Interest On Delayed Agricultural Income Tax Not Deductible Under Section 37 Income Tax Act: Kerala High Court
Safiya Malik
The High Court of Kerala Division Bench of Justice A. Muhamed Mustaque and Justice Harisankar V. Menon has held that interest paid on the belated remittance of agricultural income tax cannot be claimed as a deduction under Section 37 of the Income-tax Act, 1961. In an appeal by an assessee-company challenging the disallowance of such interest, the Bench considered whether this payment could qualify as business expenditure. The Court noted that Section 37 permits deduction only of expenses incurred wholly and exclusively for the purposes of business or profession and that agricultural income, and the tax levied on it, lie outside the taxable income under the Act. Consequently, interest arising from delayed payment of agricultural income tax was found ineligible for deduction.
The matter concerns an income tax appeal filed by the assessee challenging the order of the Income Tax Appellate Tribunal dated 19 May 2020 relating to the assessment year 2012–13. While completing the assessment under Section 143(3) of the Income Tax Act, the Assessing Officer noticed that the assessee had paid interest on Agricultural Income Tax dues amounting to Rs. 94,00,179. The Assessing Officer treated this as not allowable under the Income Tax Act and added back 35% of the interest amount, invoking Section 40(a)(ii) read with Rule 7A.
In the appeal before the first appellate authority, it was held that the appropriate provision for disallowance was Section 37 rather than Section 40(a)(ii). The authority directed the Assessing Officer to verify whether the entire amount represented delayed payment of Agricultural Income Tax, and if so, to disallow it completely.
The assessee thereafter approached the Tribunal, which concurred with the first appellate authority’s findings and upheld the disallowance. The assessee contended before the High Court that the interest paid was compensatory in nature under the scheme of the Kerala Agricultural Income Tax Act and therefore should qualify for deduction under Section 37. The Revenue argued that neither the tax nor the interest on delayed payment was allowable since agricultural income itself did not fall within taxable income under Section 10(1).
The Court recorded that “the interest which is now disallowed under Section 37 of the Act is with reference to the delayed payment of AIT.” It further observed that Section 10(1) excluded agricultural income from total taxable income and therefore noted that “even the very AIT paid was not an allowable deduction under the Act.” The Bench stated that “the interest paid takes its colour from the tax that was defaulted on account of which interest was demanded. When the tax itself was not an admissible deduction under the provisions of the Statute, it goes without saying that the interest paid on such delayed payment was also not deductible.”
The Court then addressed Section 37, stating that “it is the expenditure incurred ‘for the purpose of the business or profession’ that is prescribed as an eligible deduction.” It recorded that “the appellant-assessee admittedly has delayed the payment of AIT on account of which interest was sought to be demanded.” According to the Court, “the delayed payment of AIT cannot be considered in the business interest of the assessee, and therefore, the interest paid for the delay cannot be considered as expended for the purposes of the business of the assessee.”
The Court referred to the assessee’s contention that only simple interest was levied under the Agricultural Income Tax Act and that such interest was compensatory. However, it observed that “the reliance placed by the learned counsel on Pratibha Processors (supra), does not appear to be apposite, insofar as it is the concept of tax/interest/penalty, which was explained therein. The question as to whether the interest charged is eligible for the benefit available under Section 37 of the Act did not arise for consideration.”
Regarding Mahalaxmi Sugar Mills Co., the Court stated that while the Supreme Court had held interest on arrears of cess to be allowable, “the very Cess was an eligible deduction under the Act, whereas in the case at hand, as already noticed, AIT was not a permissible deduction.”
Addressing Consolidated Coffee Ltd., the Court recorded that although the nature of interest under the Agricultural Income Tax Act was discussed, “the said judgment was with reference to the provisions of the Karnataka Agricultural Income Tax Act, 1957, and not with reference to the Income Tax Act or the eligibility for deduction under Section 37 of the Act.”
On Prakash Cotton Mills, the Court stated that it was “not apposite, since the Apex Court, in that case, considered the eligibility for deduction on interest for delayed payments of Cess, which, in turn, was an eligible deduction under the Act thereof.”
The Bench further noted that the Supreme Court in Bharat Commerce and Industries Ltd. had held that “the delayed payment of income tax can in no way be considered as an expenditure laid out wholly and exclusively for the purpose of business.”
The Court recorded that “we are of the opinion that the appellant-assessee will not be entitled for the benefits flowing out of Section 37 of the Act, and so it is not entitled to succeed. This appeal would stand dismissed, answering the question of law, framed by us against the appellant-assessee and in favour of the revenue.”
Advocates Representing The Parties
For the Appellant: Shri M. Gopikrishnan Nambiar, Shri K. John Mathai, Sri Joson Manavalan, Sri Kuryan Thomas, Shri Paulose C. Abraham, Shri Raja Kannan
For the Respondent: Sri Jose Joseph, Standing Counsel
Case Title: Aspinwall and Company Ltd. v. Commissioner of Income Tax
Neutral Citation: 2025: KER:90157
Case Number: I.T.A. No.5 of 2021
Bench: Justice A. Muhamed Mustaque, Justice Harisankar V. Menon
