Kerala High Court
Commissioner Of Income-Tax vs T.M. Chacko & Partners on 3 April, 1978
JUDGMENT Gopalan Nambiyar, C.J.
1. The assessee is a dealer in liquor. The assessment relates to the years 1969-70, 1970-71 and 1971-72. For these three years, the assessee had not paid the kist due to the Government under the provisions of the Abkari Act 1 of 1077, in time, i.e., on the relevant dates on which the kist was due. The assessee had to pay to the Government of Kerala certain amounts by way of interest for such delayed payment. The amount of interest so paid was Rs. 11,154 for the assessment year 1969-70, Rs. 38,572 for the assessment year 1970-71, and Rs. 28,792 for the assessment year 1971-72, In the original assessment, deduction was allowed to the assessee in respect of these payments of interest in the computation of income from the business of the assessee. But later on, the Income-tax Officer acting in pursuance of the judgment of the Delhi High Court in Commissioner of Income-tax v. Mahalaxmi Sugar Mills Ltd. [1972] 85 ITR 320 reopened the assessments and held that these amounts by way of interest cannot be regarded as legitimate deductions, laid out or expended " wholly and exclusively for the purpose of the business" under Section 37 of the Income-tax Act. In the Mahalaxmi Sugar Mills Ltd.'s case [1972] 85 ITR 320 (Delhi) it was held that the penal interest paid by the assessee as a penalty for omission on his part to deposit the cess on sugarcane in time, was not a legitimate deduction under Section 10(1) or Section 10(2)(xv) of the Indian Income-tax Act, 1922.
2. On appeal by the assessee, the Appellate Assistant Commissioner agreed with the Income-tax Officer that the amount of interest paid for the years 1969-70 and 1970-71 were not deductible. But for the assessment year 1971-72, the appeal was dealt with by a different Appellate Assistant Commissioner, who disagreed with the Income-tax Officer and allowed the appeal of the assessee, holding that the amount of interest paid was deductible under Section 37 of the Act. The assessee appealed to the Tribunal against the orders in respect of the assessment years 1969-70 and 1970-71, and the Income-tax Officer appealed in respect of the assessment year 1971-72. In the appeals for the years 1969-70 and 1970-71, the Tribunal held in favour of the assessee, and found that the amount was deductible under Section 37 of the Act. Following the said decision, the Tribunal dismissed the department's appeal for the assessment year 1971-72. It referred the following question of law under Section 256(1) of the Act, viz. :
" Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was justified in holding that the interest paid on account of the delay in payment of 'kist' to the Government by the assesses is an expenditure laid out wholly and exclusively for the purpose of business ? "
3. The question has got to be decided with respect to Section 37 of the Income-tax Act, 1961. That section, in so far as it is material, reads :
" 37. (1) Any expenditure (not being expenditure of the nature described in Sections 30 to 36 and Section 80VV and not being in the nature of capital expenditure or personal expenses of the assessee, laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head ' Profits and gains of business or profession '."
4. There was no controversy that it would be enough to concentrate attention on the question whether the expenditure has been laid out or expended wholly and exclusively for the purpose of the business. The section does not contain any limitation that the expenditure should not have been incurred under the provisions of a statute or otherwise. But, for the revenue, the argument advanced was that the expenditure will not qualify for the deduction if it was incurred in discharge of a statutory obligation. We may now turn to the provisions of the Abkari Act. Section 2(23) of of the Act defines " rental " as follows :
" 'Rental' means the rental payable under Section 18A in consideration of the grant of an exclusive or other privilege of manufacturing, supplying or selling any liquor or intoxicating drugs."
5. Section 18A(1) and (2) of the Act read as follows :
" 18A. Grant of exclusive or other privilege of manufacture, etc., on payment of rentals.--(1) It shall be lawful for the Government to grant to any person or persons, on such condition and for such period as they may deem fit, the exclusive or other privilege-
(i) of manufacturing or supplying by wholesale ; or (ii) of selling by retail; or
(iii) of manufacturing or supplying by wholesale and selling by retail, any liquor or intoxicating drugs within any local area on his or their payment to the Government of an amount as rental in consideration of the grant of such privilege. The amount of rental may be settled by auction, negotiation or by any other method as may be determined by the Government, from time to time, and may be collected to the exclusion of, or in addition to, the duty or tax leviable under Sections 17 and 18.
(2) No grantee of any privilege under Sub-section (1) shall exercise the same until he has received a licence in that behalf from the Commissioner."
6. Section 28 of the Act is as follows :
" 28. Recovery of duties.--All duties, taxes, fines and fees payable to the Government direct under any of the foregoing provisions of this Act or of any licence or permit issued under it, and all amounts due to the Government by any grantee of a privilege or by any farmer under this Act or by any person on account of any contract relating to the Abkari revenue may be recovered from the person primarily liable to pay the same or from his surety, if any, as if they were arrears of land revenue, and, in case of default made by a grantee of a privilege or by a farmer, the Commissioner may take grant or farm under management at the risk of the defaulter or may declare the grant or farm forfeited, and re-sell it at the risk and loss of the defaulter. When a grant or farm is under management under the section, the Commissioner may recover any moneys due to the defaulter by any lessee or assignee as if they were arrears of land revenue. "
7. For convenience, we may refer to the decision of one of us in Ravunni Naif v. State of Kerala [1973] KLT 451 (Ker), where the scope of Section 18A read with Section 28 has been explained. The principle of that decision has been accepted by the Supreme Court in Damodaran v. State of Kerala, AIR 1976 SC 1533.
