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PETITIONER: MAHALAXMI SUGAR MILLS CO. LTD.

       Vs.

RESPONDENT: COMMISSIONER OF INCOME-TAX, DELHI, NEW DELHI

DATE OF JUDGMENT09/04/1980

BENCH: PATHAK, R.S. BENCH: PATHAK, R.S. UNTWALIA, N.L. VENKATARAMIAH, E.S. (J)

CITATION:  1980 AIR  754            1980 SCR  (3) 421  1980 SCC  (3) 475  CITATOR INFO :  R          1992 SC 847  (62)

ACT:      Indian Income  Tax Act 1922-Section 10(2) (xv)-Interest paid on  arrears of  sugarcane cess-Whether penalty-Interest if a permissible deduction.

HEADNOTE:      Section 3(2)  of the  U.P.  Sugarcane  Cess  Act,  1956 provides that the owner of a sugar factory shall pay cess on sugarcane coming  into the  premises of  a factory  for  use therein,  on   such  date  and  at  such  place  as  may  be prescribed. Sub-section (3) provides that if the cess is not paid by  the specified  date, interest  at six  per cent per annum is  payable on  the arrears from the specified date to the date  of payment. Where a person is in default in making the payment  of the  cess, sub-section  (5) provides that in addition to the amount of the arrears and interest a sum not exceeding ten  per cent  shall  be  recoverable  by  way  of penalty from the person liable to pay the cess.      In respect  of three  assessment years  the  appellant- assessee, a manufacturer of sugar, in its income tax returns claimed deduction  of certain  sums paid  by it  by  way  of interest on  arrears of  cess due  under the  U.P. Sugarcane Cess Act, 1956. The Income Tax Officer disallowed the claim. The Appellant  Assistant Commissioner, whose view was upheld by the Appellate Tribunal, held that the payment of interest constituted a permissible deduction.      On reference the High Court held that the interest paid on the  arrears did  not fall  within the  scope of s. 10(2) (xv) of  the Indian Income Tax Act, 1922 for the reason that it was  paid by  way of  penalty for  an infringement of the law.      Allowing the appeal, ^      HELD :  The interest paid under s. 3(3) of the Cess Act cannot be described as a penalty paid for an infringement of the law.  The assessee  is entitled  to claim  the sum  as a deduction under  section 10(2)  (xv)  of  the  1922  Act  as expenditure laid  out wholly  or exclusively for the purpose of the business. [427E]

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    (a) The  interest payable  on arrears  of cess under s. 3(3) is  in reality  part and parcel of the liability to pay cess. It  is an  accretion to  the cess.  Under s. 3(3) this enlargement of  the  cess  liability  is  automatic  and  no specific order  is necessary in order that the obligation to pay interest  under  this  sub-section  should  accrue.  The liability to  pay interest is as certain as the liability to pay the  cess. The  interest payable  is in  the  nature  of compensation paid to the Government for delay in the payment of cess. It is not by way of penalty. [425G-H] 422      (b) Interest  on arrears  of  cess  is  not  a  penalty because  provision   for  imposing  penalty  has  been  made separately by  s. 3(5).  It is also not a penalty within the meaning of  s. 4  which provides  for criminal liability and criminal prosecution. The penalty payable under s. 3(5) lies in the  discretion of  the collecting  officer or authority. For imposing  penalty under  s.  4  no  prosecution  can  be instituted unless  a complaint  is  made  by  or  under  the authority of the Cane Commissioner under s. 5(1) of the Cess Act. [426A-B]      (c) The procedure for collecting interest on arrears is different from  the procedure for recovering penalty imposed under s.  3(5). The Collector proceeds to recover the arrear of cess  as if  it were an arrear of land revenue on receipt from the  authority concerned of a certificate under s. 3(6) specifying the amount of arrears including interest due. The words "specifying  the amount of arrears including interest" show that  the interest  is part  of the arrears of cess. In the case  of  penalty  imposed  under  s.  3(5)  a  separate provision for recovery has been made under s. 3(7). Although the manner of recovery of penalty provided by s. 3(7) is the same as  the manner  for recovery  provided by  s. 3(6)  the Legislature has  dealt with  it as  some thing distinct from the recovery of arrears of cess including interest. [426C-E]

