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Issues involved: Whether the penalty paid for non-payment of sales tax is an allowable deduction in computing business income.
Summary: The High Court of Karnataka considered a reference under section 256(1) of the Income Tax Act, 1961, regarding the allowability of an amount of Rs. 52,944 paid as penalty for non-payment of sales tax by a public limited company for the assessment year 1972-73. The company claimed this amount as a deduction under section 37(1) of the Income Tax Act, 1961, which was disallowed by the Income Tax Officer and upheld by the Appellate Authority. The Tribunal, however, accepted the company's argument that the penalty was not for an infraction of law but a compensation for delay in tax payment, directing the deletion of the amount from taxable income. The court referred to previous judgments to analyze the nature of the penalty under section 13(2) of the Karnataka Sales Tax Act, 1957. Citing the case of Sterling Construction & Trading Co. v. Commercial Tax Officer, it was established that the penalty under section 13(2) is a statutory liability, not for the infraction of any law, and must be paid as per the provisions without discretion to waive or reduce. Drawing from the decision in Mahalakshmi Sugar Mills Co. v. CIT, which dealt with a similar provision in the U.P. Sugarcane Cess Act, 1956, the court concluded that such penalties are akin to compensation for delay rather than fines for legal violations, making them allowable as business expenditure under section 37(1) of the Income Tax Act, 1961. Therefore, the High Court ruled in favor of the assessee, holding that the penalty paid under section 13(2) of the Karnataka Sales Tax Act, 1957, was not a true penalty but a compensation for delay in tax payment, making it eligible for deduction under section 37(1) of the Income Tax Act, 1961, against the Revenue's contention.
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