COMMISSIONER OF INCOME-TAX VS PACHI PHILIP & CO.
1996 P T D 699
[212 ITR 75]
[Kerala High Court (India)]
Before T. L. Viswanatha Iyer and Mrs. K. K. Usha, JJ
COMMISSIONER OF INCOME-TAX
versus
PACHI PHILIP & CO.
Income-tax References Nos.334 and 335 of 1985, decided on 07/10/1994.
Income-tax
----Business expenditure---Fines and penalties---Interest---Liquor licence-- Interest payable under Abkari Act for delayed payment of Kist---Not in the nature of penalty---Deductible---Indian Income Tax Act, 1961, S. 37.
The scheme of disposal of Abkari shops under the rules is that the privilege to vend liquor is granted either by means of auction or by inviting tenders. When the auction is knocked down in favour of the highest bidder the licensee has to execute a temporary agreement in the first instance accompanied by payment of 30 per cent of the amount of the bid, followed by a permanent agreement in Form No. 11 after the bid is confirmed by the Board of Revenue. The balance amount of rental is to be paid in ten equal monthly instalments as specified in rule 6(25) under the Abkari Shops (Disposal in Auction) Rules, 1974, and the agreement. In case of default, the licensee becomes liable to pay interest at the rates stipulated from the 10th of each month. He is given a grace period of 15 days to make payment of the instalment subject to his paying interest, but beyond 25th and if he is still in default, he is also exposed to coercive action by way of cancellation of the licence or resale of the shop.
The assessee was an Abkari contractor. He had defaulted in prompt payment of the amount of kist due, with the result that he had to make payment of interest from the 11th of each month. Accordingly, he paid an amount of Rs.58,361 during the financial year 1977-78 and Rs.43,200 during the year 1978-79. Deduction of this amount was claimed as expenditure incurred wholly and exclusively for the purpose of business. The Income Tax Officer did not accept the claim of the assessee in its entirety. He allowed deduction of the interest relatable to the period up to the 20th of each month and refused to allow deduction of the amount related to the period subsequent to the 20th. The disallowance of the interest beyond the 20th was because it was treated as penal in nature. The Tribunal, however, allowed the assessee's claim in full. On a reference:
Held, that there is no provision in the Abkari Act or the Rules imposing any penalty on the licensee for non-payment of the Kist in time. Nor is he exposed to any criminal liability or prosecution. In fact, the liability is primarily of a civil nature, arising out of non-performance of the obligation under the rules and the agreement. The only action contemplated for default is coercive and not penal. There is absolutely no distinction between the nature of the interest payable up to 25th and thereafter. Payment of the interest accruing on delayed payment of the Kist is an expenditure incurred wholly and exclusively for the purpose of business and, therefore, liable to be deducted under section 37(1) of the Income Tax Act, 1961.
C.I.T. v. Hyderabad Allwyn Metal Works Ltd. (1988) 172 ITR 113; (1988) 72 FJR 474 (AP); C.I.T. v. T. M. Chacko and Partners (1978) 1,15 ITR 40 (Ker.); Haji Aziz and Abdul Shakoor Bros. v. C.I.T. (1961) 41 ITR 350 (SC); Mahalakshmi Sugar Mills Co. v. C.I.T. (1980) 123 ITR 429 (SC); Prakash Cotton Mills Pvt. Ltd. v. C.I.T. (1993) 201 ITR 684 -and (1993) 82 FJR 546 (SC). ref.
P. K. R. Menon and N. R. K. Nair for the Commissioner.
G. Sivarajan for the Assessee.
JUDGMENT
T. L. VISWANATHA IYER, J. ---The Income Tax Appellate Tribunal, Cochin Bench, has referred the following question for the determination of this Court under section 256(1) of the Income Tax Act, 1961, at the instance of the Revenue:
"Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the interest paid to the Government on the Kist amounts payable under the Abkari Act and the Rules for the period beyond 20th of the month is not penal in nature and that the deduction of the same can be allowed as business expenditure under the Income Tax Act, 1961?"
The assessment years concerned are 1978-79 and 1979-80 for which the relevant accounting periods ended on March 31, 1978 and March 31, 1979.