8. We may also refer to the term in the statutory licence granted under annexure H, Form F.L.I. of the Act, and, in particular, to Clause 27 thereof, which reads :
" 27. The amount for which the privilege has been purchased shall be payable by the licensee into the local taluk or other treasury as may be ordered from time to time. The rental due for the period from 1st April, 19......to 31st March, 19......shall be payable in twenty equal instalments, the first ten instalments shall be payable on or before the 10th day of each calendar month beginning from 1st April, 19......and the remaining ten instalments shall be payable on or before the 10th day of each calendar month beginning from 1st April, 19...... In case of failure interest will be charged from the 11th. But no cancellation of the licence or resale of the shop shall be ordered until after the 20th day of the month. In the case of resale of shops due to failure of payment of security deposit, the original purchaser is liable to pay interest at 9 per cent. on loss by the resale amount, if any, due from him from 1st April, 19......"
9. It will be seen from the provisions of the statute and of the statutory licence granted to the assessee that the rental or the kist as it is called, is liable to be paid in instalments on or before the 10th day of each calendar month, beginning from the 1st of April. In case of failure of payment, on or before the 10th, interest will be charged from the 11th and is liable to be paid if payment is made on or before the 20th. For further default thereof, the shops are liable to be resold for failure of payment of security deposit.
10. Counsel for the revenue contended before us that the liability to pay interest is a statutory liability in respect of which no deduction can be claimed under the provisions of Section 37. As we stated at the outset it is difficult to supply this limitation on the terms of the section itself. But counsel would read such a limitation in the light of certain decisions to which he called attention. We may examine these decisions. In Aruna Mills Ltd. v. Commissioner of Income-tax [1957] 31 ITR 153 (Bom), a Division Bench of the Bombay High Court consisting of Chagla C.J. and Tendolkar J. disallowed the deduction under the similar provisions of Section 10(2)(xv) of the Indian Income-tax Act, 1922. Deduction was claimed in respect of the penal interest paid by the assessee for failure to remit advance tax in time. The decision of the Calcutta High Court in Balmer Lawrie & Co. Ltd. v. Commissioner of Income-tax [1960] 39 ITR 751, which we have examined, also proceeds on the same principle which we shall explain presently. In Haji Aziz and Abdttl Shakoor Bros. v. Commissioner of Income-fax [1961] 41 ITR 350 (SC), at page 359, the Supreme Court, in a sentence, which appears to be crucial and vital, explained that an infraction of the law cannot give rise to an allowable deduction under the provisions of the Act. Then we have the decision of the Delhi High Court in Commissioner of Income-tax v. Mahalaxmi Sugar Mills Ltd. [1972] 85 ITR 320, which again related to the claim for penal interest for penalty for non-payment of cess on sugarcane. Our attention was also called by the counsel for the revenue to Additional Commissioner of Income-tax v. Rohit Mills Ltd. [1976] 104 ITR 132 (Guj). That again related to betterment charges and penalty for non-payment of the same, in respect of which certain disabilities were visited on the assessee which sought deduction under the Income-tax Act,
11. We have examined these decisions carefully; and we are of the opinion that all of them relate to cases where, as a result of the non-performance of a statutory or legal obligation, the assessee had put himself in the wrong and incurred either a liability to penal interest or suffered certain damages or expenses in respect of which he claimed deduction under the provisions of the taxing statute. A disallowance of the deduction in such circumstances seems to be only an application of the well-known principle that no one shall be allowed to take advantage of his own wrong ; or that infraction of the law cannot, on equitable grounds and principles, be made the foundation for a concession or a deduction, under the taxing statute. We understand the decisions cited to us to be quite consistent with this principle and no more.
12. Analysing the case on hand from the point of view of the above principle, we are unable to hold that in this case there has been any infraction of the law or any violation of the provisions of the statute by the assessee. We have extracted the provisions of Section 18A and Section 28 of the Abkari Act and Clause 27 of the statutory licence. Clause 27 permits, and indeed countenances, payment of the rental in instalments on or before the 10th of every month; or with interest on or before the 20th of every month ; and threatens penal action thereafter only if default is committed after the 20th of the month. Therefore, 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 assessce 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 curry 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. In that view, we are of the opinion that the principle of the decisions cited to us has no application and the Tribunal was right in having allowed the assessee's claim for deduction.
13. Counsel for the revenue raised before us a certain point which has not been raised at all before any of the authorities below. It was argued that the expenditure incurred is a capital expenditure and not a revenue expenditure and, therefore, was not deductible under Section 37 of the Act. This aspect of the matter has not received any attention at all from the Tribunal and has not been discussed by it ; or, for that matter, by any of the authorities below. The question is one which does not arise out of the order of the Tribunal, and we must decline to deal with this question or to answer it.
14. In the result, we answer the question referred in the affirmative, i.e., in favour of the assessee and against the department. We make no order as to costs.
15. A copy of this judgment under the seal of the court and the signature of the Registrar, will be communicated to the Tribunal, as required by law.