Supreme Court of India
MAHALAXMI SUGAR MILLS CO. LTD.versusCOMMISSIONER OF INCOME-TAX, DELHI, NEW DELHI
- Citation
- 1980 INSC 69
- Decided
- 9 April 1980
- Disposal
- Appeal(s) allowed
- Bench
- N L UNTWALIA
Holding
Interest payable under s.3(3) of the U.P. Sugarcane Cess Act is not a penalty but part of the cess liability and is deductible as revenue expenditure under s.10(2)(xv) of the Income‑Tax Act.
Summary
Mahalakshmi Sugar Mills Ltd., a sugar manufacturer, claimed deductions for interest paid on arrears of sugarcane cess under the U.P. Sugarcane Cess Act, 1956, in its income‑tax returns for the assessment years 1959‑60, 1960‑61 and 1961‑62. The Income‑Tax Officer disallowed the claims, but the Appellate Assistant Commissioner and the Income‑Tax Appellate Tribunal allowed them, holding the interest to be a permissible deduction. The Delhi High Court reversed, treating the interest as a penalty and therefore non‑deductible under s.10(2)(xv) of the Indian Income‑Tax Act, 1922. On appeal, the Supreme Court examined the nature of the interest under s.3(3) of the Cess Act, distinguishing it from the penalty provision in s.3(5) and the criminal penalty in s.4, and held that the interest is an accretion to the cess liability, not a penalty. Consequently, the interest qualifies as revenue expenditure wholly and exclusively incurred for business and is deductible under s.10(2)(xv). The appeal was allowed, setting aside the High Court judgment.
Issues considered
- Whether interest payable on arrears of cess under s.3(3) of the U.P. Sugarcane Cess Act, 1956 constitutes a penalty within the meaning of s.10(2)(xv) of the Indian Income‑Tax Act, 1922.
- Whether such interest can be allowed as a deduction as revenue expenditure under s.10(2)(xv).
Legislation cited
- Income Tax Act, 1922s. 10(2)(xv)
- U.P. Sugarcane Cess Act, 1956s. 3(2), s. 3(3), s. 3(5), s. 3(6), s. 3(7), s. 4
- U.P. Sugarcane Cess (Validation) Act, 1961
- U.P. Sugarcane Cess (Validation) Ordinance, 1961
Subjects
Income TaxDeductionInterest on arrearsCessPenaltyRevenue expenditureStatutory interpretationSugar industry
Judgment
421
MAHALAXMI SUGAR MILLS CO. LTD.
v.
COMMISSIONER OF INCOME-TAX, DELID, NEW DELHI
April 9, 1980
•
[N. L. UNTWALIA, R. S. PATHAK AND E. S. VENKATARAMIAH, JJ.] a·
" Indian Income Tax Act 1922-Section 10(2) (xv)-Inter""t paid on arrears
of mgarcane cess-Whether penalty-Interest if a permissible deduction.
Section 3(2) of the U.P. Sugarcane Cess Act, 1956 provides that the
owner of a sugar factory shall pay cess on sugaroone coming into the pre-
mises of a factory for use therein, on mch date and at such place as may c
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 tbC 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 manufactu-
rer 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. Sugar-
cane c·ess Act, 1956. The Income Tax Officer disallowed the clain1. The
Appellant Assistant Commissioner, whose view was upheld by the Appellate
Tribunal, held that the payment of interest constituted a permissible deduc-- E
tion.
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 infringe-
ment of the law.
F
Allowina the appeal,
HEID : The interest paid under s. 3 (3) of the Cess Act cannot be de..
cribed as a penalty paid for an infringement of the law. The assessee is
• entitled to claim the sum as a deduction uoder section 10(2) (xv) of the
1922 Act es expenditure laid out wholly or exclusively for the purpose of
the business. [427E] G
(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 com· H
pensation paid to the Government for delay in the payment of cess. It is
not by way of penalty. [425G·Hl
422 SUPREME COURT REPORTS [1980] 3 S.C.R..
·A (b) Interest on arrears of cess is t;tot 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 discre-
tion of the collecting officer or authority. For imposing penalty under s. 4
no prosecution oon 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-BJ
(c) The procedure for collecting interest on arrears is different from the
procedure for recovering penalty imposed under s. 3(5). The Collector pro-
ceeds 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) speci-
fying the aIDDunt of arrears including interest due. The words "specifying
the amount of arrears including interest" show that the interest is part of
c 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 fpr
recovery provided by s. 3(6) the Legislature has dealt with it aS some thin&
diitinct from the recovery of arrears of cess including interest. [426C-EJ
CML APPELLATE JURISDICTION : Civil Appeal Nos. 2440-2442 o~
D 1972.
From the Judgment and Order dated 25-10-1971 of the Delhi High.
Court in Income Tax Reference N06. 40 & 41 of 1970.
A. K. Sen and Mr. Bishamber Lal for tl]_e Appellant.
P. G. Ghokhale a"nd Miss A. Subhashini for the Respondent.
E
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.
F
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.
