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TMI Blog1993 (1) TMI 45X X X X Extracts X X X X X X X X Extracts X X X X ..... and determined the taxable income of the assessee accordingly. The Commissioner of Income-tax, in exercise of his powers under section 263 of the Act, revised the order of the Income-tax Officer and directed the Income-tax Officer to enhance the penalty disallowing the claim of Rs. 28,843 as he was of the view that the said deduction was not permissible. According to him, the said payment was not in the nature of interest and even if it could be considered as payment of interest, it was not by way of interest on borrowed capital. Aggrieved by that order, the assessee preferred an appeal to the Tribunal. Before the Tribunal, fresh material was produced to show that the assessee was granted instalments for paying its tax dues. An application in that behalf was made on January 22, 1972, and, according to the order passed in that behalf, the last instalment was to be paid by May, 1972. Though the Revenue objected to the admission of the new fact, the Tribunal admitted them in evidence as it was not likely to prejudice the Revenue in any manner. Before the Tribunal, it was contended that although the word 'penalty' is used in the order granting time, the assessee could not be said to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is submissions, learned counsel for the assessee has relied upon the decision of the Karnataka High Court in the case of CIT v. Mandya National Paper Mills Ltd. reported in [1984] 150 ITR 26. The question which was referred to it under section 256(1) of the Income-tax Act was whether, on the facts and circumstances of the case, the Tribunal was right in law in holding that the amount of Rs. 52,944 paid by the assessee as penalty for non-payment of sales tax was an allowable deduction in computing its business income. The penalty was paid by the assessee under section 13(2) of the Karnataka Sales Tax Act, 1957. What was contended on behalf of the assessee was that what was paid under that provision by the assessee was not penalty in the real sense of the term and it was only compensation for delay in the payment of the tax due. Interpreting section 13(2) of the said Act, the Karnataka High Court held that penalty payable under section 13(2) for delay in payment of tax is a statutory liability and is not for infraction of any law. The reason given in support of the conclusion is that the Act gives no discretion to the authorities to waive or reduce that penalty. Following the judgmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Legislature is to emphasise the fact of loss of revenue and to provide a remedy for such loss, although no doubt an element of coercion is present in the penalty ". The Supreme Court also observed that the terms in which the penalty falls to be quantified are significant. Heavy reliance was placed on these observations and it was submitted that the purpose for which section 45(5) has been enacted is to compensate for loss of revenue and penalty is required to be quantified by reference to the amount of tax and the rate at which penalty is to be paid is 1 per cent. of the amount of tax per month for the first three months and one and half per cent. of the amount of tax per month thereafter. This clearly indicates that penalty is really in the nature of interest. Learned counsel for the assessee also drew our attention to CIT v. Udaipur Distillery [1986] 160 ITR 444 (Raj) CIT v. Western Indian State Motors [1987] 167 ITR 395 (Raj) and CIT v. Western Indian State Motors [1988] 174 ITR 116 (Raj). But, these were all cases where a provision was made for payment of interest on arrears of tax. Therefore, they are not quite relevant for the purpose of deciding the question which ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l loss. Infraction of law is not a normal incident of business. An amount paid by way of penalty in lieu of confiscation of goods by the customs authorities cannot, therefore, be claimed as a deduction under section 28(i) or section 37(2) of the Income-tax Act. In that case, this court also held that damages payable under section 14B of the Employees' Provident Funds and Family Pension Fund Act, 1952, are a payment for infraction of law and, in that sense, penalty. This court further held that the amount paid as damages for delay in payment of tax is not deductible as business expenditure. The Bombay High Court had occasion to consider a similar section occurring in the Bombay Sales Tax Act, 1959, in the case of Jairamdas Bhagchand v. CIT [1988] 171 ITR 545 and therein it has been held that an examination of the scheme of the Sales Tax Act leaves no manner of doubt that section 36 in terms deals with penalty. For taking this view, the Bombay High Court relied upon the marginal note, the use of the word " penalty " in that section and the scheme of the Act. It is in the light of these decisions that we have to consider whether the payment which is required to be made under secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such conditions as may be prescribed, and an appellate authority in an appeal under section 65 may, remit the whole or any part of the penalty payable in respect of any period. (6) Where a dealer has failed to pay the whole of the amount of tax as required by sub-section (2) of section 47 or the whole of the extra amount of tax as required by sub-section (3) of that section or where in the case of a dealer, the amount of tax assessed or reassessed for any period under section 41 or section 44 exceeds the sum already paid by a dealer in respect of such period prior to such assessment or reassessment by more than twenty per cent. of the sum so paid, the dealer shall be deemed to have failed to pay the tax to the extent of the difference between the amount payable as aforesaid and the amount paid and the dealer shall pay by way of penalty on the amount of difference a sum calculated in accordance with the provisions of sub-section (5) and the provisions of sub-section (5) shall, so far as may be, apply thereto : Provided that, where in assessing the amount of tax from any dealer under section 41 in respect of any period the time taken for making an order of assessment exceeds eigh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e making of an order imposing penalty. Sub-section (5) provides for a statutory liability to pay penalty if tax is not paid within the prescribed time without reasonable cause. The proviso to this sub-section empowers the Commissioner and the appellate authority to remit the whole or any part of the penalty payable under that provision. Thus, provision has been made to deal with a situation arising out of default on the part of the assessee to pay tax within the specified time without reasonable cause. It, thus, appears from the context in which the word " penalty " has been used, that the Legislature really intended it to be penalty and not compensatory payment in the nature of or by way of interest. Moreover, the use of the words " reasonable cause " in sub-section (5), in our opinion, would be inconsistent if the Legislature really intended the payment under that section as compensatory interest. If it was intended as a compensation for loss of use of money, we would not have found the words " without reasonable cause " in the sub-section, as, even if there is " reasonable cause the loss or deprivation will still be there. Interest by way of compensation would be payable irrespe ..... X X X X Extracts X X X X X X X X Extracts X X X X
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