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1969 Supreme(Cal) 55
HIGH COURT OF CALCUTTA
SANKAR PRASAD MITRA, SABYASACHI MUKHERJI
DEORIA SUGAR MILLS LTD. - Appellant
Versus
COMMISSIONER OF INCOME-TAX - Respondent
Income-Tax Reference 100 Of 1965
Decided On : MARCH 6, 1969
AMIYA K.BASU, BISWA GUPTA, D.PAL, Seal
Penalty paid for a breach of the law is not allowable as business expenditure under Section 10 (2) (xv) of the Income-tax Act, 1922.
Headnote:
INCOME TAX - Deduction - Penalty paid under Section 3 (5) of the U. P. Sugarcane Cess Act, 1956, for non-payment of arrears of sugarcane cess levied under the said Act, is not allowable as business expenditure under Section 10 (2) (xv) of the Act of 1922.
Fact of the Case:
The assessee, a sugar manufacturer, claimed a deduction of Rs. 34,355 as interest paid for arrears of sugarcane cess under the Uttar Pradesh Sugarcane Cess Act, 1956. The Income-tax Officer rejected the claim on the grounds that the liability related to the assessee's accounting year which ended on the 31st August, 1957, and the assessee had not made any provisions for the said sum in its accounts for that year and that the amount in question was not allowable as a deduction since it was penal in nature for nonpayment of the cane cess on the due date.
Finding of the Court:
The Appellate Assistant Commissioner allowed the deduction of the first item, namely, the sum of Rs. 16,443. 68, which was interest on arrears of cane cess, but disallowed the second item, namely, the sum of Rs. 17,911. 39, which was the amount directed to be paid by way of penalty under Section 3 (5) of the Uttar Pradesh Sugarcane Cess Act, 1956, holding that it was a levy by way of penalty and this payment could not be said to have been incurred for commercial expediency.
Issues: Whether the sum of Rs. 17,911 being the amount paid under Section 3 (5) of the U. P. Sugarcane Cess Act, 1956, for default in making the payment of cess in due time was allowable as a deduction either under Section 10 (1) or Section 10 (2) (xv) of the Indian Income-tax Act, 1922?
Ratio Decidendi: The court held that the payment made under Section 3 (5) of the Uttar Pradesh Sugarcane Cess Act, 1956, is not allowable as business expenditure under Section 10 (2) (xv) of the Act of 1922, as it is a penalty paid for a breach of the law and is not an amount wholly and exclusively laid out for the purpose of the business of the assessee.
Final Decision: The court answered the question referred to it in the negative, holding that the penalty paid under Section 3 (5) of the U. P. Sugarcane Cess Act, 1956, for non-payment of arrears of sugarcane cess levied under the said Act, is not allowable as business expenditure under Section 10 (2) (xv) of the Act of 1922.
( 1 ) THIS is a reference under Section 66 (1) of the Indian Income-tax Act, 1922. The assessment year is 1958-59. The relevant previous year is the year which ended on the 31st August, 1957. The assessee carried on business in the manufacture and sale of sugar. It had its mill at Deoria, Uttar Pradesh, and its registered office at Calcutta. For the assessment year 1958-59, by its letter dated 25th November, 1961, the assessee claimed a deduction of Rs. 34,355 as interest paid for arrears of sugarcane cess under the Uttar Pradesh Sugarcane Cess Act, 1956.
( 2 ) THE Income-tax Officer rejected this claim. His first ground was that the liability related to the assessee's accounting year which ended on the 31st August, 1957, and the assessee had not made any provisions for the said sum in its accounts for that year though the assessee's method of accounting was mercantile. Secondly, he said that the amount in question was not allowable as a deduction since it was penal in nature for nonpayment of the cane cess on the due date.
( 3 ) BEFORE the Appellate Assistant Commissioner the assessee based the claim for deduction of the said sum of Rs. 34,355 either under Section 10 (1) or under Section 10 (2) (xv) of the Act of 1922. The argument was that under the Uttar Pradesh Sugar cane Cess Act, 1956, interest was payable for delayed payment of cess and an additional amount was also payable for non-payment of cess in certain circumstances which though described as penalty in the Act was in effect an additional levy of cess. The Appellate Assistant Commissioner was of opinion that the claim aforesaid could not be rejected merely on the plea that the amount was not provided for in the assessee's books of account in the relevant previous year. And as the liability for the payment of this amount was incurred during the year in question, the deduction should be allowed if otherwise permissible. The Appellate Assistant Commissioner found that the said sum of Rs. 34,355 was made up of two items, namely, (a) Rs. 16,443. 68 and (b) Rs. 17,911. 39. The first item was interest on arrears of cane cess for the period December 23, 1956, to August 31, 1957. The second item was the amount directed to be paid by way of penalty under Section 3 (5) of the Uttar Pradesh Sugarcane Cess Act, 1956. The Appellate Assistant Commissioner held that the second item was inadmissible since it was a levy by way of penalty and this payment could not be said to have been incurred for commercial expediency. He, however, allowed the deduction of the first item, namely, the sum of Rs. 16,443. 68.
( 4 ) IT would be convenient at this stage to set out the provisions of Sections 3 and 4 of the Uttar Pradesh Sugarcane Cess Act, 1956. These provisions are as follows:"3. (1) The State Government may by notification in the Official Gazette impose a cess not exceeding four annas per maund on the entry of the cane into the premises of a factory for use, consumption or sale therein: provided that the State Government may likewise remit in whole or in part such cess in respect of cane used or to be used in a factory for any limited purpose specified in the notification. Explanation.--If the State Government, in the case of any factory situated outside Uttar Pradesh, so declare, any place in Uttar Pradesh set apart for the purchase of cane intended or required for use, consumption or sale in such factory shall be deemed to be the premises of the factory. (2) The cess imposed under Sub-section (1) shall be payable by the owner of the factory and shall be paid on such date and at such place as may be prescribed. (3) Any arrear of cess not paid on the date prescribed under subsection (2) shall carry interest at 6 per cent. per annum from such date to date of payment. (4) The State Government may, for the purpose of assessment and collection of the cess, appoint officers and authorities and may also prescribe the manner in which the cess shall be assessed and
