JUDGMENT

S.B. Sinha, J. — Leave granted.

Respondent carries on business of arrack bottling, manufacture of industrial alcohol and their marketing. He obtained a licence from the State of Karnataka for the aforementioned purposes in terms of the provisions of Karnataka Excise Act, 1965. Indisputably, the matter relating to manufacture and bottling of arrack is governed by the said Act and the rules framed thereunder by the State of Karnataka known as Karnataka Excise (Manufacturing & Bottling of Arrack) Rules, 1987 (for short “the Rules”). Rule with which we are concerned herein is sub-Rule (3) of Rule 14 which reads as under:-

“(3) Arrack after blending shall be matured in such manner and for such period as may be specified by the Commissioner from time to time.”

3. The Commissioner of Excise, however, issued a circular stating:

“It is hereby specified that the arrack shall be matured in wooden vats for a minimum period of 15 days before bottling the same.”

4. A period of 15 days, thus, had been prescribed for the aforementioned purpose. A question, however, arose as to what would happen to the excise article, if for circumstances beyond one’s control, said directives cannot be carried. With a view to meet that contingency, it was stated:

“In case the bottling unit for any reason beyond his control is not able to mature the arrack in the manner and to the extent specified above, the unmatured arrack may be bottled with the prior permission of the officer in-charge of the bottling unit. The penalty for supplying unmatured arrack as specified above would be 29 paise per bulk litre.”

5. Indisputably, Respondent obtained permission of the appropriate authority in terms thereof as he was not in a position to comply with the first part of the said circular on paying certain additional amount therefor. He, in his income tax return, claimed deduction for the said amount from his gross income.

6. The Assessing Authority was of the opinion that as the amount payable by the assessee was in the nature of penalty, he was not entitled to any deduction. It was further opined that even if the expenditure is deductible, in view of the fact that the amount in question had not been paid during the period relevant to the assessment year, the same had to be disallowed in terms of Section 43B of the Income Tax Act, 1961 (for short “the Act”).

7. The Assessee paid certain amounts for not affixation of labels on the bottles. He preferred an appeal against the order of assessment and the Appellate Authority, being the Commissioner of Income Tax (Appeals), allowed the same opining that the amount claimed is neither in the nature of ‘excise duty’ nor a penalty.

8. In regard to the applicability of Section 43B of the Act, it was held that as the amount, in question, is neither penalty nor excise duty, Section 43B of the Act would not be attracted.

9. Appellant preferred an appeal thereagainst before the Income Tax Appellate Tribunal. The Appellate Tribunal opined that the payments made by the respondent were in the nature of an additional levy. In regard to the applicability of Section 43B of the Act, the Tribunal held it in the negative.

10. An appeal thereagainst preferred by the Revenue under Section 260A of the Act, has been dismissed by the High Court by reason of the impugned judgment. Before the High Court, the following purported questions of law were framed:

“(i) Whether the Appellate Tribunal were correct in holding that the amount of Rs. 13,25,572/- levied by the Deputy Commissioner of Excise (Breweries & Distilleries), Bangalore, for failing to affix adhesive labels on arrack bottles and failing to mature the arrack for the prescribed period as per Karnataka Excise (Manufacturing & Bottling of Arrack) Rules, 1997 was an allowable deduction despite the penalty levied having arisen due to infraction of law?

ii) Whether the penalty of Rs. 13,25,572 levied by the Deputy Commissioner of Excise (Breweries & Distilleries), Bangalore and not paid by