SUNANDA BHANDARE ( 1 ) THE Income-tax Appellate Tribunal, Delhi Bench c have referred the following question for our opinion : "whether on the facts and in the circumstances of thecase the claim for deduction of interest levied undersection 139 to the extent of Rs. 11,4701- and in. terest levied under Section 215 to the extent ofrs. 1,04,339- was rightly rejected as not allowable. ( 2 ) THE assessee is a limited company. The income of theassessee is derived from yarn manufacture and helicopter operations. The Income-tax Officer completed the assessment forthe assessment year 1972-73 on 31-6-1972. He levied on thebasis of the assessment interest under Section 139 to the extentof Rs. 11,4701- and interest under Section 215 to the extentof Rs. 1,04,339, the total amount of interest being Rs. 1. 15,809. The assessee claimed deduction of this interest amount ofrs. 1,15,809 - under Section 37 of the Income-tax Act. 1961in computing the business profits. The Appellate Assistant Commissioner of Income-tax held that the interest was not paid inrespect of the capital borrowed for the purposes of the asscssecsbusiness. The assessee went in further appeal to the Tribunal. The Tribunal following the judgment of this Court in Commissioner of Income-tax v. Mahalakshmi Sugar Mills Limited. 85itr 32 (. l ). rejected the appeal filed by the assessee. The a. ssessee, therefore, by an application under Section 256 (1) requiredthe Tribunal to state a case and refer the above question foropinion to the High Court. ( 3 ) MR. Vaish. learned counsel for the assessee contendedbefore us that interest is compensation paid for the user of moneyand since the money was used by the assessee for the purposesof its business the interest paid under Section 139 and Section215 should be allowed as deduction under Section 37 of theincome-tax Act. Counsel submitted that the unpaid amount oftax was Rs. 34. 37. 819/ and the said amount was used bythe assessee for the purposes of its business. It was submittedthat if the tax amount was paid in time the assessee would havehad to borrow the said amount from other sources for the purposes of its business and the interest paid on this borrowed amountwould have been deductible under Section 36 (l) (iii) of the Income-tax Act. It was submittedthat if the tax amount was paid in time the assessee would havehad to borrow the said amount from other sources for the purposes of its business and the interest paid on this borrowed amountwould have been deductible under Section 36 (l) (iii) of the Income-tax Act. Counsel further contended that the intention ofthe Legislature was amply made clear by the subsequent insertion of Section 80v which permitted deduction of interest onmoney borrowed to pay tax. It was furthandr contended that tax,interest and penalty are three different concepts and though under (Section 40 (a) (ii) of) the Income-tax Act, tax paid is not deductible; interest paid for delay in payment of income-tax wouldbe deductible under Section 37 of the Act. It was submitted thatthe judgment of the Delhi High Court in Commissioner of Income-tax v. Mahalaxmi Sugar Mills Limited, (supra) was setaside by the Supreme Court and was no longer good. law. ( 4 ) REFERENCE was made to the judgment of the Supreme Courtin the case of Associated Cement Company Limited v. Commercial Tax Officer, Kota, AIR 1981 SC 1887 (2 ). The Supremecourt in its majority view observed : "the contention of the assessee in the present case is thatas it had deposited the full amount of tax due onthe basis of the returns filed under sub-section (1)of Section 7 of the Act at the time when they werefiled, it had complied with sub-section (2) of Section 7 of the Act and that the question of levyinginterest on the amount of tax which it deposited onthe basis of the revised returns for the period priorto the date of the revised returns did not arise Onbehalf of the department it is urged before us thatthe words "on the basis of return" occurring in subsection (2) of Section 7 of the Act must be readas on the basis of a true and proper return in thecontext in which those words appear in the statuteand if they are so read, the assessee is liable to payinterest on the deficit amount of tax which was madegood on 20/10/1978, for the period betweenthe date on which such deposit or deposits had tobe made under Section 7 (1) of the Act read withrule 25 of the Rules and the date on which theywere actually made. We are concerned in this case with the liability of theassessee to pay. We are concerned in this case with the liability of theassessee to pay. interest on the amount of tax whichremained unpaid. Tax, interest and penalty arethree different concepts. Tax become. payable byan assessec by virtue of the charging provision in ataxing statute. Penalty ordinarily bccomecs payablewhen it is found that an asscssce has wilfully violated any of the provisions of the taxing statute. . Interest is ordinarily claimed from an assessec whohas withheld payment of any tax payable by himand it is always calculated at the prescribed rate onthe basis of the actual amount of tax withheld andthe exrent of delay in paying it it may not bewrong to say that such interest is compensatory incharacter and not penal. " WE have carefully gone through the decision of the Supremecourt in Associated Cement