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Issues:
1. Whether delayed payment of cess is allowable as business expenditure? Analysis: The case involved a reference under section 256(1) of the Income-tax Act, 1961, regarding the allowability of delayed payment of cess as business expenditure for the assessment years 1967-68 and 1969-70. The assessee, engaged in the manufacture and sale of sugar, faced interest charges by the Bihar Government due to delayed cess payment. The Income-tax Officer disallowed the claims, stating that the interest was a penal measure and not a normal incident of business. The Appellate Assistant Commissioner upheld the disallowance for 1967-68 but allowed it for 1969-70. The Tribunal also disallowed the claims, citing precedents like Haji Aziz and Abdul Shakoor Bros. v. CIT and Commissioner of Income-tax v. Mahalaxmi Sugar Mills Ltd., emphasizing that penal interest is not incidental to business activities. The Tribunal held that the interest paid for delayed cess payment was not incidental to the business or paid wholly and exclusively for business purposes. It was considered a penal measure due to the infraction of law, following the decision in Haji Aziz and Abdul Shakoor Bros. v. CIT and other relevant cases. The Tribunal upheld the disallowance for 1967-68 and reversed the Appellate Assistant Commissioner's decision for 1969-70, restoring the addition of the claimed amount. Subsequently, the matter was referred to the High Court under section 256(1) of the Income-tax Act, 1961. In the High Court, the assessee argued that the interest paid for delayed cess payment was a legitimate deduction and not a penalty. However, the revenue contended that it was a penalty and not allowable under various sections of the Income-tax Act. Citing precedents like Mahalaxmi Sugar Mills Ltd. and Waldies Ltd., the revenue argued against the allowability of such interest payments as business expenditures. The High Court referred to the Supreme Court's decision in Haji Aziz and Abdul Shakoor Bros. v. CIT, emphasizing that penalties imposed for breach of the law during business activities cannot be considered business losses. Ultimately, the High Court rejected the assessee's contentions and ruled against them, stating that the interest paid for delayed cess payment was not deductible as a business expenditure. The judgment aligned with established legal principles that penalties for legal breaches in business activities do not qualify as allowable deductions. The parties were directed to bear their respective costs, and the decision was concurred by both judges, S. C. DEB and SUDHINDRA MOHAN GUHA.
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