The assessee is an Abkari contractor. The rental (called Kist) for the grant of the privilege to vend liquor in retail shops is payable by the licensee in terms of rule 6(25) of the Kerala Abkari Shops (Disposal in Auction) Rules, 1974 (hereinafter referred to as "the Rules"). As per the said rule, the rental remaining due has to be paid in ten equal monthly instalments beginning from April 1. The instalments are payable on or before the 10th of each English calendar month. In case of failure of payment, interest is payable at the rate of 9 per cent per annum from the 11th of the month. But cancellation of the licence or resale of the shop may be ordered only after 25th of the month. The respondent had defaulted in prompt payment of the amount of Kist due, with the result he had to make payment of interest from 11th of each month as per the aforesaid rule, on the payments defaulted Accordingly, he paid an amount of Rs.58,361 during the financial year 1977-78 and Rs.43,200 during the year 1978-79. Deduction of this amount was claimed as an expenditure incurred wholly and exclusively for the purpose of business. The Income Tax Officer did not, however, accept the claim of the assessee in its entirety. He allowed deduction of the interest relatable to the period up to the 20th of each month and refused to allow deduction of the amount related to the period subsequent to the 20th. (The date 20 appears to have been assumed as the date after which the licence may be cancelled or a resale may be ordered, though as per the rule the date is 25). The disallowance of the interest beyond the 20th was because it was treated as penal in nature. This Court had in the decision in CIT v. T. M. Chacko and Partners (1978) 115 ITR 40 held that interest on the instalments due on the 10th of each month for the period up to the 20th (the relevant date as per the then rule) was compensatory and not penal in character and, therefore, the payment thereof constituted expenditure incurred wholly and exclusively for the purpose of the business and hence deductible. It was accordingly that the Income Tax Officer allowed deduction in respect of the payment of the interest for the period from 11th to 20th, but not thereafter. The assessee's appeal before the Commissioner of Income-tax (Appeals) was successful and he deleted the entire amount of interest paid by the assessee, inclusive of that paid for the period subsequent to 20th as business expenditure. This was affirmed in appeal by the Appellate Tribunal, and the Revenue is before us with this reference.
The contention of the Revenue is that having regard to the provisions of rule 6(25) referred to earlier, while default up to the 20th of each month is not penal in character, defaults subsequent to that date incur penal consequences for the assessee, like cancellation of the licence or resale of the shop. The interest that accrues for the period beyond the 20th is stated to be penal in character. According to the Revenue, it does not partake of the character of compensation, and, therefore, cannot be treated as expenditure incurred wholly and exclusively for the purpose of the business. This is the question to be considered in this reference.
In T. M. Chacko's case (1978) 115 ITR 40 (Ker), to which we have made reference, this Court was concerned with the assessment years 1969-70, 1970-71 and 1971-72 when the due date for payment of Kist was the 10th of each month with a grace period of ten days for payment with interest at 9 per cent per annum. The instalment of the Kist was payable on or before the 10th of each English calendar month without interest, and with interest at 9 per cent per annum thereafter. But no cancellation of the licence or resale of the shop shall be ordered until after the 25th of the month if the payment remained in default even thereafter. This Court in T. M. Chacko's case (1978) 115 ITR 40 considered the nature of the interest between the 10th and the 20th, and after examining the provisions of the Abkari Act and the Rules and after referring to the decision of the Supreme Court in Haji Aziz and Abdul Shakoor Bros. v. CIT (1961) 41 ITR 350, and certain other decisions, held that interest accruing up to the 20th of each month was not penal in character. This Court said (at page 45):
"The liability to pay interest is an option given to the assessee by the very terms of the statutory licence itself. In paying interest between the 10th and the 20th of the month, the assessee commits no wrong, and no infraction of the law; and the payment of interest, in the circumstances, constitutes an expenditure incurred wholly and exclusively for the purpose of the business. Payment of rental was necessary to carry on business as Abkari contractor and the mode of payment under clause 27 of the licence contemplates and permits payment of interest, if paid between the 11th and 20th of the month."
(Clause 27 is in the same terms as the present rule 6(25). This Court did not specifically consider the question of deducibility or otherwise of the interest for the period subsequent to the 20th and that question, therefore, falls to be considered by us.