G Sugarcane Cess Act, 1956. The Income-tax Officer disallowed the
claim, but the Appellate Assi~tant Commissioner held that the pay- .
ment 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. 1,83,731/- paid by way of interest
H on the arrears of cess. The claim met with the same fortune, dis-
allowed by the Income Tax Officer but upheld by the Appellate Assis-
tant Commissioner and the Appellate Tribunal. At the instance of
MAHALAXMI SUGAR MILLS V. C.l.T. (Pathak, J.) 423
the Revenue, the Appellate Tribunal referred the following question of
law to the Delhi High Court in respect of the assessment years 1959-
tiO 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. l,83,731/-, paid by the assessee B
on the arrears of cess in the assessmen_! 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 c
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 D
Rs. 2,00,439 /-, paid by .the assessee on the arrears of cess,
j!S revenue expenditure?"
The references were disposed of by the High Court by its judgment
dated 25th October 1971. The questi.ons were answered in the
negative. The High Court took the view that .the claim of the B
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 beca1l5!' 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. P
Learned couns.el for the asse~_e 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). G
The validity of the U. P. Sugarcane Cess Act, 1956 (the "CeSB
Act") was challenged by the assessee and several other sugar manu-
facturing companies by petitions under Article 226 of the Constitu-
tien in the Allahabad High Court. The High Court admitted the writ
petitions and granted an order suspending the operation of the Act. The R
High Court, on final hearing, dismissed the writ petitions. But sub-
sequently on appeal this Court declared the Cess Act ultra vires on
424 SUPREME COURT REPORTS
.
(1980] 3 S.C.R.
. A the ground that the Act fell beyond the competence of the State
Legislature.
Thereafter, on 31st January, 1961, the President promulgated tjle
U.P. Sugarcane Cess (Validation) Ordinance, 1961 validating the
cess imposed, assessed or collected by the Government of Uttar Pra-
desh during the period 26th January, 1950 to the date of the com-
mencement 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.
c 3(3) of the Sugarcane Ce~s Act, 1956 can be allowed under s. 10(2)
(xv) of the Income Tax Act requires us to examine the relevant pro·
visions of the Cess Act. The Act, as its long title states, is "an
Act to amend and consolidate the law relating to the imposition of
cess on sugarcane i'nrended for use, consumption in or sale to a
factory". The relevant provisions of s.3 declare :
D "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
caJne fnto 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.
r
( 4) The State Government may, for the purpose of
assessment and collection of the cess, appoint officers and l:,
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
G 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 per-
son liable to pay the cess. ·
B ( 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-
MAHALAXMI SUGAR MILLS V. C.I.T. (Pathak, J.) 425
rest due from any person, and on receipt ef 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 JT'.,coverable in the mauner provided in
sub-section (6) for the recovery of the arrear of cess". :B
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, contrave-
nes any provision of any rule made under this Act, he shall
without prejudice to his liability therefor u'nder sub-section c
( 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 contra vention to a further fine not
exceeding rupees one thousand for each day during which
the contravention continues". D
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 sui:arcane enter-
ing into the premises during the first fortnight of each calendar year
must be deposited in the Government treasury by the twenty second
E
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 F
on the arrears of cess but provides for an additional sum recover-
able by way of penalty from a person who defaults in making pay-
ment 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 G
in reality part and parcel of the liability to pay cess. It is an accre-
tion to the cess. The arrear of cess "carries" interest; if the cess
,';. is not paid within the prescribed peri!xl 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 6
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 SUPREME COURT REPORTS [1980] 3 S.C.R.
It is not a ~nalty, for which provisions has been separately made by
s.3 ( 5). Nor is it a penalty within the meaning of s.4, which pro-
vides for a criminal liability and a criminal prosecution. The penalty
payable uhder s.3(5) lies in the discretion of the collecting officer
or authority. In the case of the penalty under s.4, no prosecution
'B can be instituted nnless, under s.5 ( 1), a complaint is made by or
under the authority of the Cane Commissioner or the District Magis-
trate. There is another consideration distinguishing the interest pay-
able 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
c 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 "spe-
·-
cifying 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
D 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 diBtinct from the recovery of the arrears of cess including
interest. l'tt truth, the interest provided for under s.3 (3) is in the
E nature of compensation paid to the Government for delay in the
payment of cess. It is riot by way of penalty. The provision for
penalty as a civil liability has been made nnder s.3 ( 5) and for penalty
as a criminal offence under s.4. The Delhi High Court proceeded
ehtirely on the basis that the interest bore the character of a penalty.
F It was, according to the learned Jndges "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.(') and Commissioner
o{ Income-Tax West Bengal v. A. K. Das,( 2 ) but in those two cases
G
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
1
of Income-Tax v. Oriental Carpet Manufacturers (India) P. Ltd.(')
In that case, the High Court of Punjab and Haryana laid down that
H (I) (1969) 71 I. T. R. 87.
(2) (1970) 77 J. T. R. 31.
(3) (1973) 90 I. T. R. 373.
MAHALAXMI SUGAR MILLS v. c.I. T. (Pathak, !. ) 4 27
interest paid by an assessee on account of delay in payment of the A
provisional demand of tax is not a permissible deduction under s.36
(1) (iii) and s.37 of the Income Tax 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'~
• business. It is not necessary for us to express any opinion on the
decil;ion. The case is distinguishable because we are concerned with
B
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,(') 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 c
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 ~ss D
Act. A court should be slow to succumb to the temptation of decid-
ing 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 Jaw.
As that is the only grO\Jnd 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 assessee is entitled to sncceed. 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
ll-0 dispute that it is i'n the nature of revenue expenditure.
In the result, the appeal is allowed, the judgment dated 25th F
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 .
•
G
P.B.R.. Appeal allowed.
R
(1) (1979) 116 ( T. R. 367.
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