1986 (1) TMI 70 - HC - Income Tax

Summary

Issues:
1. Deduction of additional sales tax
2. Allowability of penalty as business expenditure

Analysis:
The judgment pertains to a reference under section 256(1) of the Income-tax Act, 1961, initiated by the Revenue regarding the deduction of additional sales tax and penalty under the Sales Tax Act. The assessee, a Hindu undivided family engaged in business, claimed deductions of Rs. 2,863 for additional sales tax and Rs. 41,000 for penalty imposed for late filing of returns. The Income-tax Officer disallowed both claims, which were later allowed by the Tribunal. The first issue addressed was the deduction of additional sales tax, which was upheld based on the decision in Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363 (SC), ruling in favor of the assessee.

Moving to the second issue, the penalty under section 17(3) of the Sales Tax Act was scrutinized. The court emphasized that the penalty for late filing of returns was a consequence of breaching the law, not a commercial loss incurred in business operations. Referring to Haji Aziz and Abdul Shakoor Bros. v. CIT [1961] 41 ITR 350 (SC), it was established that penalties for legal violations are not deductible as business expenses. The court rejected the argument that the penalty was akin to additional tax or interest, emphasizing that mere legal infractions do not warrant deductibility. Previous decisions by the High Court further supported the stance that penalties for statutory non-compliance are not allowable deductions.

Contrary to the assessee's reliance on Mahalakshmi Sugar Mills Co. v. CIT [1980] 123 ITR 429, the court distinguished between penalties and interest, reinforcing the non-deductibility of penalties for legal breaches. The decision of the Karnataka High Court in CIT v. Mandya National Paper Mills Ltd. [1984] 150 ITR 26 was deemed incongruent with established Supreme Court precedents. Ultimately, the court ruled in favor of the Revenue, disallowing the penalty as a deductible business expenditure while upholding the deduction of additional sales tax. The judgment concluded without costs awarded in the reference.