The scheme of disposal of Abkari shops under the rules is that the privilege to vend liquor is granted either by means of auction or by inviting tenders. When the auction is knocked down in favour of the highest bidder the licensee has to execute a temporary agreement in the first instance accompanied by payment of 30 per cent of the amount of the bid, followed by a permanent agreement in Form No. 11 after the bid is confirmed by the Board of Revenue. The balance amount of rental is to be paid in ten equal monthly instalments as specified in rule 6(25) and the agreement. In case of default, the licensee becomes liable to pay interest at the rates stipulated from the 10th of the month. He is given a grace period of 15 days to make payment of the instalment subject to his paying interest, but beyond the 25th and if he is still in default, he is also exposed to coercive action by way of cancellation of the licence or resale of the shop. It is not provided either in the Abkari Act or in the Rules that default in payment of Kist is an infraction of any law. At best it is breach of the undertaking contained in the agreement in Form No.11 and no more. In the absence of any provision in the Act or the Rules stipulating that the non-payment will be visited with consequences of a penal character, or that it will be treated as infraction of any law justifying penal action against the licensee, it cannot be held that the amount of interest paid for the period subsequent to the 25th (20th: sic) of every month partakes of the character of penalty, not deductible under section 37. It must be remembered that the nature of the interest, whether it is for the period from 10th to 25th, or thereafter, is not in any manner different from each other. The continuation of the default beyond the 25th only exposes the licensee to coercive action by way of cancellation of the licence or resale of the shop, and not any penal action for infraction of any law.
The decision in T. M. Chacko's case (1978) 115 ITR 40 (Ker.), as noted earlier, concerned only the period of default at the. first stage, up to the 20th, as the rules then stood. This Court was not dealing with the subsequent period at all. The decision has therefore no application to the interest accruing after the 25th, whether it is penal in character or not deductible. On the other hand, the extract from the said judgment made by us earlier itself shows that the interest paid is not for infraction of any law, but is compensatory in nature, the liability for which is incurred for the purpose of the business.
The law on the point has been explained by the Supreme Court it Mahalakshmi Sugar Mills Co. v. CIT (1980) 123 ITR 429. That was a case where interest was payable under section 3(3) of the U.P. Sugarcane Cess Act, 1956, on arrears or cess payable on the entry of cane into the premises of a factory. The question was whether payment of this interest represented the expenditure incurred wholly and exclusively for the purpose of the business and whether it was by way of penalty for infringement of the Cess Act. The Supreme Court stated that the interest was in reality part and parcel of the liability to pay cess. It was an accretion to the cess. It is this arrear of cess that carries interest.. The liability to pay interest is automatic and 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. It is not a penalty for any criminal liability and there is no criminal prosecution. It is, therefore, an allowable deduction in the computation of the profits and gains of business.
The matter was considered again recently by the Supreme Court in Prakash Cotton Mills Pvt. Ltd. v. CIT (1993) 201 ITR 684, in which the Court, after an exhaustive reference to the decision of the Andhra Pradesh High Court in C.I.T. v. Hyderabad Allwyn Metal Works Ltd. (1988) 172 ITR 113, held that the question whether the liability for interest was compensatory or penal in nature has to be decided with reference to the provisions of the relevant statute providing for the impost, ignoring the nomenclature of the impost as given by the statute. The amount is deductible under section 37(1) of the Income-tax Act, if the impost is compensatory in nature.
The case before us has to be tested in the light of the principles laid down in the aforesaid decisions. We have already noted that there is no provision in the Abkari Act or the Rules imposing any penalty on the licensee for non-payment of the Kist in time. Nor is he exposed to any criminal liability or prosecution. In fact, the liability is primarily of a civil nature, arising out of non-performance of the obligation under the rules and the agreement. The only action contemplated for default is coercive and not penal. It has, therefore, to be held that interest payable is compensatory in nature and not penal. Interest is generally intended to compensate the person entitled to receive the amount for the loss that is sustained by him by reason of the deprivation of the use of the money during a particular period. That is precisely the position under rule 6(25). As already pointed out, there is absolutely no distinction between the nature of the interest payable up to the 25th and thereafter. Having regard to all this, we are of the opinion that payment of the interest accruing on delayed payment of the Kist is an expenditure incurred wholly and exclusively for the purpose of business and, therefore, liable to be deducted under section 37(1) of the Act.
We, therefore, answer the question referred to us in the affirmative, that is, in favour of the assessee and against the Revenue. There will be no order as to costs.
M.B.A./1082/FReference answered.