JUDGMENT C. S. P. Singh, J. - The Income-tax Appellate Tribunal, Allahabad Bench, Allahabad has under section 256(1) of the Income-tax Act referred the following question for our opinion :-
"Whether on the facts and in the circumstances of the case, the claim of interest of Rs. 33,576/- charged under section 220(2) of the Income-tax Act. 1961 is not an allowable deduction in view of the section 40(a)(ii), under section 28(i) and section 37 of the Act.
2. The assessee a public limited Company has financial year as its accounting year. In the assessment year 1964-65, a deduction of Rs. 33,576/- was claimed being interest paid to Income-tax department under section 220(2) of the Act. The interest that was paid was for the assessment year 1960-61, 1961-62 and 1962-63. This amount was not allowed on the view that it was not permissible deduction under section 40(a)(ii) of the Act. An appeal filed before the Appellate Assistant Commissioner failed. The assessee then preferred an appeal before the Tribunal. The Tribunal held that liability to pay penal interest on account of default was not an allowable expenditure on the ground that it was commercially expedient to pay it. It also held that the claim was not allowable either under sections 40(a)(ii), 28(i) or section 37 of the Act. The question referred has been considered by the Punjab High Court in Commissioner of Income-Tax vs. Oriental Carpet Manufacturers (India) P. Ltd. (1973) 90 I.T.R. 373, and (1965) 58 I.T.R. 84) with reference to sections 10(2) (xv), 10(2) (iii) and section 12(2) of the Old Act. The principles laid down in those cases, however, apply to the question referred so far, as the deduction is being claimed under section 37 of the Act as it is in pari materia waith section 10(2)(xv) of the Act. In Commissioner if Income tax vs. Oriental Carpet Manufacturers (India) P. Ltd. (supra) the Punjab High Court has held that under section 10(2)(xv) of the old Act only such expenditure is allowable as incurred for the carrying on of the business, and falls on the assessee in its character as a trader. Interest on payment of delayed tax in view of the Punjab High Court has no connection with the business of the assessee. Payments of tax and interest on delayed payment according to the Punjab High Court are mere consequence of income accruing in such business. Before the Calcutta High Court the question was whether interset paid on money borrowed for payment of income-tax was allowable either under section 10(2) (xv), section 10(2) (iii) or section 12(2). In respect of contention based on S. 10(2) (iii), the Calcutta High Court took the view that the interest could not be allowed, as it was not interest in respect of capital borrowed for the purpose of business. It was not allowed also under sec. 10(2) (xv), as it was held that the payment of interest was not expenditure laid out wholly and exclusively for the purpose of business of the assessee. Contention based on section 12(2) was repelled on the short ground that payment of interest was not expenditure incurred solely for the purpose of making or earning income, profits or gains. In coming to this conclusion, the Calcutta High Court relied on the decision of Patna High Court in Maharajadhiraj Sir Kameshwar Singh vs. Comm. of Income-tax (1961) 43 I.T.R. 774). The claim for this amount cannot also be allowed in view of the explicit prohibition contained in section 40(a)(ii) of the new Act, if the penal interest paid is treated to be a tax paid by the assessee. There is no question of a claim being made under section 28(1) of the Act under the general principle that only such amount is chargeable to tax as represents the true profit of the trader, for the simple reason that the expenditure was not incurred for earning profits, but for delayed payment of the tax and as such was not deductible expenses.
3. Reliance on the decision of the Supreme Court in the case of Commissioner of Income-tax, West Bengal I. vs. Birla Brother P. Ltd. ((1971) 82 ITR SC 166) appears to be out of context in the present case. In that case, legal expenses for contesting the claim before the Investigation Commissioner were allowed on the ground that the expenses were incurred for preservation and protection of the assessees business from process or proceeding which might have resulted in the reduction of its income and profits. It was also held by the Supreme Court that the expenditure was incidental to the business and was necessitated or justified by commercial expediency. Such is not the here, the interest paid by the assessee was for delayed payment of tax, and was not at all incidental to the business or necessary for earning profits. We are in respectful agreement with the reasoning of the Punjab High Court which squarely deals with the question involved in the present reference, and also agree with the principles laid down by the Calcutta High Court and the Patna High Court which are decisive of the controversy raised in the present reference.
4. We accordingly answer the question in the affirmative in favour of the Department and against the assessee. The Department is entitled to its costs which we assess at Rs. 200/-. Counsels fee is assessed at the same figure.