V.K. Singhal, J. - (1.) THE Income-tax Appellate Tribunal, Jaipur Bench, Jaipur, has referred the following question arising out of its judgment under Section 256(1) of the Income-tax Act, 1961 : " Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that the entire amount paid by the assessee to the Sales Tax Department could not be allowed as a deduction in computing its total income for the relevant accounting years ?"
(2.) THE brief facts of the case are that the assessee is a dealer in Tata motor parts. Certain motor parts were purchased by the assessee from within the State of Rajasthan, on which Rajasthan sales tax was paid. While supplying such parts to the Government Departments, the assessee has charged sales tax in addition to the value of the goods. THE amount of sales tax so collected was not deposited in the Government Treasury and the entire amount of sales tax was credited in mal khata along with the sale price of the goods. THE Sales Tax Department levied penalties of Rs. 50,000 and Rs. 75,075 in respect of the assessment years 1978-79 and 1979-80 under Section 16(1)(j) of the Rajasthan Sales Tax Act, 1954. THE assessee claimed these amounts as deduction from its income before the Income-tax Officer and its claim was rejected. THE Commissioner of Income-tax (Appeals) held that the penalty levied in this case had a dual character. One was sales tax which the assessee had collected and credited in the mal khata and/therefore, in his opinion, to the extent of the sales tax collected, it should be allowed as a deduction on the basis of trade outgoings and only the remaining penalty portion should be disallowed. THE matter was taken up before the Income-tax Appellate Tribunal and the Tribunal has held that the Commissioner of Income-tax (Appeals) has erred in bifurcating the figure of penalties. Accordingly, it was held that the penalty cannot be allowed as a deduction. THE appeal of the Revenue was allowed. The submission of learned counsel for the assessee before us is that the said penalties have ultimately been quashed by the Sales Tax Tribunal and the part which was refunded by the Department to the assessee has already been declared in the income when the refunds were received. It has further been submitted that the penalty which is levied under Section 16(1)(j) of the Rajasthan Sales Tax Act is not penal in nature. We have considered the arguments of both learned counsel. The provisions of Section 16(1)(j) of the Rajasthan Sales Tax Act at the relevant time in respect of the year to which the dispute relates provide that if any person demands or charges from any purchaser tax on the sale of any goods in respect of which no tax is payable by him or tax at a rate higher than that payable under this Act or having charged such tax retains such tax knowing it to be not due or higher, then he is liable for penalty in a sum not exceeding double the amount of unauthorised tax so demanded, charged or retained. The provisions of Section 16(1)(j) have subsequently been amended which are not relevant for the purpose of determination of this dispute. A distinction has been made by a subsequent amendment between the tax amount and the quantum of penalty to be levied, but in so far as the present case is concerned, the assessee is liable for payment of penalty in respect of the unauthorised tax demanded, charged or retained. The question for determination is whether the payment of such penalty is an allowable deduction or not. The penalty is levied for infraction of a law and cannot be considered a normal incidence of business. The assessee has to conduct his business in a manner which is prescribed by law. Inaction or acting contrary to the specific requirement of the law will be contravention of the specific provisions of law and, if it has been provided under the said law that, for such inaction or breach, the assessee is liable for penalty, then it would be considered to be an infraction of law. In CIT v. Rajdev Kirana Stores [1990] 181 ITR 285, the Madhya Pradesh High Court has held that (at page 286) : " Whether the breach of law involves moral turpitude or only a violation of some technical provision is not decisive of the question as to whether the expenditure incurred would be allowable under Section 37(1) of the Income-tax Act. The expenditure incurred on account of penalty levied under the sales tax law of the State was held not allowable deduction. " The Bombay High Court in CIT v. Bharat Barrel and Drum Mfg. Co. P. Ltd. [1990] 182 ITR 21, has held that the penalty payable for non-payment of sales tax within the prescribed time is not interest for late payment of tax and is not deductible as business expenditure under Section 37 of the Act of 1961.
(3.) IT has been held by the Hon'ble Supreme Court in Haji Aziz and Abdul Shahoor Bros v. CIT [1961] 41 ITR 350 that infraction of the law is not a normal incident of business and, therefore, only such disbursements can be deducted as are really incidential 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. The Allahabad High Court in Cawnpore Sugar Works Ltd. v. CIT [1992] 196 ITR 274, has also taken the view that expenditure incurred by the assessee representing the amount of penalty in the 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 purpose of the business. The Hon'ble Supreme Court in Mahalahshmi Sugar Mills Co. v. CIT [1980] 123 ITR 429, made a distinction between interest and penalty and observed that no specific order is necessary in order that the obligation to pay interest should accrue. The liability to pay interest is as certain as the liability to pay cess. As soon as the prescribed date is crossed without payment of cess, interest begins to accrue. It is not a penalty for which a provision has been separately made. Nor is it a penalty within the meaning of Section 4 which provides for criminal liability and criminal prosecution. The penalty payable under Section 3(5) lies in the discretion of the collecting officer or authority. So, the basic distinction which has been drawn by the apex court is that, if liability is automatic under the statute, the same can be considered as an allowable deduction, but where the liability is in respect of penalty which the authority has the discretion to levy or not to levy, then the same cannot be allowed as a deduction. The penalty is no doubt, a civil sanction, but is leviable when there is infraction of law. Infraction of law is not a normal incident of business. Nor can it be considered to be a commercial loss which a trader has to bear. The law does not expect the infringement thereof and infringements are not incidental or ancilliary to business which is carried on by a businessman. The requirement of Section 37 of the Income-tax Act is that the expenditure must be laid out or expended wholly and exclusively for the purposes of business to be allowed as a deduction. The expenditure in respect of a penalty cannot be considered to be laid out or expended wholly and exclusively for the purposes of business. ;