JUDGMENT:      CIVIL APPELLATE  JURISDICTION : Civil Appeal Nos. 2440- 2442 of 1972.      From the  Judgment and  Order dated  25-10-1971 of  the Delhi High  Court in  Income Tax  Reference Nos.  40 & 41 of 1970.      A. K. Sen and Mr. Bishamber Lal for the Appellant.      P.  G.   Ghokhale  and   Miss  A.  Subhashini  for  the Respondent.      The Judgment of the Court was delivered by      PATHAK, J.-This  appeal by  certificate granted  by the Delhi High  Court raises  the question whether interest paid on arrears of cess under s. 3 (3) of the U.P. Sugarcane Cess Act, 1956 is a permissible deduction under s. 10 (2) (xv) of the Indian Income Tax Act, 1922.      The assessee is a public limited company engaged in the business of  the manufacture  and  sale  of  sugar.  In  its income-tax return  for  the  assessment  year  1959-60  (the previous year  being the  period ending 30th June, 1958) the assessee claimed  a deduction  of  Rs.  1,20,859/-  paid  as interest on  arrears of  cess due  under the  U.P. Sugarcane Cess Act, 1956. The Income-tax Officer disallowed the claim, but the  Appellate  Assistant  Commissioner  held  that  the payment of  interest constitute  a permissible deduction and this view was affirmed by the Income Tax Appellate Tribunal. For the  next assessment  year 1960-61,  (the previous  year ending 30th  June, 1959),  the assessee claimed a sum of Rs.

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1,83,731/- paid  by way  of interest on the arrears of cess. The claim  met with  the same  fortune,  disallowed  by  the Income Tax  Officer but  upheld by  the Appellate  Assistant Commissioner and the Appellate Tribunal. At the instance of 423 the Revenue,  the Appellate  Tribunal referred the following question of  law to  the Delhi  High Court in respect of the assessment years 1959-60 and 1960-61:           "Whether, on the facts and in the circumstances of      the case,  the Tribunal  was justified  in allowing the      interest of  Rs. 1,20,859/- and Rs. 1,83,731/-, paid by      the assessee  on the  arrears of cess in the assessment      years 1959-60  and  1960-61  respectively,  as  revenue      expenditure ?"      For the  assessment year 1961-62 also the previous year of which  ended 30th  June,  1960  the  assessee  claimed  a deduction of  Rs. 2,00,439/-  on account of interest paid by it on  arrears of  cess. This claim also was rejected by the Income Tax  Officer but  allowed by  the Appellate Assistant Commissioner  and   the  Appellate   Tribunal.  The  Revenue obtained a reference to the High Court on the question:           "Whether, on the facts and in the circumstances of      the case,  the Tribunal  was justified  in allowing the      interest of Rs. 2,00,439/-, paid by the assessee on the      arrears of cess, as revenue expenditure?"      The references  were disposed  of by  the High Court by its judgment  dated 25th  October 1971.  The questions  were answered in  the negative. The High Court took the view that the claim  of the assessee did not satisfy the provisions of s. 10  (2) (iii)  of the Indian Income Tax Act, 1922 because it was not interest paid on borrowed capital, and it did not fall within the scope of s.10 (2) (xv) of the Act because it was paid  by way  of penalty for an infringement of the Act. The High Court than certified under s. 66 (A) (2) of the Act that the cases were fit for appeal to this Court.      Learned counsel for the assessee has made no attempt to justify the  claim  under  s.  10  (2)  (iii)  and  we  are, therefore,  relieved  of  the  necessity  of  examining  the validity of  the claim  by reference  to that provision. The case has  been argued  before us  on the basis that it falls under s. 10 (2) (xv).      The validity of the U. P. Sugarcane Cess Act, 1956 (the "Cess Act") was challenged by the assessee and several other sugar manufacturing companies by petitions under Article 226 of the  Constitution in  the Allahabad  High Court. The High Court admitted  the writ  petitions  and  granted  an  order suspending the  operation of  the Act.  The High  Court,  on final   hearing,   dismissed   the   writ   petitions.   But subsequently on  appeal this  Court declared  the  Cess  Act ultra vires on 424 the ground  that the  Act fell  beyond the competence of the State Legislature.      Thereafter,  on   31st  January,  1961,  the  President promulgated the  U.P. Sugarcane Cess (Validation) Ordinance, 1961 validating  the cess  imposed, assessed or collected by the Government  of Uttar  Pradesh  during  the  period  26th January, 1950  to  the  date  of  the  commencement  of  the Ordinance (3rd  February, 1961).  The ordinance was replaced by the  U.P. Sugarcane  Cess  (Validation)  Act,  1961  (the "Validation Act").      The question  whether the interest paid by the assessee under s. 3(3) of the Sugarcane Cess Act, 1956 can be allowed under s.  10(2) (xv)  of the  Income Tax  Act requires us to examine the relevant provisions of the Cess Act. The Act, as

