilities for the payment of income-tax,  wealth-tax   and  annuity   deposit.  She  paid interest on  this borrowed  amount. The income earned by the assessee was  income from other sources. hence the allowable deduction would have been under Section 57(3). In respect of the payment  of annuity  deposit this  Court said  that  the dominant purpose  of making  the annuity  deposit was not to earn income  but to  meet the  statutory liability of making the deposit.  The liability  for payment  of income-tax  and wealth-tax  was   a  statutory   liability.  Therefore,  the expenditure in  the form  of interest which was paid was not expenditure wholly or exclusively for the purpose of earning income. Hence  it could  not allowed  as a  deduction  under Section 57(3)  of the  Income Tax  Act, 1961. In the case of East India  Pharmaceutical Works  Ltd.  V.  Commissioner  of Income-Tax  ([1997]  224  ITR  627)  this  court  held  that interest on  an overdraft  for payment of income-tax was not expenditure wholly  and exclusively incurred for the purpose of business  and was  not deductible under Section 37 of the Income Tax Act. This Court affirmed the decision in the case of Smt. Padmavati Jaikrishna (supra).      A similar  view has  been taken  by a  number  of  High Courts in  earlier decision.  In the  case  of  Aruna  Mills Limited v.  Commissioner of  Income-Tax Ahmedabad ([1957] 31 ITR 153)  the Bombay High Court was concerned with a similar question. It held that the interest which an assessee had to pay under  sub-section 7 of Section 18A of the India Income- Tax Act,  1922 for having under-estimated the tax payable by him by  way of  advance tax,  cannot be  claimed as business expenditure under  Section 10(2)  (xv) of  the said Act. The Court observed that it was difficult to understand how, when a business  man commits default in discharging his statutory obligation,  the   consequences  of   that   default   could constitute  an  expenditure  exclusively  incurred  for  the purpose of his business. The same view was taken in the case of orient  General Industries  Limited  v.  Commissioner  of Income-Tax ([1994] 209 ITR 490), where the Calcutta High has held that  interest paid  for delay in filing the income-tax return has  no connection with the business of the assessee. The assessee  does not  pay the  interest for the purpose of business or  for carrying  on of business activity. Hence it is not  deductible in  computing the income of the assessee. The Calcutta  High Court reaffirmed in this case its earlier judgment in  Balmer Lawrie  and Co.  Ltd. v. Commissioner of Income-Tax, Calcutta  ([1960] 39  ITR 751).  The Punjab  and Haryana High  Court has  also taken  the same  view  in  the Commissioner of Income-Tax  v. Oriental Carpet Manufacturers (India) P. Ltd. ([1973] 90 ITR 373) by holding that interest on payment  of delayed  tax takes  colour from the principle amount payable  and hence is not deductible. The madras High Court has also held in Commissioner of Income-Tax, Madras V. Sundaram &  Company Private  Ltd. ([1964]  52 ITR  763) that interest money borrowed to pay advance tax is not deductible as business expenditure. This view has been affirmed by this Court in Smt. Padmavati Jaikrishna’s case (supra) as well as in East India Pharmacutical’s case (supra).      The assessee,  however,  has  placed  reliance  upon  a

