COMMISSIONER OF INCOME TAX Vs. BHARAT PRINTERS

JUDGEMENT

(1.) THE question referred under section 256(2) of the Income-tax Act, 1961 ("the Act" for short), reads as follows :

(2.) THE assessee is a dealer registered under the provisions of the Central Sales Tax Act, 1956. It is also engaged in the business of printing for which purpose it purchased paper, printing inks, machine spare parts, machine oil, by issuing 'C' forms under the Central Sales Tax Act declaring that the said goods were purchased for the purposes of manufacturing or processing of goods for sale as per section 8(3)(b) of the Central Sale Tax Act. However, the assessee used the said goods in the execution of works contract (i.e., printing binding labels) of the assessees sister concern called Messrs. Bharath Beedi Works; this diversion of the goods for a different purpose, other than the one declared under 'C' forms, contravened the provisions of the Central Sales Tax Act; consequently, penalties were imposed on the assessee under section 10A of the Central Sales Tax Act for different years. This penalty was ultimately reduced by the appellate authority under the said Act to an amount equivalent to the sales tax that should have been paid by the assessee. As the law then stood as declared by the High Court (in S. S. Umadi v. State of Mysore [1974] 34 STC 228 (Kar)), this levy was perfectly legal and the assessee paid the same. THEreafter, for the purposes of Income-tax Act, 1961, the assessee claimed this sum paid, as a deduction. According to the assessee, the levy of penalty under the Central Sales Tax Act was illegal in the light of a subsequent decision of the Supreme Court, and, therefore, the order levying penalty should not be considered as imposing a penalty. It was further contended that the payment of the sum levied as a penalty was compensatory in nature, to recoup the State, of the loss of tax caused by the assessees action, and hence should be treated as on par with the sales tax. THE Income-tax Officer rejected the claim of the assessee for deduction; this order was affirmed by the first appellate authority. However, the Tribunal has accepted the assessees contention that the purported levy of penalty under section 10A of the Central Sales Tax Act was not sustainable in law in view of a decision of the Supreme Court in the case of Assessing Authority-cum-Excise and Taxation Officer v. East India Cotton Mfg. Co. Ltd. [1981] 48 STC 239, and hence the payment of the said sum by the assessee should not be considered as the payment of a penalty, since there was no contravention of section 8(3)(b) of the Central Sales Tax Act by the assessee.

(3.) SRI S. P. Bhat, learned counsel for the assessee, however, contended that, if section 8(3)(b) of the Central Sales Tax Act was not contravened invocation of section 10A of the said Act and levy of penalty thereunder would be without jurisdiction and, therefore, the character of the levy as a penalty would stand erased altogether. Alternatively, learned counsel urged that the levy under section 10A was compensatory in nature payment of which by the assessee was an expenditure deductible under section 37 of the Income-tax Act.