H.N. Seth, J. - (1.) IN connection with the assessment of M/s. Sir Shadi Lal Sugar and General Mills Ltd., Mansurpur District, Muzaffarnagar, for the years 1960-61, 1961-62, 1962-63 and 1963-64, the INcome-tax Appellate Tribunal, Delhi Bench, has stated the case and referred the following questions for the opinion of this court: "(1) Whether, on the facts and in the circumstances of the case, the sum of Rs. 86,230 and Rs. 47,898 being penalties for belated payment of sugarcane cess imposed under the U.P. Sugarcane Cess Act, 1956, for assessment years 1960-61 and 1961-62 respectively, and the sums of Rs, 4,000 and Rs. 135 being fines levied under the Factories Act, for the years 1962-63 and 1963-64, respectively, are allowable deductions for computing the real business profits of the assessee under Section 10(1) of the INdian INcome-tax Act, 1922/section 28 of the INcome-tax Act, 1961 ? (2) Whether, on the facts and in the circumstances of the case, the assessee was entitled to claim the admissible extra-shift allowance for double shift working at the full 50% of the normal depreciation in accordance with Rule 8 of the INcome-tax Rules, 1922, as applicable to the assessment years 1960-61 and 1961-62 and in accordance with the note appended to item III of Appendix I of Rule 5 of the INcome-tax Rules, 1962, read with the proviso to the said rule as applicable to assessment years 1962-63 and 1963-64, as if the sugar factory had worked normal as well as double shifts throughout the relevant previous years ? and (3) (a) Whether there was evidence before the Tribunal to come to the finding of fact that there was no direct connection between the contribution of Rs. 43,051 made by the assessee to the Congress Parliamentary Board and the business of sugar factory carried on by the assessee ? (b) If the answer to question (a) be in the affirmative, whether on the facts and in the circumstances of the case the Tribunal is right in holding that the said contribution was not deductible in arriving at the assessee's real business profits chargeable to tax under Section 4 read with Section 28 of the INcome-tax Act, 1961 ?"
(2.) QUESTION No. 3(a) and (b) relate to the assessment year 1963-64. The assessee-company carries on business of manufacture and sale of sugar and confectionery at Mansurpur in the District of Muzaffarnagar. In connection with its business it brought sugarcane into its factory premises and thus became liable to pay cess under the provision of Section 3 of the U.P. Sugarcane Cess Act. It appears that during the years relevant to the assessment years 1960-61 and 1961-62 it did not pay the cess payable by it within the time prescribed, with the result it was directed to pay a sum of Rs. 86,230 for the assessment year 1960-61 and Rs. 47,898 for the assessment year 1961-62 over and above the amount of cess and interest thereon by way of penalty imposed under Sub-section (5) of Section 2 of the Act. Similarly, the assessee committed certain breaches of the provisions of the Factories Act and during the accounting years relevant to the assessment years 1962-63 and 1963-64 it had to pay Rs. 4,000 and Rs. 135 as fine. The assessee claimed the aforementioned expenditure incurred by it in the relevant accounting years, as expenses which had to be deducted in computing its taxable profits and gains of the business. The Income-tax Officer disallowed the aforesaid claim of the assessee and on this score his order was upheld both by the Appellate Assistant Commissioner and the Appellate Tribunal. Learned counsel for the assessee urged that the sum of Rs. 86,230 and Rs. 47,898 representing the penalties for belated payment of sugar cane cess imposed under the U. P. Sugarcane Cess Act, 1956, partook the nature of cess payable by it in connection with its business. Accordingly, it was an expenditure which had been laid out or expended wholly and exclusively for purposes of the assessee's business. It was neither a personal expense of the assessee nor a capital, expenditure. Similarly, the amount of fine paid by it for breach of the provisions of the Factories Act was also expended or laid out and incurred wholly and exclusively for purposes of the assessee's business which could neither be described as personal expense of the assessee nor as a capital expenditure. The taxable profits and gains of the assessee had, therefore, to be computed after making an allowance in respect of all these amounts as provided in Section 10(2)(xv) of the Indian Income-tax Act, 1922, and Section 37 of the Income-tax Act, 1961. In any case, the aforesaid amounts were commercial expenses which had to be taken into account in arriving at the taxable profit and gains of the assessee's business sought to be taxed under Section 10 of the 1922 Act and Section 28 of the 1961 Act. The Income-tax Appellate Tribunal repelled both the pleas raised on behalf of the assessee and held that the aforementioned expenditure was neither allowable as deduction under Section 10(2)(xv) of the 1922 Act/section 37 of the 1961 Act, nor under Section 10(1) of the 1922 Act/section 28 of the 1961 Act. The first question referred by the Tribunal relates merely to the assessee's claim for the deduction of the aforesaid expenditure under Section 10(1) of the Indian Income-tax Act, 1922/section 28 of the Income-tax Act, 1961. It is now well-settled that under the head, "Profits and gains of business or profession", mentioned in Section 10(1) of the Indian Income-tax Act, 1922/section 28 of the Income-tax Act, 1961, what is chargeable to income-tax is the profits and gains of business properly so called and not the gross receipts of an assessee. Such profits and gains of business are to be ascertained on ordinary principles of commercial trading and commercial accounting. In the case of Badridas Daga v. Commissioner of Income-tax, 1958 34 ItR 10, 15 (SC). the Supreme Court after considering various authorities on the subject observed thus: "The result is that when a claim is made for a deduction for which there is no specific provision in Section 10(2), whether it is admissible or not will depend on whether, having regard to accepted commercial practice and trading principles, it can be said to arise out of the carrying on of the business and to be incidental to it. If that is established, then the deduction must be allowed, provided of course there is no prohibition against it, express or implied, in the Act."
(3.) MAIN question, therefore, that arises for consideration is whether having regard to accepted commercial practice and trading principles, the expenditure incurred by the assessee towards payment of penalties imposed under Section 3(5) of the U.P. Sugarcane Cess Act and for the breach of provisions of the Factories Act, is an expenditure which arises out of the carrying on of the assessee's business and is incidental thereto. In Strong and Co. of Romsey Ltd, v. Woodifield, [1906] AC 448. 453 (HL) while considering what expenses are allowable in computing profits of business, Lord Davey observed at page 453 thus: "I think the disbursements permitted are such as are made for that purpose. It is not enough that the disbursement is made in the course of, or arises out of or is connected with, the trade, or is made out of the profits of the trade. It must be made for the purpose of earning the profits." ;