Company Limited v. Commercialtax Officer, Kota ( supra) case and are humbly of opinion thatthe observations of the Supreme Court made in a difterent context would not help the assessee. The Supreme Court was concerned in this case with the sustainability of penalty and interestleviable under the Madhya Pradesh Sales Tax Act and thecentral Sales Tax Act for not including the freight charges inthe taxable turn over in the original returns and for not pavingthe tax in respect of such freight charges. On the question ofpenally the Supreme Court, held on the facts of the case. thatthe levy of penally was unsustainable. However, on the secondquestion of interest the majority view was that the assessec couldnot escape the liability to pay interest under Section 11b (a) onthe amount of tax withheld as a consequence of his own actionor inaction from the last date on which it had to be paid as persub-section (2) or sub-section (2-A) of Section 7 of the Rajasthansales-tax Act (19 of 1954 ). The Supreme Court furtherheld that. It is the duty of the court while interpreting the machinery sections so that the charge docs no fall". its manifest purpose having a full view of it. Wherever the intention to impose liability is clearcourts ought to have no hesitation in giving what wemay call a common sense interpretation to the machinery sections so that the charge does not fall". its manifest purpose having a full view of it. Wherever the intention to impose liability is clearcourts ought to have no hesitation in giving what wemay call a common sense interpretation to the machinery sections so that the charge does not fall". In the present case if the assessce is allowed the deduction, asclaimed then it would be getting an unfair advantage for notperforming its statutory obligation as against the person whopaid his tax in time as required under the law. ( 5 ) REFERENCE, was made to the judgment of the Andhra Pradesh High Court in Additional Commissioner of Income-tax. A. P. v. Burugupalli China Krishnamurthy and others 121 ITR326 (3 ). This case related to penalty and it was held thatsince penalty proceedings are penal the onus was on the Department to show that a particular receipt or amount is of revenuenature. This case has no relevance to the question in disputein the present case. ( 6 ) IN Commissioner of Income-tax, West Bengal v. Birlacotton Spinning and Weaving Mills Limited. , 82 ITR. 166 (4) thesupreme Court observed as follows : "the essential test which has to be applied is whetherthe expenses were incurred for the preservation andprotection of the assessee s business from any suchprocess or proceedings which might have iesiiltedin the reduction of its income and profits and whether the same were actually and honestly incurred. It is not possible to understand how the expenditureon the proceedings in respect of the Investigationcommission by the assessee will not fall within theabove rule. Even otherwise, the expenditure wasincidental to the business and was necessitated orjustified by commercial expediency. It must be remembered that the earning of profits and the payment of taxes are not isolated and independent activities of a business. These activities are continuousand take place from year to year during the wholeperiod for which the-business continues. If theassessee takes any steps for reducing its liability totax which result in more funds being left for thepurpose of carrying on the business there is alwaysa possibility of higher profits. " IN this case the Supreme Court was concerned with the questionwhether the expenditure on the proceeding in respect of investigation commission by the assessee was deductible under Section 10 (2) (15) of the Income-tax Act. " IN this case the Supreme Court was concerned with the questionwhether the expenditure on the proceeding in respect of investigation commission by the assessee was deductible under Section 10 (2) (15) of the Income-tax Act. The Supreme Courthad made the above observation while distinguishing anotherjudgment of the Supreme Court in Travancore Titanium Productslimited v. Commissioner of Income-tax, Kerala, 60 ITR 277 (5)where it was held that the charge of the tax was the same whether the assets were part of or used in the trading organisationof the owner. ( 7 ) IN the case of Dalmia Dadri Cement Limited v. Commissioner of Income-tax, Delhi, 125 ITR 425 (6), our High Courtwhile deciding the question whether commission paid on borrowing shares for the purposes of treating them as security to Income tax Department for securing stay of recovery of taxes followedthe judgment of the Punjab and Haryana High Court in Dalmiadadri Cement Limited v. Commissioner of Income-tax, 90 ITR297 (7) in order to have uniformity of construction in an allindia statute like the Income-tax Act. The learned judges however observed that there was no divergence of view with regardto deductibility of interest payments in connection with the liability to pay income-tax. ( 8 ) THE Bombay High Court in Aruna Mills Limited v. Commissioner of Income-tax, Ahmedabad 31 ITR 153 (8) had anoccasion to consider the question of deductibility of interestwhich an asscssee had to pay under sub-section (7) of Sectionisa for having under-estimated the tax payable by him by wayof advance tax and the interest payable to him by the Government