1981 (2) TMI 219 - HC - VAT and Sales Tax

Summary

Issues Involved:
1. Whether the penalty levied under sections 8(2) and 17(3) of the Madhya Pradesh General Sales Tax Act and paid by the assessee is allowable expenditure in the computation of total income.

Detailed Analysis:

Issue 1: Allowability of Penalty as Expenditure
The primary question referred to the court was whether the penalty paid by the assessee under sections 8(2) and 17(3) of the Madhya Pradesh General Sales Tax Act (Sales Tax Act) could be considered an allowable expenditure under section 37(1) of the Income-tax Act, 1961.

Material Facts:
- The assessee, a company engaged in the manufacture and sale of vegetable ghee and de-oiled cakes, paid penalties amounting to Rs. 1,91,660 and Rs. 1,28,000 under sections 17(3) and 8(2) of the Sales Tax Act, respectively.
- The Income-tax Officer and the Appellate Assistant Commissioner rejected the assessee's claim that these penalties should be considered allowable expenditures.
- The Income-tax Appellate Tribunal, however, held that these penalties were allowable deductions, viewing them as extra payments of sales tax and not penalties for economic offences or moral turpitude.

Arguments:
- The department's counsel cited the Supreme Court decision in Haji Aziz and Abdul Shakoor Bros. v. Commissioner of Income-tax [1961] 41 ITR 350 (SC), arguing that penalties paid for infractions of the law are not allowable expenditures.
- The assessee's counsel relied on Mahalakshmi Sugar Mills Co. v. Commissioner of Income-tax [1980] 123 ITR 429 (SC), contending that the penalties were compensatory in nature, akin to interest on overdue taxes, and hence allowable.

Court's Analysis:
- Section 37(1) of the Income-tax Act allows deductions for any expenditure laid out wholly and exclusively for business purposes, excluding capital and personal expenses.
- The court noted that sales tax and interest on arrears of sales tax are allowable expenditures as they are part and parcel of the tax liability.
- However, fines or penalties for breaches of law, even if incurred during the course of business, are not considered business expenses. They are personal liabilities imposed for legal infractions.
- The court referred to the Supreme Court's observations in Haji Aziz and Abdul Shakoor Bros. v. Commissioner of Income-tax, emphasizing that penalties for law infractions are not commercial losses but personal liabilities.
- The court also highlighted that the burden of proving that an expense is allowable lies on the assessee, per Commissioner of Income-tax v. Calcutta Agency Ltd. [1951] 19 ITR 191 (SC).
- Sections 8(2) and 17(3) of the Sales Tax Act were scrutinized. The penalties under these sections are discretionary and result from breaches of the law, not automatic liabilities like interest on overdue taxes.

Conclusion:
- The court concluded that penalties imposed under sections 8(2) and 17(3) of the Sales Tax Act are not allowable expenditures under section 37(1) of the Income-tax Act.
- The court answered the reference in the negative, ruling against the assessee.

Final Judgment:
- The penalties paid by the assessee under sections 8(2) and 17(3) of the Madhya Pradesh General Sales Tax Act are not allowable expenditures in the computation of total income.
- Reference answered in the negative, with each party bearing its own costs.