Bombay High Court
Commissioner Of Income-Tax vs Vegetable Vitamin Foods Co. Pvt. Ltd. on 23 March, 1994
Equivalent citations: [1994]209ITR840(BOM)
Author: Sujata Manohar
Bench: Sujata V. Manohar
ORDER
Mrs. Sujata Manohar, C. J.
1. All these Income-tax reference relate to the interpretation of section 36(3) of the Bombay Sales Tax Act, 1959, as it stood prior to its amendment under the Bombay Sales Tax (Amendment) Act, 1987, which came into force on April 21, 1987.
2. For the sake of convenience, we set out the facts in Income-tax Reference No. 305 of 1982. In the previous year relevant to the assessment year 1972-73, the assessee was required to pay sales tax under the provisions of the Bombay Sales Tax Act, 1959. Owing to financial difficulties, the assessee did not make the payment of sales tax in time as prescribed under the said Act. On account of delay in the payment of sales tax, the assessee was required to pay an additional sum of Rs. 13,800 under the provisions of section 36(3) of the Bombay Sales Tax Act, 1959, as it was then in force. The assessee claimed deduction of this amount in his Income-tax return on the ground that this amount formed a part of the expenditure wholly and exclusively incurred for the purpose of business of the assessee. The assessee contended that the payment of sales tax could not be made in time on account of financial stringency facing the assessee. Had the assessee borrowed monies for the payment of sales tax it would have had to pay interest which would have been more than the amount payable under section 36. Hence the sum of Rs. 13,800 should be considered as interest amount and it should be included in its expenditure wholly and exclusively incurred for the purpose of business. This contention of the assessee has been upheld by the Tribunal which has held that the payment of the said sum which was by way of penalty was no for infraction of the law but for the discharge by the assessee of its statutory liability, and hence was admissible as a revenue deduction. From the above finding of the Tribunal, the following question has been referred to us under section 256(1) of the Income-tax Act, 1961 :
"Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that interest of Rs. 13,800 levied under section 36 of the Maharashtra Sales Tax Act for delayed payment of sales tax was an allowable deduction in the computation of business income under the Income-tax Act, 1961, for the assessment year 1972-73?"
3. A similar question is raised in other references which have been heard along with this reference.
4. In order to decide this question it is necessary to reproduce the provisions of section 36(3) of the Bombay Sales Tax Act, 1959, as it stood at the relevant time :
"Section 36. .... (3) If a dealer does not, without reasonable cause, pay tax within the time he is required by or under the provisions of this Act to pay it, the Commissioner may, after giving the dealer an opportunity of being heard, by an order in writing, impose upon the dealer by way of penalty, in addition to the amount of tax, a sum equal to -
(a) one and on-half per cent. of the amount of tax for each month for the first three months, after the last date by which the dealer should have paid that tax; and
(b) two per cent. of the amount of tax for each month thereafter during the time the dealer continues to make default in the payment of tax :
Provided further that no penalty under this section shall be payable by a dealer to whom an eligibility certificate has been granted, and for whom due date of payment has been extended, moratorium has been granted or instalments have been granted under the second proviso to sub-section (4) of section 38 and the payments have been made accordingly."
5. Thus, section 36(3) requires that (1) the dealer should have failed to pay the tax within the time he is required to pay the same under the provisions of the Act; (2) such payment should have been withheld or delayed without reasonable cause; (3) the Commissioner should give to the dealer an opportunity of being heard; and (4) the Commissioner should pass an order in writing imposing upon the dealer the penalty as prescribed in addition to the amount of tax. The penalty, however, is calculated as a percentage of tax for each month after the last date by which the dealer should have paid tax. After the delay of first three months the percentage for the subsequent months is an increased percentage. The last factor which requires to be noticed in section 36(3) is that the Commissioner or any appellate or revisional authority has the power to remit the whole or any part of the penalty payable in respect of any delay.
