1983 (9) TMI 68 - HC - Income Tax

Summary

Issues:
1. Allowability of penalty paid under section 3(5) of the U.P. Sugarcane Cess Act, 1956 as a business expenditure.

Detailed Analysis:
The judgment pertains to a reference under section 256(1) of the Income Tax Act, 1961, regarding the allowability of a penalty of Rs. 20,095 paid by the assessee under section 3(5) of the U.P. Sugarcane Cess Act, 1956, as a business expenditure. The assessee, a sugar mill company, claimed a deduction for interest and penalty paid for late payment of cess under the Cess Act. The Income Tax Officer disallowed the penalty, considering it as a fine and not for the purpose of business. The Appellate Authority and the Tribunal upheld the decision, leading to the reference before the High Court.

The counsel for the assessee argued that the penalty was a civil liability, not a penalty for a criminal offense, and should be allowed as a business expenditure. The statutory provisions of the Cess Act were examined, highlighting that the penalty under section 3(5) is imposed for default in payment of cess, distinct from the criminal penalties under section 4. The counsel contended that the penalty was incidental to the business due to financial constraints. However, the Court emphasized the distinction between cess, interest, and penalty under the Cess Act, noting that penalties for breaches of law are not normal incidents of business and are not wholly and exclusively laid out for business purposes.

The Court referenced previous judgments, including the Supreme Court decision in Mahalakshmi Sugar Mills Co. case, to establish that penalties for breaches of law cannot be considered as expenditures for the purpose of business. The Court concluded that the penalty paid by the assessee was a result of a breach of law, not automatic, and not incidental to the business. Therefore, the penalty was not allowable as a business expenditure. The Court ruled against the assessee, holding that the penalty paid was not deductible as a business expense, aligning with the principle that expenses permitted as deductions must be incurred for the purpose of carrying on the business.

In light of the above analysis, the High Court answered the reference question in the negative, ruling against the assessee and in favor of the Department. No costs were awarded in the judgment. The decision underscores the principle that penalties incurred for breaches of law are not considered legitimate business expenditures, emphasizing the distinction between business expenses and penalties imposed for non-compliance with legal obligations.