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 3 of 7  

decision of  this court  in commissioner of Income-Tax, West Bengal I  V. Birla  Cotton Spinning  and Weaving  Mills Ltd. ([1971] 82  ITR 166).  The assessee  in that  case had spent money towards  expenses in  engaging lawyers  and conducting proceedings before the Investigation Commission for its case relating to  certain assessment  years and had also incurred such expenses in courts where the vires of the statute under which the  Commission was  constituted were  challenged. The Court allowed  the expenses  so incurred  in connection with the  proceedings  before  the  Investigation  commission  as deductible expenses  while  computing  the  profits  of  the assessee’s business.  On the  facts of  that case  the Court came to  the conclusion  that the  expenses so incurred were for protection  of the  assessee’s business from any process or proceedings  which would  have affected  its  income  and profits. Even  otherwise the  expenditure was  incidental to the business and was necessitated or justified by commercial expediency.      The expenses  in that  case were  incurred for  a  very different purpose  from the  purpose for  which the assessee has paid interest in the present case. When interest is paid for committing a default in respect of a statutory liability to pay  advance tax,  the amount  paid and  the  expenditure incurred in  that connection  is in  no way  connected  with preserving or  promoting the  business of the assessee. this is not  expenditure   which is  incurred and which has to be taken into  account before  the profits  of the business are calculated. The  liability in the case of payment of income- tax and  interest  for  delayed  payment  of  income-tax  of advance tax  arises on  the computation  of the  profits and gains of  business. The  tax which  is  payable  is  on  the assessee’s income  after  the  income  is  determined.  This cannot, therefore,  be considered  as an expenditure for the purpose of earning any income or profits. The ratio or Biral Cotton Mills  case (supra)  is not applicable in the present case.      Learned Counsel  for the  assessee also  relied upon  a decision of  this Court  in Mahalakshmi  Sugar Mill  Co.  V. Commissioner of  Income-TAx, Delhi ([1980] 123 ITR 429). The assessee in that case had claimed deduction of interest paid on arrears of sugarcane cess. this was held by this Court as a part  of the assessee’s liability to pay cess and was held to be  deductible. The  ratio of this judgment also can have no application  here. The  payment of sugarcane cess is very much a part of the assessee’s business expense. Any interest on arrears  of cess  would, therefore, take colour from cess which is payable. it is an indirect tax which has to be paid in the  course of carrying on business. It is required to be deducted in  order to  arrive at  the  net  profits  of  the assessee for  the relevant  assessment year. We are here not concerned with  the payment  of any  indirect tax  which the assessee may  have to  pay in the course of his business. We are concerned  with the  tax with  was required  to be  paid after the  ascertainment of  the net  income of the assessee for the relevant assessment year. Interest which is paid for delayed payment  of advance  tax on  such income  cannot  be considered as  expenditure wholly  and exclusively  for  the purpose of business. Under the Income Tax act the payment of such interest  is inextricably connected with the assessee’s tax liability.  If income-tax  itself is  not a  permissible deduction under Section 37, any interest payable for default committed by  the  assessee  in  discharging  his  statutory obligation under  the Income  Tax Act,  which is  calculated with reference  to the  tax on income cannot be allowed as a deduction.

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 4 of 7  

    In the  present case  section 80V of the income Tax Act is not  attracted because  Section 80V  was inserted  in the Income Tax Act only with effect from 1st of April, 1976.      In the premises the High Court has rightly answered the question in  favour of the revenue and against the assessee. The appeal is, therefore, dismissed with costs. C.A. Nos. 3355-56/1993      These appeals  relate to  assessment years  1977-78 and 1978-79. The  following question  was referred  to the  High Court under  Section 256(1)  of the  Income Tax Act, 1961 at the instance of the revenue:-      "Whether on facts and circumstances      of the case and in law the Tribunal      was  right   in  holding  that  the      assessee was  not entitled  to  the      deduction  of   Rs.   2,94,082   in      assessment  year  1977-78  and  Rs.      43,142/-  assessment  year  1978-79      being  the   interest  payable   on      account of additional liability for      income-tax and  sur-tax on  account      of the  disclosure of  income  made      under the  Voluntary Disclosure  of      Income and  Wealth Act, 1976 u/s 37      or 36(1)  (iii) of  the  Income-tax      Act, 1961?." The assessee  disclosed certain  income under  the voluntary Disclosure of  Income and  Wealth Act, 1976. As a result the assessee became  liable to  pay income-tax  and sur-tax. The assessee applied  for payment  of income-tax  and sur-tax by instalments under the provisions of the Voluntary Disclosure of Income  and Wealth  Act, 1976.  The assessee  was granted these instalments.  The assessee  was also  required to  pay interest under Section 6 of the said Act for delayed payment of income-tax  and sur-tax. The assessee paid by way of such interest, a sum of Rs. 2,82,106/- in assessment year 1977-78 and a  sum of  Rs. 36,370/-  in assessment year 1978-79. The claim of  the assessee  for deduction  of these  amounts was rejected by the revenue authorities.      At the  instance of the assessee the above question has been raised,  The High  Court has also answered the question against the  assessee. It  is the contention of the assessee that instead  of taking  a loan  or withdrawing capital from his business  for payment  of  tax,  the  assessee  obtained instalments for  payment of tax and was, therefore, required to pay  interest. The payment of interest is, therefore, for the purposes  of assessee’s  business and  hence  should  be allowed as  a deduction.  The argument  is  similar  to  the argument advanced  in C.A.  No. 5509  of  1985  relating  to Bharat  Commerce   &  Industries  Ltd.  The  main  point  of distinction  which  the  assessee  has  drawn  is  that  the interest in  his case  is under  the Voluntary Disclosure of Income and  Wealth Act,  1976 and hence it should be treated as expenditure  incurred for  the purposes of the assessee’s business.      Voluntary Disclosure  of Income  and Wealth  Act,  1976 [102 ITR  page 49  (statutes)] is  an  Act  to  provide  for Voluntary Disclosure  of Income and Wealth. Section 3 of the Act provides  that where  any person makes, on or before the prescribed date, as set out in the Section, a declaration in respect of  any income  chargeable to  tax under  the Indian Income Tax  Act for  any assessment  year for  which he  has failed to  furnish a  return under Section 139 of the Income Tax; or  has failed  to disclose  in a return of income, the income so  disclosed; or the assessee makes a declaration of

