Sunanda Bhandare, J.
(1) The Income-tax Appellate Tribunal, Delhi Bench 'C' have referred the following question for our opinion :
'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. 11,4701- and in.terest levied under Section 215 to the extent ofRs. 1,04,339- was rightly rejected as not allowable.
(2) The assessed is a limited company. The income of the assessed is derived from yarn manufacture and helicopter operations. The Income-tax Officer completed the assessment for the assessment year 1972-73 on 31-6-1972. He levied on the basis of the assessment interest under Section 139 to the extent of Rs. 11,4701- and interest under Section 215 to the extentof Rs. 1,04,339, the total amount of interest being Rs. 1.15,809.The assessed claimed deduction of this interest amount ofRs. 1,15,809'- under Section 37 of the Income-tax Act. 1961in computing the business profits. The Appellate Assistant Commissioner of Income-tax held that the interest was not paid in respect of the capital borrowed for the purposes of the asscssecsbusiness. The assessed went in further appeal to the Tribunal.The Tribunal following the judgment of this Court in Commissioner of Income-tax v. Mahalakshmi Sugar Mills Limited. 85ITR 32 .rejected the appeal filed by the assessed. The a.ssessee, thereforee, by an application under Section 256(1) required the Tribunal to state a case and refer the above question for opinion to the High Court.
(3) Mr. Vaish. learned counsel for the assessed contended before us that interest is compensation paid for the 'user of money and since the money was used by the assessed for the purposes of its business the interest paid under Section 139 and Section 215 should be allowed as deduction under Section 37 of the Income-tax Act. Counsel submitted that the unpaid amount of tax was Rs. 34.37.819/ and the said amount was used by the assessed for the purposes of its business. It was submitted that if the tax amount was paid in time the assessed would have had to borrow the said amount from other sources for the purposes of its business and the interest paid on this borrowed amount would have been deductible under Section 36(l)(iii) of the Income-tax Act. Counsel further contended that the intention of the Legislature was amply made clear by the subsequent insertion of Section 80V which permitted deduction of interest on money borrowed to pay tax. It was further contended that tax,interest and penalty are three different concepts and though under(Section 40(a)(ii) of) the Income-tax Act, tax paid is not deductible; interest paid for delay in payment of income-tax would be deductible under Section 37 of the Act. It was submitted that the judgment of the Delhi High Court in Commissioner of Income-tax v.Mahalaxmi Sugar Mills Limited, (supra) was set aside by the Supreme Court and was no longer good. law.
(4) Reference was made to the judgment of the Supreme Court in the case of Associated Cement Company Limited v. Commercial Tax Officer, Kota, : 1SCR563 . The SupremeCourt in its majority view observed :
'THE contention of the assessed in the present case is that as it had deposited the full amount of tax due on the basis of the returns filed under sub-section (1)of Section 7 of the Act at the time when they werefiled, it had complied with sub-section (2) of Section 7 of the Act and that the question of levying interest on the amount of tax which it deposited onthe basis of the revised returns for the period prior to the date of the revised returns did not arise On behalf of the department it is urged before us thatthe words 'on the basis of return' occurring in subsection (2) of Section 7 of the Act must be read as on the basis of a true and proper return in the context in which those words appear in the statuts and if they are so read, the assessed is liable to pay interest on the deficit amount of tax which was made good on 20/10/1978, for the period between the date on which such deposit or deposits had to be made under Section 7(1) of the Act read with Rule 25 of the Rules and the date on which they were actually made.We are concerned in this case with the liability of theassessed to pay .interest on the amount of tax which remained unpaid. Tax, interest and penalty are three different concepts. Tax become. payable by an assessec by virtue of the charging provision in at axing statute. Penalty ordinarily bc comecs payable when it is found that an asscssce has willfully violated any of the provisions of the taxing statute..Interest is ordinarily claimed from an assessec who has withheld payment of any tax payable by him and it is always calculated at the prescribed rate onthe basis of the actual amount of tax withheld and the exrent of delay in paying it it may not be wrong to say that such interest is compensatory incharacter and not penal.'
