Kerala High Court
Commissioner Of Income-Tax vs Travancore Electro Chemical ... on 6 October, 1994
Equivalent citations: [1995]211ITR775(KER)
JUDGMENT K.K. Usha, J.
1. The references at the instance of the Commissioner of Income-tax, Cochin, relate to the assessment years 1971-72, 1976-77 and 1977-78. The following common questions are referred in Income-tax References Nos. 492 and 493 of 1985 :
"(1) Whether, on the facts and in the circumstances of the case and also in view of the statutory provisions contained in Rule 27E of the Regulation framed under the Electricity (Supply) Act, the Tribunal is right in law and fact in holding that there was no infraction of law and this was not any penal interest ?
(2) Whether, on the facts and in the circumstances of the case and also in view of the decision of the Supreme Court in Indian Aluminium Co. Ltd. v. CIT [1971] 79 ITR 514, the assessee is entitled to claim deduction for the interest paid or payable ?"
2. In Income-tax Reference No. 24 of 1985 apart from the second question referred to above, two other questions are referred as follows :
"(1) Whether, on the facts and in the circumstances of the case and also in view of the statutory provisions contained in Rule 27E of the Regulation framed under the Electricity (Supply) Act, the Tribunal is right in law and fact in holding that the payment of interest for delay in payment of electricity charges was the result of agreement ?
(2) Whether, on the facts and in the circumstances of the case, the Tribunal is right in law and fact in holding that the payment was made in the course of the business ?"
3. The assessee claimed deduction under Section 37(1) of the Income-tax Act in respect of the interest payable by it to the Kerala State Electricity Board for delayed payment of power charges for the assessment year 1971-72. It was contended by the assessee that due to certain disputes between the assessee and the Board regarding the tariff applicable, delay was caused in payment of power charges. Ultimately, after a series of discussions between the parties, an agreement was entered into on October 23, 1970, under which certain rates were agreed to between the parties. The agreement also contained a term for payment of interest at the rate of six per cent. On these facts which are not in dispute, the assessing authority took the view that the interest payable by the assessee was penal in nature and, therefore, not a permissible deduction. Reliance was placed on a decision of the Delhi High Court in CIT v. Mahalaxmi Sugar Mills Ltd. [1972] 85 ITR 320. On appeal, the Appellate Assistant Commissioner of Income-tax took the view that the interest payable for delayed payment of power charges is not a penalty, it is only an interest charged as any other commercial transaction where payment is delayed and that the assessee had to pay interest not for any violation of any law. Thus, the claim made by the assessee was allowed. On further appeal before the Income-tax Appellate Tribunal by the Revenue, the decision of the first appellate authority was confirmed. The Tribunal has referred to the minutes of the discussion between the assessee and the Electricity Board and it found that there was considerable area of dispute about the supply to be made, the rates to be paid, etc., and all that was settled only consequent to the discussion. The interest, which was charged at six per cent. per annum and described as damages in the minutes was also the result of the agreement. The Tribunal found that it was not a case where there was any infraction of any statutory provision.
4. As far as the assessment years 1976-77 and 1977-78 are concerned, the only difference is that the assessee had a liability to pay interest at the rate of 12 per cent. per annum for the delayed payment of current charges as per the provisions contained under Sub-clause (e) of Clause 27 of the Regulations relating to conditions of supply of electrical energy.
5. The above regulation which was issued by the Board in exercise of its powers conferred under Section 79(j) of the Electricity (Supply) Act, 1948, and the provisions of the Kerala State Electricity Board (General Tariffs) Regulations, came into force with effect from October 1, 1972. Clause 27 contains provisions regarding payment of bills. Sub-clause (e) directs that if the bills are not paid on or before the due date, penalty will be levied at 12 per cent. per annum (one per cent. per mensem) subject to a minimum of 25 paise per invoice. Part of a month will be treated as one month for the purpose of calculating penal interest. Apparently there was a demand made by the Kerala State Electricity Board for interest at the rate of 18 per cent. per annum for delayed payment of electricity charges, which was not agreed to by the assessee. The assessing authority disallowed the claim on the ground that the assessee had not made any provision, that there was a dispute regarding the amount payable as interest between the assessee and the Electricity Board that no claim had been made during the previous year by the Electricity Board and, therefore, there was no enforceable and ascertained liability that had accrued to the assessee. The first appellate authority took the view that since the liability to pay interest was certain in view of the provisions contained under the Regulations and the dispute was only regarding the rate of interest and since the assessee was following the mercantile system of accounting the deduction claimed was admissible. The Tribunal took the view that the liability to pay interest did not involve any infraction of law as it had already held in the case of the assessee for the year 1971-72 and upheld the claim put forward by the assessee.
6. Since the Regulation relating to the conditions of supply of electrical energy came into effect only from October 1, 1972, the provision contained under Sub-clause (e) of Clause 27 has no application to the assessment year 1971-72. The source of liability of the assessee to pay interest has necessarily to be traced to the agreement entered into between the assessee and the Kerala State Electricity Board. But, as far as the other two assessment years are concerned, the liability to pay interest at the rate of 12 per cent. for delayed payment of power charges is in accordance with the provisions contained under Sub-clause (e) of Clause 27 of the Regulations. The main contention put forward on behalf of the Revenue in these cases is that liability to pay interest for delayed payment of power charges is penal in nature and, therefore, the assessee cannot put forward a claim for deduction. In support of the above contention, learned counsel for the Revenue relied on a decision of the Supreme Court in Prakash Cotton Mills P. Ltd. v. CIT [1993] 201 ITR 684. He pointed out that the interest was to be paid as damages as per the agreement for the year 1971-72 and for the other two years, it is imposed as a penalty by the statutory provision. Since the interest payable is described as damages, according to learned counsel, it is penal in nature.
