1968 (3) TMI 10 - HC - Income Tax

Whether the sum paid as penalty u/s 3(5) of the U.P. Sugarcane Cess Act, 1956, on the arrears of sugarcane cess is an allowable deduction in computing the profits of the assessee - Held, no

Summary

Issues:
1. Whether penalty paid under sub-section (5) of section 3 of the U.P. Sugarcane Cess Act, 1956 is a permissible deduction under section 10(2)(xv) of the Indian Income-tax Act, 1922.

Analysis:
The case involved the question of whether a penalty paid under the U.P. Sugarcane Cess Act, 1956 could be considered a permissible deduction under the Indian Income-tax Act, 1922. The assessee, a private limited company operating a sugar mill, had to pay a penalty of Rs. 14,664 for failing to pay the cess within the prescribed time. The Income-tax Officer disallowed this claim as a permissible expense, leading to an appeal by the assessee. The Appellate Assistant Commissioner initially allowed the claim, but the Income-tax Appellate Tribunal reversed this decision, holding that the penalty was not deductible under section 10(2)(xv) of the Income-tax Act.

The Tribunal referred to previous legal precedents to support its decision. In the case of Indian Aluminium Company Ltd. v. Commissioner of Income-tax, it was held that penalties paid for statutory violations were not deductible under section 10(2)(xv) of the Income-tax Act. Similarly, in Senthlikumara Nadar & Sons v. Commissioner of Income-tax, it was established that penalties for infractions of liability were outside the scope of permissible deductions. Additionally, the judgment in J. K. Cotton Spinning and Weaving Company Ltd. v. Commissioner of Income-tax emphasized that payments made for compounding offenses were not wholly and exclusively for the purpose of business and thus not deductible.

The court also referred to the principle set in Haji Aziz and Abdul Shakoor Bros. v. Commissioner of Income-tax, where it was clarified that expenses paid as penalties for breaches of the law, even if involving no personal liability, could not be considered wholly and exclusively laid for the purpose of business under section 10(2)(xv) of the Income-tax Act. The court concluded that the penalty paid under the U.P. Sugarcane Cess Act was not a permissible deduction, aligning with the established legal principles and precedents.

In light of the above analysis, the court answered the question in the negative, ruling that the penalty amount was not an allowable deduction under the Income-tax Act. The Commissioner of Income-tax was awarded costs of the reference.