We have carefully gone through the decision of the SupremeCourt in Associated Cement Company Limited v. Commercial Tax Officer, Kota ( supra) case and are humbly of opinion thatthe observations of the Supreme Court made in a different context would not help the assessed. The Supreme Court was concerned in this case with the sustainability of penalty and inter estleviable under the Madhya Pradesh Sales Tax Act and the Central Sales Tax Act for not including the freight charges in the taxable turn over in the original returns and for not paving the tax in respect of such freight charges. On the question of penally the Supreme Court, held on the facts of the case. thatthe levy of penally was unsustainable. However, on the second question of interest the majority view was that the assessec could not escape the liability to pay interest under Section 11B(a) onthe amount of tax withheld as a consequence of his own action or inaction from the last date on which it had to be paid as per sub-section (2) or sub-section (2-A) of Section 7 of the RajasthanSales-tax Act (19 of 1954). The Supreme Court further held that. It is the duty of the court while interpreting the machinery sections so that the charge docs no' fall'.its manifest purpose having a full view of it.Wherever the intention to impose liability is clear courts ought to have no hesitation in giving what we may call a common sense interpretation to the machinery sections so that the charge does not fall'.In the present case if the assessce is allowed the deduction, as claimed then it would be getting an unfair advantage for not performing its statutory obligation as against the person who paid his tax in time as required under the law.
(5) Reference, was made to the judgment of the Andhra Pradesh High Court in Additional Commissioner of Income-tax.A.P. v. Burugupalli China Krishnamurthy and others : 121ITR326(AP) . This case related to penalty and it was held that since penalty proceedings are penal the onus was on the Department to show that a particular receipt or amount is of revenuenature. This case has no relevance to the question in dispute in the present case.
(6) In Commissioner of Income-tax, West Bengal v. BirlaCotton Spinning & Weaving Mills Limited. : 82ITR166(SC) theSupreme Court observed as follows :
'THE essential test which has to be applied is whether the expenses were incurred for the preservation and protection of the assessed's business from any such process or proceedings which might have resulted in the reduction of its income and profits and whether the same were actually and honestly incurred.It is not possible to understand how the expenditure on the proceedings in respect of the Investigation Commission by the assessed will not fall within the above rule. Even otherwise, the expenditure was incidental to the business and was necessitated or justified by commercial expediency. It must be remembered that the earning of profits and the payment of taxes are not isolated and independent activities of a business. These activities are continuous and take place from year to year during the whole period for which the-business continues. If theassessed takes any steps for reducing its liability to tax which result in more funds being left for the purpose of carrying on the business there is always a possibility of higher profits.'
In this case the Supreme Court was concerned with the question whether the expenditure on the proceeding in respect of investigation commission by the assessed was deductible under Section 10(2)(15) of the Income-tax Act. The Supreme Cour thad made the above observation while distinguishing another judgment of the Supreme Court in Travancore Titanium ProductsLimited v. Commissioner of Income-tax, Kerala : 60ITR277(SC) where it was held that the charge of the tax was the same whether the assets were part of or used in the trading organisation of the owner.
(7) In the case of Dalmia Dadri Cement Limited v. Commissioner of Income-tax, Delhi : 125ITR425(Delhi) , our High Court while deciding the question whether commission paid on borrowing shares for the purposes of treating them as security to Income tax Department for securing stay of recovery of taxes followed the judgment of the Punjab & Haryana High Court in DalmiaDadri Cement Limited v. Commissioner of Income-tax in order to have uniformity of construction in an all India statute like the Income-tax Act. The learned judges however observed that there was no divergence of view with regard to deductibility of interest payments in connection with the liability to pay income-tax.
