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TMI Blog1983 (9) TMI 68X X X X Extracts X X X X X X X X Extracts X X X X ..... j Sugar Mills Co. Ltd. The reference relates to the assessment year 1959-60 and the relevant accounting period is the year ending October 31, 1958. The assessee has a factory at Nawabganj, District Gonda, U.P. The assessee claimed a deduction of Rs. 38,045 as interest and penalty paid for late payment of the cess due under the U.P. Sugarcane Cess Act, 1956 (hereinafter called " the Cess Act "). In the course of the assessment, the ITO held that the penalty is in the nature of fine and, therefore, it is not for the purpose of business. The amount paid as interest on arrears of cess due under the Cess Act was allowed. The amount of penalty of Rs. 20,095 was disallowed. On appeal, the AAC confirmed the order of the ITO. The assessee appealed t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd consolidate the law relating to imposition of cess on sugarcane intended for use, consumption in or sale to a factory. Section 3 provides for the imposition of cess. The State Government may by notification in the Official Gazette impose a cess not exceeding four annas per maund on the entry of the cane into the premises of a factory for use, consumption or sale therein. The cess imposed is payable by the owner of the factory and has to be paid on such date and at such place as may be prescribed. The rules called U.P. Sugarcane Cess Rules, 1956, have been framed in exercise of the powers conferred by s. 10 of the Cess Act. It provides for the period during which the cess is to be paid and the manner in which it is to be paid. Under sub-s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the provisions of the said sub-section, such penalty as he thinks fit. The penalty of Rs. 20,095 against the assessee has been imposed under sub-s. (5) of s. 3 of the Cess Act after following the procedure laid down in rule 8. The validity of the Cess Act was challenged by sugar manufacturing companies by a petition under article 226 of the Constitution in the Allahabad High Court. The High Court, on final hearing, dismissed the writ petition. Subsequently, on appeal, the Supreme Court declared the Cess Act ultra vires on the ground that the Cess Act fell beyond the competence of the State Legislature. The judgment was given on December 13, 1960, and is reported as Diamond Sugar Mills Ltd. v. State of Uttar Pradesh [1961] 3 SCR 242; A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in relation to the recovery of the said cess has been incorporated in the Validation Act itself. The command under which the cess would be deemed to have been recovered would, therefore, be the command of Parliament, because all the relevant sections, notifications, orders and rules have been adopted by the parliamentary statute itself. As already noticed, the Supreme Court had the occasion to consider the question of interest payable on an arrear of cess under s. 3(3) of the Cess Act in Mahalakshmi Sugar Mills Co.'s case [1980] 123 ITR 429 (SC). Their Lordships expressed that the interest payable on an arrear of cess under s. 3(3) is in reality part and parcel of the liability to pay cess and it is an accretion to the cess. The enlargeme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by s. 3(7) is the same as the manner for recovery provided by s. 3(6) of the arrears of cess, the Legislature dealt with it as something distinct from the recovery of the arrears of cess including interest. In truth, the interest provided for under s. 3(3) is in the nature of compensation paid to the Government for delay, in the payment of cess. It is not by way of penalty. The provision for penalty as a civil liability has been made under s. 3(5) and for penalty as a criminal offence under s. 4". " Cess ", " interest " and " penalty " are separate and distinct under the Cess Act at all material times. The liability to pay interest or penalty arises under the Cess Act only when payment of the cess is not made on the due date. The definit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as used in the Cess Act. We are fortified in this view by a Division Bench of this court in CIT v. Upper Doab Sugar Mills Ltd. [1972] 85 ITR 489. There is a catena of authorities right from Haji Aziz and Abdul Shahoor Bros. v. CIT [1961] 41 ITR 350 (SC), that infraction of law is not a normal incident of business. The expenses which are permitted as deductions are such as are made for the purpose of the carrying on of the business. An expenditure is not deductible unless it is a commercial loss in trade. A penalty imposed for breach of law cannot be said to be an expenditure wholly and exclusively laid out for the purpose of business. The penalty of Rs. 20,095 paid by the assessee is because, in conducting its business, it has acted in a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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