1. The only contention in this appeal, filed by the assessee, is that the Commissioner (Appeals) was wrong in upholding the disallowance of Rs. 22,253 claimed as a deduction by the assessee in the computation of its total income.
2. The assessee is a private limited company carrying on business as travel agents. Under the provisions of Section 192 of the Income-tax Act, 1961 ("the Act"), it was required to deduct tax from salaries paid to its employees and under the provisions of Section 200 of the Act, the assessee was required to pay such tax deducted, to the credit of the Central Government within the prescribed time. The assessee did deduct tax as required under Section 192 but failed to pay the amount to the credit of the Government within the prescribed time.
Consequently, it was required to pay interest under Section 201(1A) of the Act, in the sum of Rs. 22,253. It is this interest which has been claimed by the assessee as a business expenditure.
3. It was the contention of the assessee that the amount of tax deducted at source was utilised by it for carrying on its business and, consequently, the interest payment under Section 201(1 A) should be regarded as interest paid on borrowed funds utilised for the purpose of the business. The ITO was of the view that the interest charged from the assessee under Section 201(1A) was penal in nature and was, therefore, not permissible as a deduction. In this view of the matter, he rejected the assessee's claim.
4. On appeal by the assessee, the Commissioner (Appeals) confirmed the disallowance, though on a ground different from the one on which the disallowance was made by the ITO. He observed that the requirement to deduct tax at source, from salaries payable to its employees and to remit such tax to the credit of the Central Government were statutory obligations imposed on the assessee by the statute. The charging of interest under Section 201(1A) for the delay in making the payment of the tax deducted at source has no connection with the business carried on by the assessee but is only referable to the default on the part of the assessee in making the payment. For this reason, he held that that payment of interest cannot be treated as interest on money borrowed for the purpose of the business. Aggrieved by the order of the Commissioner (Appeals), the assessee is in second appeal before the Tribunal.
5. On behalf of the assessee, it was contended that the tax deducted at source was, no doubt, not paid by the assessee to the credit of the Central Government, within the prescribed time and it was for this reason that the impugned interest was charged. However, it was the contention of the learned counsel for the assessee that the funds so withheld were utilised by the assessee for the purposes of its business and even if there may be an element of illegality in withholding the payment of such tax to the Government, the interest referable to such delay would be admissible as a revenue deduction. In this connection, he referred to the decision of the Supreme Court in CIT v. Piara Singh  124 ITR 40. He also referred to the decision of the Gujarat High Court in CIT v. Tarun Commercial Mills Co. Ltd.  107 ITR 172, pointing out the distinction between an expenditure incurred for the purpose of a business and payments in the nature of penalties. Reliance was also placed on the decision of the Allahabad High Court in CIT v.J.K. Cotton Spg. & Wvg. Mills Co.  123 ITR 911.
6. On behalf of the revenue, it was argued that the interest claimed as deduction by the assessee did not represent interest on borrowed capital. It was interest charged pursuant to a statutory default committed by the assessee. In support of his argument that such a claim is not permissible, he relied on the decision of the Full Bench of the Allahabad High Court in Saraya Sugar Mills (P.) Ltd. v. CIT  116 ITR 387. He also referred to the decision of the Calcutta High Court in National Engg. Industries Ltd. v. CIT  113 ITR 252 in support of his submission that interest paid for the belated payment of the tax deducted at source is not admissible as a deduction.
7. After having heard the parties, I am of the view that the assessee's claim for deduction is not tenable. There has been no borrowal of funds by the assessee for purposes of carrying on its business. On the other hand, revenue which is due to the Government was unlawfully withheld and it is for this reason that the interest under Section 201(1A) was charged on the belated payment. Besides, no material has been placed before me to show that such funds withheld by the assessee were actually utilised for the purposes of the business. The decision of the Supreme Court in CIT v. Piara Singh (supra) is clearly distinguishable on facts as the business carried on in that case was an illegal business and the expenditure, which was incidental to the carrying on of such a business, was held by the Supreme Court to be admissible against the income from the illegal business for purposes of charging of income-tax. In the present case, it is not the stand of the assessee that the business carried on by it is an illegal business. It is a perfectly legitimate business of travel agents. The interest has been charged under Section 201(1A) for a statutory default committed by the assessee. There is no nexus between the commission of such default and the carrying on of the business. In other words, it is not incidental to the carrying on of the legitimate business that the assessee should commit such a default incurring the payment of such interest. Thus, as the payment of the interest under Section 201(1A) could not be said to be incidental to the carrying on of the business by the assessee, the authorities below were justified in rejecting the assessee's claim to deduct such interest while computing its total income.