THE COMMISSIONER OF INCOME TAX,COCHIN vs. M/S.POPULAR MEGA MOTORS(INDIA)LTD.,KOCHI

The assessment involved is for the year 2004-05. During the previous year the assessee, a registered dealer under the KGST Act, filed sales tax returns misclassifying taxable items as non taxable items in the returns and consequently did not remit the tax along with monthly returns. However while completing the sales tax assessment, the Assessing Officer levied mandatory interest under Section 23(3A) of the said Act for non payment of tax which ought to have been paid along with monthly returns under Rule 21(7) of the KGST Rules. In the income tax assessment 1st respondent assessee claimed deduction of the interest paid for belated payment of tax. However, income tax officer disallowed the claim of expenditure made by the assessee holding that the interest paid under Section 23(3A) is for default in payment and hence penal in nature, not allowable under the Act. In appeal the CIT (Appeals) allowed the claim and Tribunal confirmed it holding that interest payable under Section 23(3A) is compensatory in nature and not a penal levy warranting disallowance.

Section 23(3) and 23(3A) of the KGST Act is extracted hereunder for easy reference. “(3) If the tax or any other amount assessed or due under this Act is not paid by any dealer or other within the time prescribed thereof, in this Act or in any rule made thereunder and in other cases within the time specified thereof in the notice of demand the dealer or other person shall pay by way of interest, in the manner prescribed, in addition to the amount due, a sum equal to (a) one percent of such amount for each month or part thereof for the first three months after the date specified for its payment; (b) two percent of such amount for each month or part thereof subsequent to the first three months aforesaid. (3A) Where any dealer has failed to include any turnover of his business in any return filed or where any turnover has escaped assessment, interest under sub- section (3) shall accrue on tax due on such turnover with effect from such date on which the tax would have fallen due for payment had the dealer included the same in the return relating to the period to which such turnover relates, for the default or payment of sales tax amount due under the said Act”.

It is a settled position through several decisions of the Supreme Court, particularly in Mahalakshmi Cotton Mills's case reported in 123 ITR 429 and Prakash Cotton Mills's case reported in 201 ITR 484 that penal levies cannot be allowed as deduction under the head business expenditure in the computation of profits and gains of business under the Income Tax Act. Therefore the only question to be considered is whether the interest paid by the assessee under Section 23(3A) is in the nature of penal levy or is it a compensatory levy for belated payment of tax. In order to consider the nature of the levy we have to look into the scheme of the KGST Act and Rules providing for filing of returns, payment of tax, provision for interest and penal provisions for violation of the provisions of the Act including non payment of tax. In fact the provision namely S.23(3A) was introduced only in the year 1998. The original provision for interest for belated payment of tax was Section 23 (3) which provides for interest for default in payment of tax. It is settled by several court decisions that under this provision interest could be demanded only for default in payment of tax due under the returns filed or based on notice of demand issued by Assessing Officer. However in order to enlarge the scope of levy, i.e: to demand interest in every case of delayed payment on tax, Section 23(3A) was introduced with effect on 1.4.1998. A dealer is required under Rule 21(7) of KGST Rules to file monthly returns and remit the tax due thereon along with monthly returns filed for every month. Non payment or short payment of tax along with monthly returns may arise on account of non inclusion of turnover, misclassification of turnover, between taxable and non taxable and further misclassification under various rates. If the return is not accepted and the assessment is made on higher taxable turnover or the turnover is assessed after re-classification at higher rate of tax there is bound to be higher demand of tax and the scheme of Section 23 (3A) is to demand interest on such higher amount of tax. In fact Section 23(3A) covers all situations of non payment or short payment of tax along with monthly returns as illustrated above and obviously it may even cover bonafide mistakes by the assessee in relation to classification of goods. The provision for interest under Section 23(3A) cannot therefore be treated as a penal provision and further because the specific provision under Section 45A of the KGST Act provide for levy of penalty for violation of statutory provisions include filing of false returns. Besides this another provision, namely Section 45(AA) was introduced with effect on 1.4.1994 providing for penalty at double the amount of tax for non payment of tax. In the first place when penal provisions are provided for any violation of the statutory provisions including filing of false returns and penalty for default in payment of tax, it cannot be said that provision for interest can be treated as a penal provision. Of course the rate of tax provided in Section 23 (3) and 3(A) are quite high and may give an indication that it is of penal character. However we feel the higher rate of interest is provided for non payment or delayed payment of tax only to deter the dealers from delaying payment of tax dues. In fact there is provision in Section 23(3B) of the KGST Act providing for interest during the period the recovery of tax remained stayed. The scheme of levy of interest under the various provisions stated above clearly indicate that interest which is made compulsory and mandatory are only compensatory in nature and are not in the nature of a penal levy. We are of the view that the Tribunal rightly applied the ratio of the decision of this Court in CIT Vs. Pachiphilip & Co. reported in 212 ITR 75 wherein interest paid for belated payment of Kist under Abkari Act was held allowable. We

So long as the other issue is concerned, that is assessee's claim for reduction of expense on loose tools, we notice that the value of each of the loose tools purchased by the assessee was below Rs.5000/- and the Tribunal allowed it as a revenue expenditure. We do not find anything against the order of the Tribunal and consequently the appeal on this issue is also dismissed. C.N.RAMACHANDRAN NAIR, JUDGE. C.K.ABDUL REHIM, JUDGE. okb