COMMISSIONER OF INCOME TAX Vs. NEW ALPINE FORESTS

JUDGEMENT

(1.) BY this reference under section 256(1) of the Income-tax Act, 1961 ("Act"), the Income-tax Appellate Tribunal, Amritsar Bench, Amritsar ("Tribunal") has referred the following question of law to this Court for opinion at the instance of the revenue :

(2.) AS is evident from the question, the controversy in this case pertains to the allowability of interest payable on belated payments of royalty to the Forest Department as a deduction under section 37(1) of the Act. The material facts of the case, giving rise to this reference, are as follows: The assessee, who is a forest contractor, took lease of certain forests from the Forest Department of the Government of Jammu andamp; Kashmir for which it was required to pay royalty to the Forest Department. In terms of clause 7 of the lease deed, in case of delay in payment of royalty, the assessee was also liable to pay interest at the rate of 9 percent per annum for the period of delay. Under the above clause, the Chief Conservator of Forests was, however, empowered to reduce the rate of interest not below 6 percent per annum for sufficient reasons to be recorded by him. In the previous year relevant to the assessment year, 1972-73, the assessee was required to pay a sum of Rs.1, 10,980/- by way of interest on delayed payment of royalty. The assessee claimed that amount as an allowable expenditure in its assessment for the assessment year 1972-73. The Income-tax Officer disallowed the assessee's claim on various grounds, namely, that there was no provision made in accounts for the payment of any such interest, that it was in the nature of a penalty, that the calculation of interest was not correct with reference to the quantum of royalty and finally that the assessee had not charged any interest from M/S Sheikh Abdul Rashid andamp; Co. from whom a sum of s.1, 97,330/- was due. The assessee appealed against the above order to the Appellate ASsistant Commissioner .The Appellate ASsistant Commissioner dismissed the appeal and upheld the disallowance made by the Income-tax Officer as he was of the opinion that the payment of interest on delayed payments of royalty was in the nature of penalty. Against the above order, the assessee appealed to the Income-tax Appellate Tribunal. The Tribunal, on hearing the parties, allowed the appeal of the assessee. The Tribunal held that the interest paid by the assessee to the Forest Department on belated payment of royalty was an allowable deduction as the assessee had not violated the provisions of any statute but entered into a lease agreement in the course of its business for which certain amount of royalty was payable in instalments and the contract of lease itself envisaged possible default in timely payment of royalty and provided for the charging of interest for delayed payments. Aggrieved by the above order, the revenue is before us by way of this reference.

(3.) IN Mahalakshmi Sugar Mills Co. v CIT (supra), the Supreme Court had to decide whether interest paid by the assessee under section 3(3) of the U.P. Sugarcane Cess Act, 1956 ("Cess Act") for delayed payment of cess payable thereunder was an allowable expenditure under section 10(2)(xv) of the INcome-tax Act, 1922 (corresponding to section 37(1) of the INcome-tax Act, 1961). The Supreme Court, on examination of the scheme of the Cess Act, held that the interest payable on an arrears of cess was in reality part and parcel of the liability to pay cess. It was observed :