Decided on September 07,1983



S.S.CHADHA, J. - (1.)IN this reference under S. 256(1) of the INCOME TAX ACT, 1961 (hereinafter referred to as "the Act"), the following question has been referred for the decision of the Court:
"Whether, on the facts and in the circumstances of the case, the penalty of Rs. 20,095 paid by the assessee under S. 3(5) of the U. P. Sugarcane Cess Act, 1956, is allowable as a business expenditure ?"

(2.)THE assessee is M/s Nawabganj Sugar Mills Co. Ltd. The reference relates to the asst. 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 to the Tribunal. It was argued that the cess could not be paid in time due to business exigencies and the payment of the penalty was incidental to business. The Tribunal held that the penalty has been imposed under S. 3(5) of the Cess Act which, unlike the interest, is for an infraction of law which cannot be allowed as business expenditure. The reference is at the instance of the assessee.
Mr. Bishamber Lal, the learned counsel for the assessee, contends that the assessee could not pay the cess in time as the funds were otherwise needed or locked up in the business of the assessee. He contends that the interest payable on arrears of cess under S. 3(3) is in reality part and parcel of the liability to pay cess and this has been accepted by the decision of the Supreme Court in Mahalaxmi Sugar Mills Co. vs. CIT (1980) 16 CTR (SC) 198 : (1980) 123 ITR 429 (SC). He then draws the same analogy to the penalty imposed under S. 3(5) of the Cess Act. He contends that the provision for penalty is a civil liability and is not a penalty for a criminal offence. The criminal liability and prosecution is provided in S. 4 of the Cess Act and, therefore, the default of an assessee is dealt with in two separate provisions. The penalty payable under S. 3(5) of the Cess Act would be incidental to the business of the assessee and is to be allowed as a permissible deduction. In order to appreciate these submissions, it is necessary to refer to the statutory provisions.

(3.)THE Cess Act, as the preamble says, is an Act to amend and consolidate the law relating to imposition of cess on sugarcane intended for use, consumption in or sale to a factory. Sec. 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. (3) of S. 3 of the Cess Act, if any arrear of cess is not paid on the date prescribed under sub -s. (2), it shall carry interest at 6per cent per annum from such date to the date of payment. Sub -s. (5) of S. 3 reads as follows :
"Where any person is in default in making the payment of the cess, the officer or authority empowered to collect the cess may direct that in addition to the amount of the arrears and interest, a sum not exceeding 10 per cent thereof shall by way of penalty be recovered from the person liable to pay the cess."
Sec. 4 reads as under:
"Penalties. -If any person defaults in the payment of cess imposed under sub -s. (1) or S. 3, or contravenes any provision of any rule made under this Act, he shall without prejudice to his liability therefor under sub -s. (5) of S. 3, be liable to imprisonment up to six months or to a fine not exceeding rupees five thousand or both and in the case of continuing contravention to a further fine not exceeding rupees one thousand for each day during which the contravention continues."


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