A fine paid for breach of a lease agreement is not an allowable deduction under Section 10 (2) (xv) of the Indian Income-tax Act, 1922, because it is not laid out or expended wholly and exclusively for the purpose of the assessee's business.

KAPUR, J.

1. This is a reference made by the Income-tax Appellate Tribunal and the two questions which have been referred to this Court are :-

" (1) Whether there was material upon which the Tribunal found that the assessee attempted to extract more rosin by contravening the terms of the lease?

(2) If so, whether, upon the facts found by the Tribunal found that "the assessee as fine under the penalty clause of the terms of the lease was a proper deduction within the meaning of Section 10 (2) (xv) of the Indian Income-tax Act, 1922? "

In order to answer these questions it is necessary to briefly give the facts of the case as given in the statement of the case by the Tribunal. An agreement, exhibit H. was entered into between the Tehri Garhwal State and the assessee, the Himalaya Rosin-Turpentine Manufacturing Company on the 24th November, 1937, which was to take effect from the 1st of Dec., 1937. The clause of this agreement relevant to the present case is No. II which is follows :-

"II. That you will be responsible to extract rosin according to the specifications and prescription prescribed in the standard books on the subject as is described in the schedule enclosed herewith. You will further be responsible to pay compensation for failure to observe the terms contained in the above paragraphs or for careless or intentional damage to the forest, either by fire or otherwise resulting from your action or the action of your staff or labourers."

It appears that the assessee, the Himalaya Rosin-Turpentine Manufacturing Company, was accused of having transgressed the terms of the agreement and on the 31st October, 1944, the Home Secretary on behalf of the Tehri Garhwal State wrote to the present assessee calling upon them to pay Rs. 5,000 by way of fine, In this letter it was said :-

"I am to inform you that it has been reported to the Durbar that against the rules you are making the channels as deep as 3" as broad as 5" and as long as 22" and that even small sapplings are being tapped. As such a compensation of Rs. 5,000 (five thousand rupees) is imposed on you by way of fine which please credit into the Treasury by the 30th November, without fail, otherwise stricter steps will be taken against you."

The assessee accepted this liability and paid up Rs. 5,000 as they were called upon to do. In the assessment year 1945-46 the assessee claimed this sum of Rs. 5,000 as deduction in order to arrive at their net profits. This claim was rejected by the Income-tax Officer as also by the Appellant Assistant Commissioner. The matter was taken on appeal to the Income-tax Appellate Tribunal which allowed this sum as a deduction. They said :-

"Objections in this appeal are taken to the addition of cash credits in three accounts and to the disallowance of Rs. 5,000 paid by the assessee firm as compensation to Tehri Garhwal State for breach of certain conditions of the lease, which the assessee held for extraction of rosin from State forests. The assessee attempted to extract more rosin by contravening the terms of the lease and for this unlawful gain he had to pay compensation to the State. On these facts, we see no reason why the sum of Rs. 5,000 paid to the State be not allowed as a revenue expense. This compensation would in other words, mean royalty for the rosin actually extracted or for an attempt to do it. In the circumstances of the case, we feel that payment of Rs. 5,000 is an allowable deduction in assessees trading account. It is therefore ordered accordingly."

According to the statement of the case it is quite clear that the Home Secretary of the Tehri Garhwal State wrote to the assessee on the 31st October, 1944, that it had been reported to the Durbar that they, the assessees, were making the channels 3" deep, 5" wide and 22" long and were taping even small sapplings which was against the rules made by the Durbar, which shows quite clearly that the allegations made against them was that the rules in accordance with which th