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TMI Blog1972 (1) TMI 11X X X X Extracts X X X X X X X X Extracts X X X X ..... tember, 1961. As the assessment order was made by the Income-tax Officer after the coming into force of the Income-tax Act, 1961, in response to a notice issued under that Act, the Commissioner's application for reference was made under section 256(1) of the said Act and the following question of law was referred to this court: " Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the sum of Rs. 97,021 was an allowable deduction?" There is no dispute as to facts which lie in a short compass. The company which will hereafter be referred to as the assessee is the Upper Doab Sugar Mills Ltd., Shamli. It derives income from manufacture and sale of sugar, distillery products, power alcohol and spirit. During the previous year, the company had besides one sugar mill, two distilleries, one at Shamli and the other at Pilkbani. During that year the assessee paid cane cess to the tune of Rs. 12,53,059 and cane purchase tax amounting to Rs. 16,66,890. Over and above these payments a penalty of Rs. 97,028.04 was paid on delayed payments of the cess and purchase tax. It was claimed that the payments were made in accordance with the instruct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... given an option to pay a fine and have the dates released. The assessee paid the fine and while computing its profits sought to deduct the amount paid as fine as an allowable expenditure under section 10(2)(xv) of the Income-tax Act, 1922. It was held by their Lordships of the Supreme Court that no expense which was incurred by way of penalty for a breach of the law could be considered as an amount wholly and exclusively laid out for the purposes of business of the assessee within the meaning of section 10(2)(xv) of the Act and hence the fine paid by the assessee was not an allowable deduction. It was also observed that the expenses which are permitted as deductions are only those as are made for the purposes of carrying on the business, i.e., that which enable the person concerned to carry on and earn profit in that business. In John Moore v. Stewarts Lloyds Ltd. Lord Pearson observed at page 507 that the statute did not require the party claiming deduction to show that any profit was in fact earned by the expenditure in question. In Hughes v. Bank of New Zealand, Lord Thankerton observed at page 644 that "expenditure in course of the trade which is unremunerative is none-the- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 958) by a resident company incorporated outside India on the death of shareholders not domiciled in India. The question before the Supreme Court was whether the amounts paid were expenditure under section 10(2)(xv) of the Income-tax Act, 1922. Their Lordships held that the expression "for the purpose of the business" is wider in scope than the expression "for the purpose of earning profits". Its range is wide ; it may take in not only the day to day running of a business but also the rationalisation of its administration and modernisation of its machinery; it may include measures for the preservation of the business and for the protection of its assets and property from expropriation, coercive process or assertion of hostile title ; it may also comprehend payment of statutory dues and taxes imposed as a precondition to commence or for the carrying on of a business ; it may comprehend many other acts incidental to the carrying on of the business. However wide the meaning of the expression may be, its limits are implicit in it. The purpose shall be for the purpose of the business, that is to say, the expenditure incurred shall be for the carrying on of the business and the assessee s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of section 10(2)(xv) of the Act. The second case relied upon by the counsel for the revenue is a decision of the Calcutta High Court in Deoria Sugar Mills Co. v. Commissioner of Income-tax . The case of Mahabir Sugar Mills was relied upon in this decision and what was said was that an infraction of law is not a normal incident of trade. The third case is a decision of this court in Commissioner of Income-tax v. Mahalakshmi Sugar Mills Ltd. (Income-tax Reference No. 40 of 1971) decided on 25-10-1971. Prithvi Raj J., who wrote the judgment (Hardy C.J. concurring), observed : "But, in the case before us what is to be seen is whether the assessee by infringing the provisions of the statute and not depositing the cess in time whereby penal interest was imposed on him could claim that the amount deposited by way of penal interest was in any manner closely related to the assessee's business as a result whereof the expenditure incurred by way of penal interest could be said to be laid out or expended wholly or exclusively for the purpose of the assessee's business. We are unable to answer the question in favour of the assessee as the origin of the liability flows from a statute and i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or order directing the refund of any cess paid under any State Act; and (c) any cess imposed or assessed under any State Act before the 3rd day of February, 1961, but not collected before that date, may be recovered (after assessment of the cess, where necessary) in the manner provided under that Act. (2) For the removal of doubts, it is hereby declared that nothing in sub-section (1) shall be construed as preventing any person, (a) from questioning in accordance with the provisions of any State Act and rules made thereunder the assessment of any cess for any period, or (b) from claiming refund of any cess paid by him in excess of the amount due from him under any State Act and the rules made thereunder." Counsel for the assessee referred to the definition of "cess" as given in section 2(a) of the Validating Act which has already been reproduced above and submitted that in the Validating Act, 'cess' meant 'cess' payable under any State Act and included any sums recoverable under any such Act by way of interest or penalty. According to the learned counsel, the words "interest" or "penalty" therefore, formed part of the term "cess" and when therefore the assessee paid in add ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ording to their nature and import but also those things which the interpretation clause declares that they shall include. The argument does not seem to us to have any force. The original liability of the assessee was to pay cess and therefore the State Government went on imposing, assessing and collecting cess from various sugarcane factory owners. Some of them did not pay the amount of cess and became defaulters. They therefore became liable to payment of interest and in some cases also to pay penalty. The cess and also the interest and/or penalty were imposed, assessed or collected before the third day of February, 1961. On 13th December, 1960, the Supreme Court delivered its majority judgment. The result was that the entire amount of cess, interest and/or penalty that had been collected by the State Government had to be refunded. The President therefore passed an Ordinance validating the recovery of the cess, interest and/or penalty and this Ordinance was replaced by Parliament by the Validating Act which mentioned the 3rd day of February, 1961, as the deadline and provided that cess, interest and/or penalty that had been imposed, assessed or collected in accordance with law, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and different from that expression. The liability of the factory owner to pay interest and/or penalty arose only when payment of cess was not made on due date but neither penalty nor interest became part of the term "cess". Counsel for the assessee referred to a decision of the Madhya Pradesh High Court Joara Sugar Mills Private Ltd. v. State of Madhya Pradesh and submitted that the deeming provision in section 3 of the Validating Act only creates an artificial imposition of cess for a period before the commencement of the Act and makes the imposition, assessment and collection thereof "in accordance with law". It does not give retrospective validity to any State Act imposing a cess. We do not see how this decision can be of any assistance to the argument of the learned counsel, more so, in view of clause (c) of sub-section (1) of section 3 of the Validating Act which clearly refers to the State Act. The deeming provision in the Validating Act is, in our view, retroactive to the extent mentioned therein. The imposition of penalty was on account of failure on the part of the assessee to comply with a statutory obligation and as such any payment made by the assessee was not incid ..... X X X X Extracts X X X X X X X X Extracts X X X X
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