Ita/1291/2009 Of The Commissioner Of Income Tax,Cochin v. M/S.popular Mega Motors(India)Ltd.,Kochi

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE C.N.RAMACHANDRAN NAIR & THE HONOURABLE MR. JUSTICE C.K.ABDUL REHIM WEDNESDAY, THE 26TH AUGUST 2009 / 4TH BHADRA 1931 ITA.No. 1291 of 2009() ---------------------- ITA.670/COCH/2007 of I.T.A.TRIBUNAL,COCHIN BENCH .................... APPELLANT/APPELLANT: -------------------------- THE COMMISSIONER OF INCOME TAX, COCHIN. BY ADV. SRI.P.K.R.MENON,SR.COUNSEL, GOI(TAXES) SRI.JOSE JOSEPH, SC, FOR INCOME TAX RESPONDENT(S): RESPONDENT ------------------------- M/S.POPULAR MEGA MOTORS(INDIA)LTD, KUTTUKARAN CENTRE, MAMANGALAM, KOCHI-682 525. THIS INCOME TAX APPEAL HAVING COME UP FOR ADMISSION ON 26/08/2009, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: C.N.RAMACHANDRAN NAIR & C.K.ABDUL REHIM, JJ. ---------------------------------- I.T.A. No.1291 of 2009 ---------------------------------- Dated this the 26[th] day of August, 2009 J U D G M E N T ---------------------- Ramachandran Nair, J. The question raised in the appeal filed by the Revenueis whether the Income Tax Appellate Tribunal was justified inallowing assessee's claim for deduction of the interest paid to theSales Tax Department under Section 23(3A) of the KGST Act,1963 for belated payment of sales tax. We have heard StandingCounsel appearing for the appellant and since we do not find anyground to disagree with the view taken by the Tribunal weproceed to dispose of the appeal on merits without issuing noticeto the assessee. 2.The assessment involved is for the year 2004-05.During the previous year the assessee, a registered dealer underthe KGST Act, filed sales tax returns misclassifying taxable itemsas non taxable items in the returns and consequently did notremit the tax along with monthly returns. However whilecompleting the sales tax assessment, the Assessing Officer leviedmandatory interest under Section 23(3A) of the said Act for nonpayment of tax which ought to have been paid along with monthly returns under Rule 21(7) of the KGST Rules. In theincome tax assessment 1[st]respondent assessee claimeddeduction of the interest paid for belated payment of tax.However, income tax officer disallowed the claim of expendituremade by the assessee holding that the interest paid underSection 23(3A) is for default in payment and hence penal innature, not allowable under the Act. In appeal the CIT (Appeals)allowed the claim and Tribunal confirmed it holding that interestpayable under Section 23(3A) is compensatory in nature and nota penal levy warranting disallowance. 3.Section 23(3) and 23(3A) of the KGST Act is extractedhereunder for easy reference. “(3) If the tax or any other amount assessed or dueunder this Act is not paid by any dealer or other within thetime prescribed thereof, in this Act or in any rule madethereunder and in other cases within the time specifiedthereof in the notice of demand the dealer or other personshall pay by way of interest, in the manner prescribed, inaddition to the amount due, a sum equal to (a) one percentof such amount for each month or part thereof for the firstthree months after the date specified for its payment;(b) two percent of such amount for each month or partthereof subsequent to the first three months aforesaid. (3A) Where any dealer has failed to include anyturnover of his business in any return filed or where anyturnover has escaped assessment, interest under sub-section (3) shall accrue on tax due on such turnover witheffect from such date on which the tax would have fallendue for payment had the dealer included the same in thereturn relating to the period to which such turnover relates,for the default or payment of sales tax amount due underthe said Act”. (3A) Where any dealer has failed to include anyturnover of his business in any return filed or where anyturnover has escaped assessment, interest under sub-section (3) shall accrue on tax due on such turnover witheffect from such date on which the tax would have fallendue for payment had the dealer included the same in thereturn relating to the period to which such turnover relates,for the default or payment of sales tax amount due underthe said Act”. 