6. Taking all these factors into account, a Division Bench of this court in Jairamdas Bhagchand v. CIT [1988] 171 ITR 545 held that section 36(3) imposed a penalty and hence such penalty was not an allowable deduction under section 37 of the Income-tax Act, 1961. The Division Bench relied upon the fact that under section 36(3) it was necessary for the Commissioner to give a notice to the dealer to show cause and pass a speaking order imposing penalty. The Division Bench also referred to the owner of the Commissioner to remit the amount of penalty. It held that taking all these factors into consideration, the payment cannot be considered as in the nature of interest. It was submitted before the Division Bench that under section 38(2) a registered dealer furnishing returns as required under the said Act was required first to pay into the Government treasury the whole of the amount of tax due from him according to such return along with the amount of any penalty payable by him under section 36. It was, therefore, submitted that since the amount of penalty had to be deposited in the first instance in the Government treasury, the payment was in the nature of interest, there being no question of any hearing, or absence or presence of any reasonable cause for delay, or of remission. This contention was negatived by the Division Bench. It held that section 38(2) cannot be read in isolation. A combined reading of sections 36 and 38 indicated that there was an obligation to deposit the maximum penalty in the first instance which, on reasonable cause being shown, might be reduced or totally waived. The Division Bench noted that the mere obligation to pay the maximum penalty in the first instance would not change its character from penalty into interest. On the basis of the scheme of section 36, the Division Bench expressly negatived the contention that the penalty payable under section 36(3) was by way of interest and was not penalty as such.
7. The same section had earlier come up for consideration before a Division Bench of this court, to which one of us was a party (Mrs. Sujata Manohar C. J.) in the case of CST v. Rajendra Motors [1985] 59 STC 155. The Division Bench in the course of its judgment said that the liability to penalty under section 36(3) was incurred by non-payment on a particular date and that liability was complete. Only the calculation of penalty had to be undertaken in accordance with the length of time during which the failure to pay continued. It observed (at page 163) :
"It may be that the penalty in a given case might have been fixed with reference to the loss of interest incurred by the Revenue by late payment, but, in law, the notion of a penalty has to be kept distinct from the notion of payment of interest."
8. In other words, the Division Bench negatived the contention that the method of calculation of penalty with reference to the period of defaults would necessarily convert such penalty into interest.
9. In the case of Avery India Ltd. v. State of Maharashtra [1990] 76 STC 296 (Bom), to which one of us was a party (Mrs. Sujata Manohar C. J.), the court again considered the levy of penalty under section 36(3) of the Bombay Sales Tax Act. The Division Bench said that failure to pay the tax within the time prescribed without reasonable cause was an ingredient of the penalty provisions. In the case before the Division Bench the Tribunal had observed that the delay had arisen on account of technicalities and it could not be said that there was any mala fide intention on the part of the assessee to evade or delay the payment of tax. The Division Bench said that the Tribunal, therefore, ought to have remitted the entire penalty.
10. In the case of CST v. Machinery Sales Service [1990] 77 STC 131 (Bom), to which one of us was a party (Mrs. Sujata Manohar C. J.), the court said that penalty could not be levied on the dealer under section 36(3) of the Bombay Sales Tax Act, 1959, read with section 9(2A) of the Central Sales Tax Act, 1956, for failure to pay tax in accordance with the returns in the absence of any notice under section 38(4) of the Bombay Sales Tax Act, which if not complied with, would attract penalty. This decision proceeds on the basis that penalty levied under section 36(3) is to be treated as penalty and can be levied only if the necessary ingredients for levy of such penalty are present.
11. Apart from the above decisions, if we look at the scheme of section 36, it is clear that the entire section 36 deals with the imposition of penalty. Under section 36(1), penalty not exceeding twice the amount of tax is prescribed where any person, dealer or commissioner agent purchases any taxable goods under declaration given by him under sections 8A, 11, 12 or under any notification issued under section 41, and fails to comply with the conditions, recitals or undertakings of such declaration. Under sub-section (2) penalty not exceeding one and one-half times the amount of the tax can be imposed if it appears to the Commissioner while assessing or reassessing the amount of tax that the dealer has wilfully failed to apply for registration or has, without reasonable cause, failed to comply with any notice in any proceeding under section 33 or section 35 or has concealed the particulars of any transaction or knowingly furnished inaccurate particulars of any transaction liable to tax. Under sub-sections (2A) and (2B) also, penalties are levied for making wrong declarations, etc., or for contravening the terms of any declaration, certificate, etc., as set out in those sub-sections. Sub-section (3) imposes penalty for delay in the payment of tax without reasonable cause. Sub-section (4) levies penalty not exceeding double the amount of the bill or cash memo if the dealer contravenes the provisions of section 47 which require him to issue bills. All these are clearly penal provisions and looking to the context in which section 36(3) appears also it is clear that section 36(3) is wholly penal in nature. This position is borne out by the last sub-section (5) of section 36. It provides as follows :
"(5) No prosecution for an offence under this Act shall be instituted in respect of the same facts on which a penalty has been imposed under this section."
