May 2008
S. 37 r.w. S. 43B — Interest on account of default in repaying interest-free sales tax loan is compensatory in nature and allowable — S. 43B are not applicable
By C. N. Vaze, Shailesh Kamdar, Chartered Accountants
Reading Time 2 mins
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17 (2008) 111 ITD 1 (Hyd.)
Southern Electrodes Ltd. v. ACIT
A.Y. 2002-2003. Dated : 31-8-2006
S. 37 r.w. S. 43B of the Income-tax Act, 1961 — Interest
arising on account of default on part of the assessee in repaying interest-free
sales tax loan was compensatory in nature and was to be allowed u/s.37 and also
provisions of S. 43B are not applicable.
Facts :
The Govt. of Andhra Pradesh had given an interest-free sales
tax loan to the assessee company. When the loan was not repaid, interest was
charged to the assessee. The AO as well as the CIT(A) disallowed the said
interest on the following grounds :
(i) The assessee defaulted in repayment of loan and
interest is charged for non-payment of sales tax within the time allowed.
(ii) Interest charged is also in the nature of sales tax;
is penal and covered by S. 43B and hence not allowable.
On further appeal, the ITAT deleted the disallowance
referring to the following :
(a) The charging of interest in case of default is
automatic.
(b) The charging of interest is not within the discretion
of any authority.
(c) Interest payable is not an act of penal nature but it
is only compensatory in nature.
Cases referred to :
(i) Mewar Motors v. CIT, (2003) 260 ITR 218 (Raj.)
(ii) Swadeshi Cotton Mills Co. Ltd. v. CIT, (1998)
233 ITR 199 (SC)
(iii) Padmavati Raje Cotton Mills Ltd. (1999) 239
ITR 355 (Cal.)
(iv) Western Indian State Motors (1987) 167 ITR
395/31 Taxman 412 (Raj.) CIT v. Pheros & Co. (P.) Ltd., (1989) 178 ITR
472/44 Taxman 43 (Gauhati) and a few more.
