1969 (1) TMI 4 - HC - Income Tax

Assessee, an agent procuring paddy, paid levy, penalty for supply of paddy not conforming to quality requirements - Whether, the amount paid by the assessee by way of penalty to the Government of Orissa was an admissible deduction u/s 10(1) of the Income-tax Act, 1922 - Held yes

Summary

Issues:
- Whether the penalty paid by the assessee to the Government of Orissa is an admissible deduction under section 10(1) of the Income-tax Act, 1922?

Analysis:
The High Court judgment dealt with the question of whether the penalty paid by the assessee to the Government of Orissa, amounting to Rs. 25,700, was an admissible deduction under section 10(1) of the Income-tax Act, 1922. The Tribunal had initially held that the deduction was not admissible as it was considered a penalty imposed on the assessee for supplying sub-standard quality goods, not incurred wholly and exclusively for the purpose of business. The Supreme Court, in a subsequent appeal, clarified that the High Court should focus on whether the penalty amount should be excluded from the computation of profits and gains of the business under section 10(1) rather than delving into the applicability of section 10(2)(xv) of the Act.

The Tribunal's findings indicated that the penalty was a result of a breach of warranty, not due to dishonest or criminal intent on the part of the assessee. The Tribunal concluded that the penalty was a reduction in the price paid to the assessee for goods supplied, as damages for breach of warranty. The High Court emphasized that only losses connected with the trade and incidental to the business could be deducted. In this case, the penalty was considered incidental to the business of paddy procurement, as it was an unavoidable loss arising from the consequences of carrying out the business. The payment of penalty was viewed as a diminution of the price paid, in line with the Sale of Goods Act, and not a commercial loss.

The High Court highlighted the principle that a taxpayer should be taxed only on profits actually received, not on potential profits. The assessee's genuine belief in supplying goods in conformity with the contract standard was noted, along with the absence of evidence of misbehavior regarding quality factors. The Tribunal's findings on facts were deemed final, and the High Court's role was to base its decision on these established facts. Consequently, the High Court held that the penalty amount of Rs. 25,700 paid by the assessee to the Government of Orissa was an admissible deduction under section 10(1) of the Income-tax Act, 1922. The judgment favored the assessee, who was entitled to the costs of the reference.