7. We find from the nature of the liability cast on the assessee to pay interest for delayed payment of electricity charges that it does not have any penal character. Merely because it is described as damages or penalty it will not lose its compensatory character. In Prakash Cotton Mills P. Ltd.'s case [1993] 201 ITR 684, the Supreme Court has a quoted with approval the observations made by a Division Bench of the Andhra Pradesh High Court in CIT v. Hyderabad Allwyn Metal Works Ltd. [1988] 172 ITR 113, that (at page 689) : "the mere nomenclature as interest, penalty or damages in the Act may not be conclusive for the purpose of allowing it as a deduction under the Income-tax Act." In Mahalahshmi Sugar Mills Co. v. CJT [1980] 123 ITR 429 (SC), the Supreme Court considered the question whether the interest paid by the assessee under Section 3(3) of the U. P. Sugarcane Cess Act, 1956, for delayed payment of cess payable thereunder was an allowable expenditure under Section 10(2)(xv) of the Indian Income-tax Act, 1922. Sub-section (2) of Section 3 of the Sugarcane Cess Act, 1956, provided that the cess imposed under Sub-section (1) shall be payable by the owner of the factory and shall be paid on such date and at such place as may be prescribed. Sub-section (3) provided that any arrear of cess not paid on the date prescribed under Sub-section (2) shall carry interest at six per cent. per annum from such date to date of payment. Sub-section (5) of the above Act provided that in case of default in making the payment of the cess in addition to the amount of the arrears and interest a sum not exceeding ten per cent. thereof shall by way of penalty be recovered from the person liable to pay the cess. Apart from the above, there was a provision for imprisonment in case of default of payment of the cess under Section 4. Considering these provisions, the Supreme Court held that the interest payable on an arrear of cess under Section 3(3) is in reality part and parcel of the liability to pay cess. No specific order is necessary for accruing an obligation to pay interest. As soon as the prescribed date is over without payment of the cess, interest begins to accrue. It is not a penalty as provided under Sub-section (5) of Section 3 or Section 4. Thus reversing the decision of the High Court in CIT v. Mahalaxmi Sugar Mills Ltd. [1972] 85 ITR 320 (Delhi), the Supreme Court held that interest to be paid under Section 3(3) is in the nature of compensation paid to the Government for delay in payment of cess and, therefore, the assessee is entitled to deduction under Section 10(2)(xv) of the Indian Income-tax Act, 1922.
8. Clause 27 of the Regulations regarding Conditions of Supply of Electrical Energy, 1972, provides for matters relating to payment of bills. Sub-clause (a) directs that the bill shall be paid by the consumer at the local office of the Board on or before the due date shown in the invoice. Sub-clause (c) provides that if the consumer fails to pay any bill presented to him on or before the due date, the Board shall be at liberty to take action under Sub-section (1) of Section 24 of the Indian Electricity Act and to cut off the supply after giving the consumer not less than seven clear days' notice in writing. If the consumer fails to remit the charges before the expiry of the seven clear days, the service will be disconnected without further notice on the next working day. The supply disconnected will be reconnected only on payment of all dues and reconnection fees as per rules. The above would show that a penal provision by way of disconnecting the supply is contained in Section 24 of the Indian Electricity Act and also in Sub-clause (c) of the Regulations. While taking such penal action, notice has to be issued by the authorities. But in the case of interest levied under Sub-clause (e) no separate order is contemplated. If the bill is not paid on or before the due date, interest automatically accrues. Liability for payment of interest as above can only be compensatory in nature and not a penal provision. For the years 1971-72 as mentioned earlier, the assessee was made liable to pay interest as per the terms of the agreement entered into between the assessee and the Kerala State Electricity Board, and it cannot in any manner be described as penal in nature. The decision in Indian Aluminium Co. Ltd. v. CIT [1971] 79 ITR 514 (SC), has no application to the facts of the present case. In the above case, the assessee failed to recover from the payment made to the foreign company which provided the assessee with technical know-how, engineering services, etc., the amounts which the assessee was bound to deduct under Section 18(3B) of the Indian Income-tax Act, 1922. There was no condition or stipulation in the agreement between the assessee and the foreign company that the fee would be payable by the assessee without deduction of tax under the provisions of the Indian Income-tax Act, 1922. The assessee had therefore to pay the amount of tax liable to be deducted from the payments made to the foreign company. When the foreign company refused to reimburse the amount, the assessee wrote off the amount and claimed deduction as bad debt. The claim was negatived by the Supreme Court holding that payment made under a statutory obligation because the assessee was in default could not constitute expenditure laid out for the purpose of the assessee's business, within the meaning of Section 10(2)(xv). The facts stated above would clearly show that the nature of the liability of the assessee in the present case is entirely different from the statutory obligation of the assessee in the case decided by the Supreme Court.
9. We are, therefore, of the view that the Tribunal has correctly held that the interest liable to be paid by the assessee to the Kerala State Electricity Board for delayed payment of electricity charges is not penal in nature and, therefore, the assessee is entitled to claim deduction under Section 37(1) of the Income-tax Act. Thus, questions Nos. 1 to 5 in Income-tax Reference No. 24 of 1985 and questions Nos. 1 and 2 in Income-tax References Nos. 492 and 493 of 1985 are answered in the affirmative, in favour of the assessee and against the Revenue.