12. Looking to all these circumstances it is clear that the provisions of section 36(3) are penal in nature and have been so held in a number of cases by our High Court.
13. The assessee, however, relies upon a judgment of the Andhra Pradesh High Court in CIT v. Hyderabad Allwyn Metal Works Ltd. [1988] 172 ITR 113. The Andhra Pradesh High Court was also, inter alia, concerned with the provisions of section 36(3) of the Bombay Sales Tax Act, 1959. The Tribunal in that case had considered the payment made under section 36(3) on account of delayed payment of sales tax as interest and had allowed a deduction on that basis in the Income-tax return of the assessee. The Andhra Pradesh High Court referred to the scheme of section 36(3) and held that the payment had an element of penalty and hence was a composite payment comprising both penalty and compensation for delayed payment. To the extent the payment was compensatory, a deduction had to be allowed under the Income-tax Act. The attention of the Andhra Pradesh High Court does not appear to have been drawn to several cases of this High Court relating to the interpretation of section 36(3) of the Bombay Sales Tax Act, 1959.
14. The assessee has strongly relied upon a decision of the Supreme Court in the case of Prakash Cotton Mills P. Ltd. v. CIT [1993] 201 ITR 684, where the judgment of the Andhra Pradesh High Court in the case of Hyderabad Allwyn Metal Works Ltd. [1988] 172 ITR 113 is cited with approval. The Supreme Court has observed that whenever any statutory impost paid by an assessee by way of damages or penalty or interest is claimed as an allowable expenditure under section 37(1) of the Income-tax Act, 1961, the assessing authority is required to examine the scheme of the provisions of the relevant statute providing for payment of such impost notwithstanding the nomenclature of the impost as given by the statute, to find whether it is compensatory or penal in nature. We are in respectful agreement with this observation of the Supreme Court. The Supreme Court was required to consider, inter alia, the payment made under section 36(3) of the Bombay Sales Tax Act, 1959. The Supreme Court in its judgment has throughout referred to this payment as interest and in view of the decision of the Andhra Pradesh High Court in the case of Hyderabad Allwyn Metal Works Ltd. [1988] 172 ITR 113, it remitted the question to the Tribunal for deciding whether the amount contained any element of compensation or penalty and give deduction accordingly. The Supreme Court did this because it observed (at page 691) :
"The facts of the case under our consideration disclose that the Income-tax Officer and the appellate authorities have refused to allow the claims made by the assessee under section 37(1) of the Income-tax Act, without any examination of the scheme of the provisions of the Bombay Sales Tax Act, to find whether impost of the interest paid by the assessee for delayed payment of sales tax was compensatory in nature as would entitle it for deduction under section 37(1) of the Income-tax Act......."
15. As far as this court is concerned, it has, after examination of the scheme of the provisions of the Act, held in a number of cases that the penalty which is levied under section 36(3) is penal in character and contains no element of interest. The Tribunal is bound by these decisions as far as this jurisdiction is concerned. In view of this position it is futile for us to remit the question to the Tribunal in order to decide whether the penalty which is levied for delayed payment of sales tax is compensatory in nature either in part or in full as would entitle it for a deduction under section 37(1) of the Income-tax Act. Therefore, while we respectfully agree with the ratio laid down by the Supreme Court in the case of Prakash Cotton Mills P. Ltd. [1993] 201 ITR 684, it is not necessary to remit the question to the Tribunal in the present case as was done by the Supreme Court in the case before it.