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 5 of 7  

income  which  has  escaped  assessment  by  reason  of  the omission or  failure on  the part  of such  person to make a return or  to disclose  fully and  truly all  material facts necessary for  his assessment  or  otherwise;  then  on  the income so  disclosed  and  declared,  income  tax  shall  be charged at  the rates  specified in the schedule to the said Act.      Section  4   provides  for  the  manner  in  which  the declaration is  to be  made and  particulars which are to be furnished. Under  Section 5 income-tax payable under the Act in respect  of the  Voluntarily disclosed income is required to be  paid by  the declarant  before making the declaration and the  declaration is  required to be accompanied by proof of payment  of such  tax. Sub-section (2), however, provides that if  the Commissioner  is satisfied   on  an application made in  this behalf by the declarant, that the declarant is unable, for  good and  sufficient reasons,  to pay  the full amount of income-tax in respect of the voluntarily disclosed income in accordance with sub-section (1), he may extend the time for payment of the amount which remains unpaid or allow payment of  the amount which remains unpaid of allow payment by instalments  if the declarant furnishes adequate security for the  payment thereof.  However, an  amount which  is not less than  one-half of  the amount  of income-tax payable in respect of  the Voluntarily  disclosed income has to be paid on or  before 31st of day of march. 1976, and the remainder, on or before the 31st day of March, 1977.      Under Section  6, if  the amount  of income-tax  is not paid on  or before  31st of  March, 1976  the  declarant  is liable to  pay simple  interest at  12 per cent per annum on the amount  remaining unpaid  from 1st of April, 1976 to the date of payment and "the rules made thereunder shall, so far as may  be, apply  as if  the interest  payable  under  this section were  interest  payable  under  sub-section  (2)  of Section 220  of that  Act (i.e.  Income Tax Act, 1961)". The interest, therefore, which is payable for delayed payment of income-tax on  the voluntarily  disclosed income  is of  the same nature  as interest  on income-tax under the Income Tax Act. Payment  of  such  interest  cannot  be  considered  as expenditure incurred  wholly or exclusively for the purposes of business  of the  assessee. For the reasons which we have set out  above in C.A. No. 5509 of 1985, in the present case also the  tax which  is required to paid under the Voluntary Disclosure of  Income and  Wealth Act,  1976 is a tax on the declared income  of the  assessee which  was  not  disclosed earlier and  is disclosed  under the said Act. Income-tax is payable by  virtue of the said Act. It is nevertheless a tax on income  and shares  all characteristics of such tax. When the assessee is liable to pay interest on delayed payment of such tax,  it is  on account  of his  not paying  income-tax within the  prescribed period.  We do not see any reason why any distinction  can  be  made  between  such  interest  and interest paid  under the Income Tax Act, 1961. Both payments do not  have any  nexus with  the business  of the assessee. They are statutory liabilities in respect of the obligations of the assessee which arise under the Income Tax Act and the Voluntary Disclosure  of Income  and Wealth  Act, 1976 after the income  of the  assessee is  determined and/or  declared under the  said Acts.  They cannot  be deducted  before  the determination of such income.      The assessee,  however,  has  drawn  our  attention  to Section 80V  of the  Income Tax Act, 1961 which was in force during the  assessment years  with which  we are  concerned. Under   Section 80V,  "In computing  the total  income of an assessee there  shall be  allowed by  way of  deduction  any

