1972 (1) TMI 11 - HC - Income Tax

Court denies deduction for penalty on delayed tax payment; ruling favors revenue.

The court ruled in favor of the revenue, determining that the penalty of Rs. 97,028.04 paid by the sugar manufacturing company for delayed payment of cess ... Imposition of penalty for delayed payment of cess and purchase tax levied under the U.P. Sugarcane Cess Act, 1956 – held that imposition of penalty was on account of failure on the part of the assessee to comply with a statutory obligation and as such any payment made by the assessee was not incidental to its business nor was there any commercial expediency for its payment – therefore amount was not an allowable expenditure under section 10(2)(xv) Issues Involved:1. Imposition of penalty for delayed payment of cess and purchase tax.2. Allowability of penalty as a deductible expenditure under section 10(2)(xv) of the Income-tax Act, 1922.3. Validity and implications of the U.P. Sugarcane Cess (Validation) Act, 1961.Detailed Analysis:1. Imposition of Penalty for Delayed Payment of Cess and Purchase Tax:The assessee, a sugar manufacturing company, paid a penalty of Rs. 97,028.04 for delayed payments of cess and purchase tax under the U.P. Sugarcane Cess Act, 1956. The penalty was imposed due to the failure to make payments on the prescribed dates.2. Allowability of Penalty as a Deductible Expenditure:The Tribunal had allowed the penalty as a deductible expenditure under section 10(2)(xv) of the Income-tax Act, 1922. However, both the Income-tax Officer and the Appellate Assistant Commissioner had disallowed this deduction, stating that the penalty was for a breach of law and not an expenditure wholly and exclusively laid out for the purpose of business.The court referred to several precedents:- Haji Aziz and Abdul Shakoor Bros. v. Commissioner of Income-tax: The Supreme Court held that expenses incurred by way of penalty for a breach of law could not be considered as an amount wholly and exclusively laid out for business purposes.- Commissioner of Income-tax v. Prafulla Kumar Mallik: Payments by way of penalty are not incidental to business and cannot be deducted under section 10(2)(xv).- Mahabir Sugar Mills (P.) Ltd. v. Commissioner of Income-tax: The Allahabad High Court held that no expense paid by way of penalty for breach of law could be said to be wholly and exclusively laid out for business purposes.- Deoria Sugar Mills Co. v. Commissioner of Income-tax: An infraction of law is not a normal incident of trade.The court concluded that the penalty imposed for delayed payment of cess and purchase tax was not an allowable deduction under section 10(2)(xv) as it was a consequence of a statutory breach and not a business expenditure.3. Validity and Implications of the U.P. Sugarcane Cess (Validation) Act, 1961:The U.P. Sugarcane Cess Act, 1956, was declared invalid by the Supreme Court in Diamond Sugar Mills Ltd. v. State of U.P. Subsequently, the U.P. Legislature passed the U.P. Sugarcane Cess (Validation) Act, 1961, to validate the imposition and collection of cess, interest, and penalties.Section 2(a) of the Validating Act defined 'cess' to include sums recoverable by way of interest or penalty. However, the court clarified that under the original State Act, 'cess' did not include interest or penalty. These were separate liabilities arising from the non-payment of cess on the due date.The court noted that the Validating Act's deeming provision gave retrospective effect to the imposition, assessment, and collection of cess, interest, and penalties. However, this did not alter the nature of the penalty as a consequence of statutory breach.The court held that the penalty paid by the assessee was not incidental to the business nor was it commercially expedient. Therefore, it could not be considered a deductible expenditure.Conclusion:The court answered the question in favor of the revenue, holding that the penalty amounting to Rs. 97,028.04 was not an allowable deduction under section 10(2)(xv) of the Income-tax Act, 1922. The assessee was also ordered to pay the costs of the proceedings, with counsel's fee set at Rs. 300.