R.K. Gulati, J. - (1.) AT the instance of the assessee under Sub-section (1) of Section 256 of the Income-tax Act, 1961, the Income-tax Appellate Tribunal has referred the following question of law for the opinion of this court : "Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that penalties under the U.P. Sugarcane Cess Act, 1956, and the U. P. Sugarcane (Purchase Tax) Act, 1961, aggregating to Rs. 1,64,014 could not be allowed as a deduction in working out the business income of the assessee-company ?"
(2.) THE dispute relates to the assessment year 1953-64. THE assessee was subjected to various amounts of penalties aggregating to Rs. 1,64,014 under the provisions of the U. P. Sugarcane Cess Act, 1956, and the U. P. Sugarcane (Purchase Tax) Act, 1961, for non-payment of cane cess and cane purchase tax by the due dates. THE assessee claimed before the Income-tax Officer that its inability to pay cane cess and cane purchase tax by the due dates was due to financial difficulties which did not involve any contumacious conduct and, therefore, the penalties which the assessee incurred should be allowed as a deduction in working out its business income. THE Income-tax Officer, however, did not allow the claim of deduction and his action was confirmed in appeal by the appellate authorities including the Income-tax Appellate Tribunal. Now, under the relevant provisions of the Income-tax Act, only such expenditure is a permissible deduction in computing the taxable income which is incidental to and is incurred or expended wholly and exclusively for the purpose of carrying on of the business. An expenditure representing the amount of penalty incurred by an assessee in carrying on of the business in contravention of the rules and regulations cannot be regarded as commercial loss or as an expenditure expended wholly and exclusively for the purposes of the business. Infraction of law is not a normal incident of business, for a business can and should be carried on without infringement or breach of the law. An expenditure which the assessee incurs in carrying on its business otherwise than in accordance with law is the result of his own conduct and such an expenditure cannot be regarded as incidental to the business or as an expenditure which is necessitated for carrying on of the business. In order that an amount may qualify as a revenue outgoing in computing taxable income as stated earlier, it must be a commercial loss or its nature must be contemplated as such. There is a catena of authorities right from Haji Aziz and Abdul Shakoor Bros. v. CIT[1961] 41 ITR 350 (SC) that infraction of law is not a normal incident of business and no expense which is paid by way of penalty for a breach of law can be said to be an amount wholly and exclusively laid our for the purpose of carrying on of the business. In the above case, the Supreme Court observed as under (at pages 359 and 360) : "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 on trade for making profits in the business are permitted but not if they are merely connected with the business ... no expense which is paid by way of penalty for a breach of the law can be said to be an amount wholly and exclusively laid Out for the purpose of the business." The precise controversy with which we are concerned had been the subject-matter of consideration before this court on earlier occasions also. A Division Bench of this court, in Mahabir Sugar Mills (P.) Ltd. v. CIT [1969] 71 ITR 87, held that penalty paid under Section 3(5) of the United Provinces Sugarcane Cess Act, 1956, for non-payment of arrears of sugarcane cess levied under the said Act, is not allowable as business expenditure under Section 10(2)(xv) of the Indian Income-tax Act, 1922.
(3.) THE same view was reiterated in two other different Division Bench decisions of this court in Shadi Lal Sugar and General Mills Ltd. v. CIT [1976] 103 ITR 748 and Upper Doab Sugar Mills Ltd. v. CIT [1979] 116 ITR 928. With respect, we agree with the views expressed in these decisions. Thus, the Income-tax Appellate Tribunal was right in its view that the amounts of penalty aggregating to Its. 1,64,014 incurred by the assessee under the provisions of the U. P. Sugarcane Cess Act and the U. P. Sugarcane (Purchase Tax) Act were not permissible deductions in computing the taxable income of the assessee. We answer the question referred to this court in the affirmative in favour of the Department and against the assessee. There shall be no order as to costs.;