A reference regarding the admissibility of a deduction under Section 10(1) of the Income-tax Act, 1922, must be decided based on the computation of profits and gains under that section, not by incorrectly applying the criteria for business expenditure under Section 10(2)(xv).

JUDGMENT

BHARGAVA J.-This appeal on certificate granted by the High Court of Orissa under section 66A(2) of the Indian Income-tax Act, 1922, arises under the following circumstances :

During the calendar year 1954, which was the previous year relating to the assessment year 1955-56, the appellant worked as a paddy procuring agent under the Government of Orissa on the basis of an agreement entered into by the appellant and the Government of Orissa. Under that agreement, the appellant was required to supply paddy and rice of a certain standard quality known as "fair average quality ". The criterion for the "fair average quality" was defined. There was a clause in the agreement that the quality of foodgrains supplied must conform to the " fair average quality " standard and that the Collector may, subject to the approval of the Government, levy such penalty as he may deem fit for supply of foodgrains not conforming to the " fair average quality ", and such penalty shall be deducted from the amount or amounts due to the agent on pending or future bills submitted in accordance with another clause of the agreement. In exercise of this power, during the course of the accounting year in question, penalties amounting to Rs. 25,700 were imposed on the appellant and were realised by deduction from the bills. The appellant claimed deduction of this amount from the assessable income under section 10(1) of the Income-tax Act. The claim was negatived by the Income-tax Officer and the Appellate Assistant Commissioner, but was accepted by the Income-tax Appellate Tribunal. The Tribunal held that this amount of Rs. 25,700 deducted by the Government from the bills of the appellant could not be brought to tax in view of section 10(1) of the Income-tax Act. Thereupon, the Commissioner of Income-tax asked for a reference to the High Court, and the Tribunal under section 66(1) of the Income-tax Act referred the following question for the opinion of the High Court:

" Whether, on the facts and in the circumstances of the case, the amount of Rs. 25,700 paid by the assessee by way "of penalty to the Government of Orissa Shall be an admissible deduction under section 10(1) of the income-tax Act, 1922 ?"

The High Court, in dealing with this question, considered the provisions of section 10(2)(xv) of the Act and held that the deduction claimed by the appellant was not admissible as it amounted to a penalty imposed on the appellant for his dishonest action in supplying sub-standard quality goods, and that such penalty could not be said to be an expenditure incurred wholly and exclusively for the purpose of the business. It is quite obvious that the High Court, in answering the question on this basis, misdirected itself and totally misunderstood the question that was referred to it for opinion by the Tribunal. The appellant had at no stage contended that the Tribunal had wrongly held that this sum of Rs. 25,700 was not deductible under section 10(2)(xv) of the Act as expenditure wholly and exclusively laid out for the purpose of the business, nor was this proposition the subject-matter of the question which was referred by the Tribunal for opinion to the High Court. In answering the question on this basis, therefore, the High Court did what it was not at all called upon to do and, thus, committed a clear error.

The High Court was actually required to answer the question whether this sum of Rs. 25,700 which was paid by the assessee by way of penalty to the Government of Orissa was an admissible deduction under section 10(1) of the Income-tax Act. The question was, no doubt, framed in rather unfortunate language, because section 10(1) of the Income-tax Act does not refer to any deduction. Section 10(1) lays down that the tax shall be payable by an assessee under the head " profits and gains of business, profession or vocation " in respect of the profits or gains of any business, profession or vocation carried on by him. In these circumstances, what the appellant ha