16. It has been urged by Mr. Patil, learned counsel appearing for the assessee that the earlier judgments of this court have not dealt with the question whether the payment of penalty under section 36(3) is composite in nature and whether, although it is termed as penalty, it has an element of compensation in it. The question whether such penalty should be considered as interest payment was directly before the Division Bench of this court in the case of Jairamdas Bhagchand [1988] 171 ITR 545. In any case we have ourselves examined whether penalty under section 36(3) is a composite payment containing an element of compensation. According to Mr. Patil, the following factors would indicate that the payment of penalty is a composite payment containing an element of interest, i.e., compensation for delayed payment. Firstly, the amount of penalty is calculated with reference to the period of delay and the rate is fixed as a percentage of the tax. It should, therefore, be considered substantially as interest. In this connection, he has pointed out that no maximum or minimum amount is prescribed and the payment is entirely dependent upon the period of delay. Secondly, under section 38(2) the amount of penalty should also be calculated and paid along with the return. Thirdly, there is no provision in the Bombay Sales Tax Act, 1959, for payment of interest on delayed payment of tax. He has submitted that normally such a provision would have been there. In the absence of such a provision the penal provision under section 36(3) should be considered as a provision for payment of interest. All these facts which are pointed out by Mr. Patil would have carried substantial weight but for the scheme of section 36(3). In the first place, although section 38(2) requires that penalty under section 36(3) should also be calculated and paid along with the return, the entire penalty amount can be refunded if it is shown that the assessee had a reasonable cause for not paying the tax in time. The assessee is, therefore, not liable to pay the penalty automatically for delayed payment. Only in certain circumstances he is liable to pay the penalty. Secondly, had it been an automatic calculation of payment as submitted by Mr. Patil there would have been no necessity for a notice to show cause to the assessee, and for an order in writing imposing such penalty. There is also a provision for remission. All these factors clearly indicate that the payment is by way of penalty although the quantum of penalty is entirely proportionate to the delay in payment of tax. The very fact that the assessee would not be liable to any penalty if there is reasonable cause for delay goes to show that there is no element of compensation in this payment. Had there been any element of compensation the assessee would not have been absolved of penalty for delay when there was a good reason for such delay. The manner of calculation of penalty has been examined by our High Court in the cases of CST v. Rajendra Motors [1985] 59 STC 155 and also in the case of Jairamdas Bhagchand [1988] 171 ITR 545 and it has not accepted the argument similar to the argument which is advanced before us.
17. It is also pointed out by Mr. Jetley, learned counsel for the Revenue, that under section 44A of the Bombay Sales Tax Act there is an express provision for payment of interest on delayed refunds. Therefore, the distinction between interest and penalty was present before the Legislature when the terms "interest" and "penalty" were used in the Act. He has also pointed out that with effect from April 21, 1987, section 36(3) has now been substituted by a new section. It is necessary to reproduce this section so that it may be compared with the old section. It reads :
"(3) If a dealer -
(a) does not pay the tax within the time he is required by or under the provisions of this Act to pay it, or
(b) is found liable to pay tax under the provisions of clause (c) of sub-section (2), then, without prejudice to the provisions of sub-section (2), he shall be liable to pay simple interest at the rate of two per cent. of the amount of such tax for each month after the last date by which he should have paid such tax :
Provided that the Commissioner or any appellate or revisional authority may, for reasons to be recorded in writing, remit the whole or any part of the interest payable in respect of any period :
Provided further that no interest under this section shall be payable by a dealer to whom an eligibility certificate has been granted and for whom the due date of payment has been extended, moratorium has been granted or instalments have been granted under the second proviso to sub-section(4) of section 38 and the payments have been made in accordance with the provisions of this Act."
18. The new section has now substituted payment of simple interest in the place of penalty. It has deleted the requirement that the dealer should have failed to pay the tax within the prescribed time without reasonable cause. Therefore, under section 36(3), the calculation of payment of what is now termed as interest is automatic. There is no need to examine whether there was or there was not any reasonable cause for delay. The provision for issuing a notice to the dealer and passing an order in writing is also deleted. Interest, therefore, as prescribed under section 36(3) has now to be calculated and paid as set out therein. The proviso, however, enables the Commissioner or any appellate or revisional authority to remit the whole or any part of the interest payable in respect of any period for reasons to be recorded in writing. Clearly, therefore, the previous provision which was penal in nature is now substituted by a provision for payment of simple interest. There is a conscious change from imposition of penalty to payment of interest. We are not concerned with the subsequent amendments to section 36(3). We have referred to the altered provision merely for the purpose of showing that there has been a deliberate change in the provisions of section 36(3).
19. In the premises, the question which is before us in Income-tax Reference No. 305 of 1982 is answered in the negative and in favour of the Revenue. We may like to point out that the question as posed before us is somewhat misleading because it refers to interest of Rs. 13,800 levied under section 36 as it stood at the relevant time. There was no provision at the material time for levy of any interest. The only provision was for levy of penalty.
20. The questions which are raised in the remaining references are also, accordingly, answered in favour of the Revenue and against the assessee.
21. There shall, however, be no order as to costs.