JUDGMENT :

BARMAN J. - The question of law referred by the Income Tax Appellate Tribunal to this court u/s 66 (1) of the Indian Income Tax Act, 1922, for decision is :

"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 was an admissible deduction u/s 10 (1) (sic) of the Income Tax Act, 1922 ?"

The provisions of section 10 (1) and (2) (xv) of the Indian Income Tax Act, 1922, so far as relevant for the present purpose, are these :

"10. (1) 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.

(2) Such profits of gains shall be computed after making the following allowances, namely :...

(xv) any expenditure (not being an allowance of the nature described in any of the clauses (i) to (xiv) inclusive, and not being in the nature of capital expenditure or personal expenses of the assessee) laid out or expended wholly and exclusively for the purpose of such business, profession or vocation."

The facts are these : The case relates to the assessment year 1955-56 for which the previous year is the calendar 1954. On May 5, 1954, the opposite party (assessee) entered into an agreement with the Director of Food Supplies on behalf of the Government of Orissa by which the assessee was appointed paddy procuring agent under the Government of Orissa for the purpose of obtaining by purpose or otherwise foodgrains for distribution to such places and at such times as best suits the needs of the people on the terms and conditions of the said agreement, the duration of the agreement commencing from December 11, 1953, and remaining in force up to November, 1954, unless otherwise determined under the provisions thereof. Under the terms of the said agreement the assessee was to supply paddy and rice of a standard quality known as F. A. Q. (fair average quality). Schedule 1 to the agreement provides that in the case of common quality boiled rice the brokens should not exceed more than 22.5%, foreign matter 2%, red, stained and discoloured grains 6% and damaged, shrivelled, chalky and weevilled grains 1%. In the case of fine quality boiled rice, the brokens were not to exceed 15%, foreign matter 1.5%, red, stained and discoloured grains 4%, damaged, shrivelled, chalky and weevilled grains 0.5%. Clause 3 (d) of the agreement provides as follows :

"3 (d). The quality of foodgrain supplied by the agent shall conform to the F. A. Q. standard as specified in Schedule I annexed hereto. The collector may, subject to the approval of the Government, levy such penalty as he may deem fit for supply of foodgrain not conforming to the F. A. Q. standard for local consumption and export, and such penalty shall be deducted from the amount or amounts due to the agent on pending or future bills submitted in accordance with clause 13 of this agreement."

The assessee worked as paddy procuring agent in the accounting year under the Government of Orissa. In exercise of the power under clause 3 (d) quoted above, the Government levied in the course of the year penalties on the assessee amounting to Rs. 25,700. The assessee claimed to be entitled to deduct the said sum of Rs. 25,700 as allowable business expenditure u/s 10 (2) (xv). This contention was rejected by the Income Tax Officer which in appeal was upheld by the Appellate Assistant Commissioner. The Income Tax Appellate Tribunal, however, accepted the assessees contention and allowed the deduction. The Commissioner of Income Tax then made an application requiring the Income Tax Appellate Tribunal to refer to the High Court the said question of law arising out of the Tribunals order allowing the deduction. The said application was granted and consequently the Tribunal has referred to this court the aforesaid question of law.

The answer to the question, in my opinion, mainly depends upon