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its long  title states,  is "an Act to amend and consolidate the law  relating to  the imposition  of cess  on  sugarcane intended for  use, consumption in or sale to a factory". The relevant provisions of s.3 declare:           "3. Imposition  of cess-(1)  The State  Government      may by  notification in  the official  Gazette impose a      cess not exceeding four annas per maund on the entry of      the cane  into the  premises  of  a  factory  for  use,      consumption or sale therein. ..    ..   ..     ..           (2) The  cess imposed under sub-section  (1) shall      be payable  by the  owner of  the factory  and shall be      paid  on  such  date  and  at  such  place  as  may  be      prescribed.           (3) Any  arrear of  cess  not  paid  on  the  date      prescribed under  sub-section (2)  shall carry interest      at 6  per cent  per annum  from such  date to  date  of      payment.           (4) The  State Government  may, for the purpose of      assessment and collection of the cess, appoint officers      and authorities  and may  also prescribe  the manner in      which the cess shall be assessed and collected.           (5) Where  any person  is in default in making the      payment of the cess, the officer or authority empowered      to collect  the cess may direct that in addition to the      amount of  the arrears and interest a sum not exceeding      10  per  cent  thereof  shall  by  way  of  penalty  be      recovered from the person liable to pay the cess.           (6) The  officer or authority empowered to collect      the cess  may forward  to the  Collector a  certificate      under his  signature specifying  the amount  of arrears      including inte- 425      rest due  from any  person,  and  on  receipt  of  such      certificate the  Collector shall proceed to recover the      amount specified  from such  person as  if it  were  an      arrear of land revenue.           (7) Any  sum imposed  by way of penalty under sub-      section (5) shall be recoverable in the manner provided      in sub-section  (6) for  the recovery  of the arrear of      cess". Then follows s.4 and it provides:           "4.  Penalties-If   any  person  defaults  in  the      payment of cess imposed under sub-section (1) of See.3,      or, contravenes  any provision  of any  rule made under      this Act,  he shall  without prejudice to his liability      therefor under  sub-section (5)  of Sec.3  be liable to      imprisonment  up  to  six  months  or  to  a  fine  not      exceeding rupees  five thousand or both and in the case      of continuing  contravention  to  a  further  fine  not      exceeding rupees one thousand for each day during which      the contravention continues".      It is  apparent that  section 3(2) requires the payment of cess  on the  date prescribed  under the rules. Rule 4 of the U.P.  Sugarcane Cess  Rules, 1956 provides that the cess due on  the sugarcane  entering into the premises during the first fortnight  of each  calendar year must be deposited in the Government  treasury by  the twenty  second day  of that month and  the cess  due for the remainder of the month must be deposited  before the  seventh day  of the next following month. If  the cess  is not paid by the specified date, then by virtue  of s.3(3)  the arrear of cess will carry interest at the  rate of  six per  cent per  annum from the specified date to  the  date  of  payment.  Section  3(5)  is  a  very different provision. It does not deal with the interest paid on the  arrears of  cess but  provides for an additional sum

