1978 (1) TMI 42 - HC - Income Tax

Business Expenditure, Capital Of Company, Equity Shares, Expenditure Incurred, Sugarcane Cess

Summary

Issues:
1. Allowability of penalty on cess and purchase-tax as expenditure for assessment years 1963-64 and 1964-65.
2. Allowability of expenditure incurred in connection with the issue of additional equity shares for assessment years 1963-64 and 1964-65.

Analysis:

The first issue pertains to the allowability of penalties on cess and purchase-tax as expenditure for the assessment years 1963-64 and 1964-65. The court referred to a previous case where it was established that penalties paid for defaults in payment of cess were not permissible deductions under the Income Tax Act. The court emphasized that penalties imposed for breaches of the law cannot be considered as expenses wholly and exclusively laid for the purpose of business. Despite the assessee's arguments, citing a Supreme Court decision in a different context, the court maintained that penalties paid out of business income are not allowable deductions. Therefore, the court answered the first question in favor of the department.

Moving on to the second issue, the court examined the expenditure of Rs. 75,863 incurred in connection with the issue of additional equity shares. The court determined that this expenditure was related to the capital structure of the company and was not connected to the working capital used for day-to-day business operations. As such, the court agreed with the Tribunal's decision to disallow this expenditure as it pertained to capital account. Consequently, the second question was also answered in favor of the department.

In conclusion, the court ruled in favor of the department on both issues, disallowing the penalties on cess and purchase-tax as well as the expenditure on additional equity shares. The Commissioner was awarded costs amounting to Rs. 200.