1966 (9) TMI 31 - SC - Income Tax

Whether, on the facts and in the circumstances of the case, the amount of ₹ 25,700 paid by the assessee by way of penalty to the Government of Orissa shall be an admissible deduction under section 10(1) of the Income-tax Act, 1922 ? Held that - What the appellant had claimed was that, in the computation of profits and gains of business, profession or vocation under section 10(1) of the Act, this amount should be deducted, which was intended to mean that this amount should not be included in the computation of the profits and gains of the business. The word deduction appears to have been used by the appellant as well as by the Tribunal only because the dispute related to a sum which had been deducted by the Government of Orissa as a penalty from the amount due to the appellant for the supplies made by him in pursuance of the agreement. The High Court, therefore, in answering the question referred to it, should not have gone into the question of the applicability of section 10(2)(xv) of the Act at all, and should have confined itself to deciding whether this amount deducted from the claims of the assessee by the Government of Orissa was liable to be excluded when computing the income under section 10(1) of the Act. The decision given by the High Court is, therefore, liable to be quashed and a direction is necessary to the High Court to answer the question really referred to it. Appeal allowed.

Summary

Issues:
Interpretation of section 10(1) of the Income-tax Act for deduction of penalty amount paid to the Government of Orissa.

Detailed Analysis:

The appellant, a paddy procuring agent under the Government of Orissa, was penalized Rs. 25,700 for supplying sub-standard quality goods, deducted from pending bills. The appellant claimed this penalty amount as a deduction under section 10(1) of the Income-tax Act. The Income-tax Officer and the Appellate Assistant Commissioner denied the deduction, but the Income-tax Appellate Tribunal allowed it. The Commissioner of Income-tax sought a reference to the High Court, which incorrectly analyzed the deduction claim under section 10(2)(xv) instead of section 10(1). The High Court held the penalty not admissible as it was for dishonest actions, not for business purposes. The Supreme Court found the High Court's analysis erroneous as the question referred was about the deduction under section 10(1), not section 10(2)(xv).

The High Court misdirected itself by considering the penalty as an expenditure not wholly and exclusively for business purposes under section 10(2)(xv), instead of analyzing it under section 10(1) for deduction in the computation of business profits. The appellant's claim was about excluding the penalty amount from profit computation, not about claiming it as an allowable business expense. The High Court's decision was quashed, and the case was remanded to the High Court to answer the original question referred by the Tribunal correctly, focusing on the applicability of section 10(1) for the deduction of the penalty amount from the income calculation. The Supreme Court allowed the appeal, set aside the High Court's judgment, and directed the High Court to reconsider the matter in light of the correct legal interpretation of section 10(1) of the Income-tax Act.

In conclusion, the Supreme Court clarified the misinterpretation by the High Court regarding the deduction claim of the penalty amount paid to the Government of Orissa by the appellant. The correct legal perspective under section 10(1) was emphasized for excluding the penalty from profit computation, not as a business expense, warranting a remand of the case to the High Court for a proper determination based on the original question referred by the Tribunal.