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recoverable by  way of penalty from a person who defaults in making payment  of cess.  It is a thing apart from an arrear of cess and the interest due thereon.      Now the  interest payable on an arrear of cess under s. 3(3) is  in reality  part and parcel of the liability to pay cess. It  is an  accretion to  the cess.  The arrear of cess "carries" interest;  if the  cess is  not  paid  within  the prescribed period  a larger sum will become payable as cess. The enlargement  of the cess liability is automatic under s. 3(3). No  specific order  is necessary  in  order  that  the obligation to  pay interest  should accrue. The liability to pay interest  is as certain as the liability to pay cess. As soon as  the prescribed  date is  crossed without payment of the cess, interest begins to accrue. 426 It  is   not  a  penalty,  for  which  provisions  has  been separately made  by s.3(5).  Nor is  it a penalty within the meaning of  s.4, which provides for a criminal liability and a criminal  prosecution. The  penalty payable  under  s.3(5) lies  in   the  discretion  of  the  collecting  officer  or authority.  In  the  case  of  the  penalty  under  s.4,  no prosecution  can  be  instituted  unless,  under  s.5(1),  a complaint is  made by  or under  the authority  of the  Cane Commissioner or  the District  Magistrate. There  is another consideration  distinguishing  the  interest  payable  under s.3(3) from  the penalty  imposed under s.3(5). Section 3(6) provides that  the officer or authority empowered to collect the cess  may forward  to the  Collector a certificate under his signature  specifying the  amount of  arrears  including interest due  from  any  person,  and  on  receipt  of  such certificate the  Collector is required to proceed to recover the amount  specified from  such person  as if  it  were  an arrear of  land  revenue.  The  words  used  in  s.3(6)  are "specifying the  amount of arrears including interest", that is to  say that  the interest is part of the arrear of cess. In the  case of  a penalty  imposed under s.3(5), a separate provision for  recovery has been made under s.3(7). Although the manner  of recovery  of a  penalty provided by s.3(7) is the same  as the  manner for  recovery provided by s.3(6) of the arrears  of cess,  the   Legislature dealt  with  it  as something distinct  from the recovery of the arrears of cess including interest.  In truth,  the  interest  provided  for under s.3(3)  is in  the nature  of compensation paid to the Government for  delay in  the payment  of cess. It is not by way of  penalty.  The  provision  for  penalty  as  a  civil liability has  been made  under s.3(5)  and for penalty as a criminal offence  under s.4.  The Delhi High Court proceeded entirely on  the basis  that the interest bore the character of a penalty. It was, according to the learned Judges "penal interest". The  learned Judges  failed to  notice s.3(5) and s.4 and the other provisions of the Cess Act.      We have  been referred  by the Revenue to Mahabir Sugar Mills (P)  Ltd. v.  Commissioner of  Income Tax, U.P.(1) and Commissioner of  Income-Tax West Bengal v. A. K. Das,(2) but in those  two cases  the Delhi  High Court  and the Calcutta High Court  respectively were  concerned  with  a  claim  to deduction on  account of  penalty paid  under s.3(5)  of the Cess Act.  Reliance  was  also  placed  on  Commissioner  of Income-Tax  v.  Oriental  Carpet  Manufacturers  (India)  P. Ltd.(3) In  that case,  the High Court of Punjab and Haryana laid down that 427 interest paid  by an assessee on account of delay in payment of the   provisional  demand of  tax is  not  a  permissible deduction under  s.36 (1)  (iii) and  s.37 of the Income Tax

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Act. The  learned Judges observed that the liability to tax, although arising  out of  a business  activity, could not be said to  be a liability related to the assessee’s, business. It is  not necessary  for us  to express  any opinion on the decision.  The   case  is  distinguishable  because  we  are concerned with a particular statutory scheme enacted in ss.3 and 4 of the Cess Act before us. Our attention has also been invited to  Suraya Sugar  Mills (P)  Ltd. v. Commissioner of Income-Tax,(1) where  a Full  Bench of  the  Allahabad  High Court has  held that the payment of interest under s.3(3) of the U.P.  Sugarcane  Purchase  Tax  Act,  1961  is  a  penal liability which accrues on an infraction of the law. Section 3(3) of  the U.P. Sugarcane Purchase Tax Act, 1961 does seem to be  in pari  materia with s. 3(3) of the Cess Act. But we think we.  should resist the blandishment to sit in judgment over that  decision when  it is  not in appeal before us. We are concerned solely with the nature of the liability to pay interest under  s.3(3) of  the Cess  Act. A  court should be slow to  succumb to  the temptation of deciding questions on the construction of a statute not directly before it.      In our  opinion, the  interest paid under s.3(3) of the Cess Act  cannot be  described as  a  penalty  paid  for  an infringement of the law. As that is the only ground on which the Revenue resists the claim of the assessee to a deduction of the interest under s.10(2)(xv) of the Income-Tax Act, the assesee is entitled to succeed. There is no dispute that the payment of  interest represents  expenditure laid out wholly or exclusively  for the  purpose of  the business.  There is also no  dispute  that  it  is  in  the  nature  of  revenue expenditure.      In the  result, the  appeal is  allowed,  the  judgment dated 25th  October, 1971  of the  Delhi High  Court is  set aside and  the question referred by the Income Tax Appellate Tribunal are  answered in  the affirmative, in favour of the assessee and  against the  Revenue.  The  assessee  will  be entitled to its costs of these appeals. P.B.R.                                       Appeal allowed. 428