Decided on April 01,1997

Khushal Singh Subhash Chander Appellant


M.SRINIVASAN, J. - (1.)THE question referred to this court by the Tribunal reads as follows :
' Whether, on the facts and in the circumstances of the case, the Tribunal erred in law in disallowing the payment of additional royalty/ penalty on blazes cut on trees which were not allotted to the assessee ?'

(2.)THE relevant facts are that the assessee had entered into a contract for cutting blazes in the trees for the purpose of collecting resin. He had to pay penalty on two counts, one for cutting bigger sizes of blazes than permitted and second for putting blazes on trees which were not allotted to him. The total penalty levied was with reference to three assessment years, i.e., 1978 -79, 1979 -80 and 1980 -81. In the course of assessment proceedings, the Income -tax Officer held that the payment of those sums had to be made because the assessee had acted in contravention of law and disallowed the claim of the assessee that it should be treated as business expenditure. When the matter came before the Tribunal it was held by the Tribunal that a distinction should be made with regard to the penalty or additional royalty levied for cutting bigger blazes on allotted trees and the penalty or additional royalty paid for cutting blazes unauthorisedly on unallotted trees. The Tribunal took the view that payment made with regard to the cutting of blazes bigger in size than permitted could be treated as business expenditure and the other payments of additional royalty or penalties on blazes cut on trees which were never allotted to the assessee could not be treated as business expenditure. In order to ascertain the relevant facts under the two different counts, the Tribunal remanded the matter to the Income -tax Officer for redoing the assessment in the light of the observations made by the Tribunal.
However, at the instance of the assessee, this court had directed the reference of the question set out earlier by its order dated August 18, 1986. Pursuant to the said order of this court, the question has been referred to us.

(3.)IN so far as the principle is concerned, there is no difficulty whatever, as it has been settled by the Supreme Court as early as in 1960 inHaji Aziz and Abdul Shakoor Bros. v. CIT : 1983ECR1942D(SC) . In that case, the assessee was carrying on the business of importing dates from abroad and selling them in India. He imported dates from Iraq partly by steamer and partly by country craft, at a time when import of dates by steamer was prohibited. As he had contravened the provisions of the Sea Customs Act, the customs authorities confiscated the dates imported by him and he was given an option under Section 183 of that Act to pay a fine for getting the dates released. Thus, he paid the fine but claimed the same as allowable expenditure under Section 10(2)(xv) of the Indian Income -tax Act, 1922. It was held that the expenditure incurred by him was by way of penalty for a breach of law, even though it might involve no personal liability and it cannot be said for the purpose of Section 10(2)(xv) of the Income -tax Act as expenditure incurred wholly and exclusively for the business of the assessee. Thus, the claim of the assessee was disallowed. The principle was laid down by the Supreme Court in the following passage (page 359) :
' A review of these cases shows that expenses which are permitted as deductions are such as are made for the purpose of carrying on the business, i.e., to enable a person to carry on and earn profit in that business. It is not enough that the disbursements are made in the course of or arise out of or are concerned with or made out of the profits of the business but they must also be for the purpose of earning the profits of the business. As was pointed out in Alexander von Glehn's case [1920] 2 KB 553 an expenditure is not deductible unless it is a commercial loss in trade and a penalty imposed for breach of law during the course of trade cannot be described as such. If a sum is paid by an assessee conducting his business, because in conducting it he has acted in a manner which has rendered him liable to penalty, it cannot be claimed as a deductible expense. It must be a commercial loss and in its nature must be contemplable as such. Such penalties which are incurred by an assessee in proceedings launched against him for an infraction of the law cannot be called commercial losses incurred by an assessee in carrying on his business, Infraction of the law is not a normal incident of business and, therefore, only such disbursements can be deducted as are really incidental to the business itself. They cannot be deducted if they fall on the assessee in some character other than that of a trader. Therefore, where a penalty is incurred for the contravention of any specific statutory provision, it cannot be said to be a commercial loss falling on the assessee as a trader the test being that the expenses which are for the purpose of enabling a person to carry ontrade for making profits in the business are permitted but not if they are merely connected with the business.'

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