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 6 of 7  

interest paid  by him  in the  previous year  on  any  money borrowed for  the payment of any tax due from him under this Act". Learned  counsel for  the  respondent  submitted  that Section 80V  will apply only to the payment of any tax under the Income  Tax Act of 1961. It will not apply to payment of income-tax under  the Voluntary  Disclosure  of  Income  and Wealth Act,  1976. We  need not  dwell  on  this  submission because, even  it we  assume  that Section 80V does apply it can apply  only if  the assessee  has borrowed any money for payment of  any tax  and has  paid interest  in the relevant previous year  on such  borrowed money. In the present case, the assessee  has not  borrowed any money for the purpose of paying tax;  nor has he paid any interest to any third party for such  borrowing. The contention of the assessee seems to be, that  he had  avoided borrowing money for payment of tax by obtaining  instalments from  the  department  and  paying interest. Therefore,  the  payment  of  interest  should  be considered as  equivalent to his paying interest on borrowed money for payment of tax. The submission has to be stated to be rejected.  Obtaining instalments  from the department and paying  interest  cannot  be  considered  as  equivalent  to borrowing money  from a  third party  for payment of tax and paying interest  on  such  borrowed  money.  The  assessee’s argument, if  taken to  its logical conclusion, would amount to saying  that the  assessee had, in effect, borrowed money from the  income tax  department to pay tax for which he was paying interest  to  the  income  tax  department.  Such  is clearly not the case, as it cannot be.      The assessee  has placed  reliance on a decision of the Andhra Pradesh  High Court  in the  case of  Commissioner of Income-Tax V.  Bakelite Hylam  Ltd. ([1988] 171 ITR 583). In the case  before the  Andhra Pradesh High Court the assessee had taken  certain amount  from his overdraft account to pay income tax.  The interest payable on the amount so withdrawn was held  deductible under section 80V. This decision has no application to  the facts  of the  present  case  where  the assessee has  not borrowed  any moneys for payment of income tax. Section 80V is not attracted in the present case.      The assessee has strongly relied upon a decision of the Gujarat High  Court in  the case  of c.J.  Patel  &  co.  v. Commissioner of  Income-Tax   ([1986] 179 ITR 486). The case before the  Gujarat High Court was a case where the assessee had made a disclosure under the Voluntary Disclosure scheme. Instead of  making payment  of  tax  a  bank  guarantee  was furnished to  the department  and commission was paid to the bank for  obtaining the  bank guarantee.  A  question  arose whether this  commission which  was paid  to the bank by the assessee was  allowable as  a deduction.  The  Gujarat  High Court purported  to distinguish  the earlier judgments where interest paid  on delayed  payment of  tax was  held as  not deductible. The  Gujarat High  Court said  that  payment  of interest for  delayed payment  of tax or payment of interest on moneys borrowed from third parties fro payment of tax may be inadmissible.  But such  payments are  not similar to the payment which  an assessee  makes to  the bank as commission for obtaining  a bank  guarantee for securing the payment of tax. The  Gujarat High has not held that payment of interest on delayed  payment of  tax is n expense incurred wholly for the purposes  of the  assessee’s business.  It has, however, distinguished commission  on bank guarantee from interest on money borrowed  for payment of tax. The above case does not, therefore, help  the assessee  in the  present case. We need not, therefore,  help the  assessee in  the present case. We need not, therefore, examine the correctness or otherwise of the judgment of the Gujarat High Court.

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 7 of 7  

    It cannot  be said,  in  the  present  case,  that  the payment of interest is in any way an expense incurred wholly or exclusively for the purpose of assessee’s business. Nor s it  a  payment  made  for  the  purpose  of  preserving  and protecting the  assessee’s business  as in the case of Birla Cotton Mills (supra).      Apart from  section 37,  the assessee  has also present into service  Section 36(1) (iii) which permits deduction in respect of the amount of interest paid in respect of capital borrowed for  the purposes  of the  assessee’s  business  or profession. For  the reasons  set out earlier, the claim for deduction under section 36(1)(iii) is also misconceived just as the assessee’s claim under section 37 is misconceived.      In the premises, the question raised has to be answered in favour  of the  revenue and  against  the  assessee.  The appeals are, therefore, dismissed with costs.