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Issues:
Whether penalties under the U.P. Sugarcane Cess Act, 1956, and the U. P. Sugarcane (Purchase Tax) Act, 1961, aggregating to Rs. 1,64,014 could be allowed as a deduction in working out the business income of the assessee-company for the assessment year 1963-64. Analysis: The dispute revolves around the claim of the assessee that penalties amounting to Rs. 1,64,014 imposed under the U.P. Sugarcane Cess Act, 1956, and the U. P. Sugarcane (Purchase Tax) Act, 1961, should be deductible as business expenses due to financial difficulties causing non-payment by the due dates. However, the Income-tax Officer and appellate authorities, including the Income-tax Appellate Tribunal, rejected this claim. The crux of the matter lies in whether such penalties can be considered permissible deductions under the Income-tax Act, 1961. The judgment emphasizes that only expenses incidental to and wholly and exclusively for the purpose of carrying on business are deductible for computing taxable income. It asserts that penalties incurred due to contravention of rules and regulations do not qualify as commercial losses or legitimate business expenses. The court highlights that conducting business in violation of the law is not a normal business practice and expenses arising from such conduct cannot be deemed necessary for business operations. Citing precedents like Haji Aziz and Abdul Shahoor Bros. v. CIT, the court reiterates that expenses paid as penalties for breaching statutory provisions do not meet the criteria of being wholly and exclusively laid out for the purpose of the business. The judgment refers to past decisions of the court, such as Mahabir Sugar Mills (P.) Ltd. v. CIT, Shadi Lal Sugar and General Mills Ltd. v. CIT, and Upper Doab Sugar Mills Ltd. v. CIT, which held that penalties under the U.P. Sugarcane Cess Act, 1956, are not allowable as business expenditures. The court aligns with these precedents and concurs with the Income-tax Appellate Tribunal's view that the penalties totaling Rs. 1,64,014 imposed on the assessee are not deductible in computing taxable income. Consequently, the court rules in favor of the Department and against the assessee, affirming that the penalties cannot be considered permissible deductions for business income calculation. In conclusion, the court answers the referred question in the affirmative, supporting the Department's stance on disallowing the penalties as deductible expenses. No costs are awarded in this matter.
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