4.It is a settled position through several decisions of theSupreme Court, particularly in Mahalakshmi Cotton Mills'scase reported in 123 ITR 429 and Prakash Cotton Mills's casereported in 201 ITR 484 that penal levies cannot be allowed asdeduction under the head business expenditure in thecomputation of profits and gains of business under the IncomeTax Act. Therefore the only question to be considered is whetherthe interest paid by the assessee under Section 23(3A) is in thenature of penal levy or is it a compensatory levy for belatedpayment of tax. In order to consider the nature of the levy wehave to look into the scheme of the KGST Act and Rulesproviding for filing of returns, payment of tax, provision forinterest and penal provisions for violation of the provisions of theAct including non payment of tax. In fact the provision namelyS.23(3A) was introduced only in the year 1998. The originalprovision for interest for belated payment of tax was Section 23(3) which provides for interest for default in payment of tax. It issettled by several court decisions that under this provisioninterest could be demanded only for default in payment of taxdue under the returns filed or based on notice of demand issuedby Assessing Officer. However in order to enlarge the scope oflevy, i.e: to demand interest in every case of delayed payment ontax, Section 23(3A) was introduced with effect on 1.4.1998. A dealer is required under Rule 21(7) of KGST Rules to filemonthly returns and remit the tax due thereon along withmonthly returns filed for every month. Non payment or shortpayment of tax along with monthly returns may arise on accountof non inclusion of turnover, misclassification of turnover,between taxable and non taxable and further misclassificationunder various rates. If the return is not accepted and theassessment is made on higher taxable turnover or the turnover isassessed after re-classification at higher rate of tax there isbound to be higher demand of tax and the scheme of Section 23(3A) is to demand interest on such higher amount of tax. In factSection 23(3A) covers all situations of non payment or shortpayment of tax along with monthly returns as illustrated aboveand obviously it may even cover bonafide mistakes by theassessee in relation to classification of goods. The provision forinterest under Section 23(3A) cannot therefore be treated as apenal provision and further because the specific provision underSection 45A of the KGST Act provide for levy of penalty forviolation of statutory provisions include filing of false returns.Besides this another provision, namely Section 45(AA) wasintroduced with effect on 1.4.1994 providing for penalty atdouble the amount of tax for non payment of tax. In the firstplace when penal provisions are provided for any violation of the statutory provisions including filing of false returns and penaltyfor default in payment of tax, it cannot be said that provision forinterest can be treated as a penal provision. Of course the rateof tax provided in Section 23 (3) and 3(A) are quite high and maygive an indication that it is of penal character. However we feelthe higher rate of interest is provided for non payment ordelayed payment of tax only to deter the dealers from delayingpayment of tax dues. In fact there is provision in Section 23(3B)of the KGST Act providing for interest during the period therecovery of tax remained stayed. The scheme of levy of interestunder the various provisions stated above clearly indicate thatinterest which is made compulsory and mandatory are onlycompensatory in nature and are not in the nature of a penal levy.We are of the view that the Tribunal rightly applied the ratio ofthe decision of this Court in CIT Vs. Pachiphilip & Co.reported in 212 ITR 75 wherein interest paid for belatedpayment of Kist under Abkari Act was held allowable. Wetherefore uphold the order of the Tribunal and dismiss thedepartmental appeal. 5.So long as the other issue is concerned, that isassessee's claim for reduction of expense on loose tools, wenotice that the value of each of the loose tools purchased by theassessee was below Rs.5000/- and the Tribunal allowed it as a revenue expenditure. We do not find anything against the orderof the Tribunal and consequently the appeal on this issue is alsodismissed. C.N.RAMACHANDRAN NAIR, JUDGE. C.K.ABDUL REHIM, JUDGE.