(8) The Bombay High Court in Aruna Mills Limited v. Commissioner of Income-tax, Ahmedabad : 31ITR153(Bom) had an occasion to consider the question of deductibility of interest which an asscssee had to pay under sub-section (7) of Section ISA for having under-estimated the tax payable by him by way of advance tax and the interest payable to him by the Government under sub-section (5) of the said section in respect of relevant to note at this stage that while referring to the judgment of the Punjab High Court in Oriental Carpet Manufacturers, case the Supreme Court kept open the question regarding the deductibility of interest paid by an assessed on account of delay in payment of the provisional demand of tax under Section 36(l)(iii)and Section 37 of the Income-tax Act. The Supreme Court held that interest payable on arrears of cess under Section 3(3) is inreality part and parcel of the liability to pay cess. The SupremeCourt observed as follows :
'NOW the interest payable an an arrear of cess under section 3(3) is in reality part and parcel of the liability to pay cess. It is an accretion to the cass.The arrears of cess 'carries' intrest if the cess is not paid within the prescribed period a larger sun will become payable as cess. The enlargement ofthe cess liability is automatic under Section 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 paycess. As soon as the prescribed date is crossed without payment of the cess, interest begins to accrue.It is not a penalty, for which provision has been separately made by Section 3(5). Nor is it a penalty within the meaning of Section 4, which provides for a criminal liability and a criminal prosecution.'
(9) The learned counsel for the assessed fairly conceded that in the case of Commissioner of Income-lax v. Oriental Carpet .. the PunjabHigh Court has held that the interest would derive its colour from the principal amount and will partake of it. The PunjabHigh Court observed as follows
'IT cannot be said that the interest on payment of delayed tax has many connection with the business ofthe assessed, within the four corners of the aforesaid test. The assessed paid interest in order to get adjustment from the department to pay the incometax by Installments, and this has nothing to do with his business activity. The liability to tax. though arising out of business activity, cannot be said -to being any manner a liability which has anything to do with the business of the assessed. It is merely a consequence of income accruing in such business and nothing more. We do not agree with the observations of the Tribunal that the- treatment ..if interest earned on refund of tax, as income of thetax-payer, has anything to do with interest which anassessce incurs in order to raise money to discharge his income-tax liability. This interest will .derive its colour from the principal amount and will part of it. The interest earned by the department is interest on tax and must be held to be part of thetax. This does not follow when the asscssee :are interest on excess payment of tax. The two situations are totally different.'
It was however contended that in view of the judgment of the Supereme Court in Associated Cement Company's case (supra)where Supreme Court has held that interest is compensatory in character the judgment of the Punjab High Court is no longer good law. As Stated above, the Supreme Court had made the observations in Associated Cement Company's case on totally different questions of fact and law and the same weredistinguishable. Moreover the question of deductibility of the amount paid towards interest was specificilly kept open by theSupreme Court in Mahalaxmi Sugar Mills case (supra).
(10) WE. thereforee, have no hesitation in coming to the conclusion that interest paid due to delay in payment of lax would also be a part and parcel of the liability to pay income-tax. Since income-tax paid by an assessed is net a permissible deducting the interest paid for delay in payment of income-tax would thereforee,also not be a permissible deduction under Section 37 of the Income-tax Act. This interest would take the colour of the original amount liable to he paid as income-tax. The liability to pay arose from failure to pay tax under, section 139 and 215 of the Income-tax Act. Interest was paid as a consequence of default committed by the assessed in discharging its statutoryobligations. Although, it is true that the interest charged, due to failure to comply with the statutory obligation is not a penalty,yet it cannot be said that the payment of such interest is compensation to Government in the ordinary commercial sense.
(11) The reference to the insertion of Section 80V will not make any difference for the present case. since the question referred pertains to the assessment year 1972-73 and Section 80V was inserted by the Taxation Laws (Amendment) Act, 1975with effect from 1/04/1976.
(12) We, threfore, answer the question in the affirmative in favor of the Department and against the assessed leaving the parties to bear their own costs.