under sub-section (5) of the said section in respect ofrelevant to note at this stage that while referring to the judgmentof the Punjab High Court in Oriental Carpet Manufacturers, casethe Supreme Court kept open the question regarding the deductibility of interest paid by an assessee on account of delay in payment of the provisional demand of tax under Section 36 (l) (iii)and Section 37 of the Income-tax Act. The Supreme Court heldthat interest payable on arrears of cess under Section 3 (3) is inreality part and parcel of the liability to pay cess. The Supremecourt observed as follows : "now the interest payable an an arrear of cess undersection 3 (3) is in reality part and parcel of theliability to pay cess. It is an accretion to the cass. The Supremecourt observed as follows : "now the interest payable an an arrear of cess undersection 3 (3) is in reality part and parcel of theliability to pay cess. It is an accretion to the cass. The arrears of cess carries intreset if the cess isnot paid within the prescribed period a larger sunwill become payable as cess. The enlargement ofthe cess liability is automatic under Section 3 (3 ). No specific order is necessary in order that the obligation to pay interest should accrue. The liabiiityto pay interest is as certain as the liability TO paycess. As soon as the prescribed date is crossed without payment of the cess, interest begins to accrue. It is not a penalty, for which provision has beenseparately made by Section 3 (5 ). Nor is it a penaltywithin the meaning of Section 4, which provides fora criminal liability and a criminal prosecution. " ( 11 ) THE learned counsel for the assessee fairlv conceded thatin the case of Commissioner of Income-lax v. Oriental Carpetmanufacturers India Pvt. Ltd. . 90 ITR 373 (12) the Punjabhigh Court has held that the interest would derive its colourfrom the principal amount and will partake of it. The Punjabhigh Court observed as follows "it cannot be said that the interest on payment of delayed tax has many connection with the business ofthe assessee, within the four corners of the aforesaid test. The assessee paid interest in order to getadjustment from the department to pay the incometax by instalments, and this has nothing to do withhis business activity. The liability to tax. thougharising out of business activity, cannot be said -to bein any manner a liability which has anything to dowith the business of the assessee. It is merely aconsequence of income accruing in such businessand nothing more. We do not agree with the observations of the Tribunal that the- treatment. . if interest earned on refund of tax, as income of thetax-payer, has anything to do with interest which anassessce incurs in order to raise money to dischargehis income-tax liability. This interest will. derive itscolour from the principal amount and will partakeof it. The interest earned by the department isinterest on tax and must be held to be part of thetax. This does not follow when the asscssee :arnsinterest on excess payment of tax. The two situations are totally different. This interest will. derive itscolour from the principal amount and will partakeof it. The interest earned by the department isinterest on tax and must be held to be part of thetax. This does not follow when the asscssee :arnsinterest on excess payment of tax. The two situations are totally different. " IT was however contended that in view of the judgment of thesupereme Court in Associated Cement Company s case (supra)where Supreme Court has held that interest is compensatoryin character the judgment of the Punjab High Court is no longer good law. As Stated above, the Supreme Court had madethe observations in Associated Cement Company s cnse ontotallydifferent questions of fact and law and the same weredistinguishable. Moreover the question of deductibility of theamount paid towards interest was specificilly kept open by thesupreme Court in Mahalaxmi Sugar Mills case (supra ). ( 12 ) WE. therefore, have no hesitation in coming to the conclusion that interest paid due to delay in payment of lax wouldalso be a part and parcel of the liability to pay income-tax. Sinceincome-tax paid by an assessee is net a permissible deducting theinterest paid for delay in payment of income-tax would therefore,also not be a permissible deduction under Section 37 of the Income-tax Act. This interest would take the colour of the original amount liable to he paid as income-tax. The liability to payarose from failure to pay tax under, section 139 and 215of the Income-tax Act. Interest was paid as a consequence ofdefault committed by the assessee in discharging its statutoryobligations. Although, it is true that the interest charged, due tofailure to comply with the statutory obligation is not a penalty,yet it cannot be said that the payment of such interest is compensation to Government in the ordinary commercial sense. ( 13 ) THE reference to the insertion of Section 80v will notmake any difference for the present case. since the question referred pertains to the assessment year 1972-73 and Section 80vwas inserted by the Taxation Laws (Amendment) Act, 1975with effect from 1/04/1976. ( 14 ) WE, threfore, answer the question in the affirmative infavour of the Department and against the assessee leaving theparties to bear their own costs.