ORIENT TRADING COMPANY Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THIS reference has been made by the Tribunal, Ahmedabad Bench under S. 256(1) of the IT Act, 1961. The question referred to this Court is as under :

(2.) THE assessee is a dealer under the Gujarat ST Act, 1969. During the accounting year corresponding to the asst. year 1973 74, the assessee was required to pay penalty of Rs. 28,843 under Sub S. (5) of S. 45 of that Act as it stood then, as it had not paid tax within the stipulated time. The assessee treating it as payment of interest, had claimed deduction of that amount from its taxable income. The ITO allowed that deduction and determined the taxable income of the assessee accordingly. The CIT in exercise of his power under S. 263 of the Act, revised the order of the ITO and directed the ITO to enhance the penalty, disallowing the claim of Rs. 28,843 as he was of the view that the said deduction was not permissible. According to him, the said payment was not in the nature of interest and even if it could be considered as payment of interest, it was not by way of interest on borrowed capital. Aggrieved by that order, the assessee preferred An appeal to the Tribunal. Before the Tribunal, fresh material was produced to show that the assessee was granted instalments for paying its tax dues. an application in that behalf was made on 22nd July, 1972 and according to the order passed in that behalf, the last instalment was to be paid by May 1972. Though the Revenue objected to the admission of the new facts, the Tribunal admitted them in evidence as it was not likely to prejudice the Revenue in any manner. Before the Tribunal, it was contended that although the word 'penalty' is used in the order granting time, the assessee could not be said to be in default and that the amounts charged in addition to the amounts due on account of sales tax must be treated as interest charged on the arrears of sales tax. This contention was rejected by the Tribunal in view of the decision of this Court in CIT vs. Mihir Textiles Ltd. (1976) 104 ITR 167 (Guj) wherein it has been held that if a sum is paid for infraction of the law, then it is a penalty. Infraction of law is not a normal incidence of business and, therefore, whatever is paid for infraction of law cannot be allowed as commercial loss. As regards grant of instalments, the Tribunal held that the instalments included payment of arrears of sales tax and also penalty. Therefore, delay in making payment was not completely condoned by the ST authorities even though they possessed power to remit whole or any part of penalty payable for default in paying sales tax within time. The appeal filed by the assessee was, therefore, dismissed. Thereupon, the assessee moved the Tribunal for referring the following question to this Court :

(3.) WE will now refer to the three decisions which have been relied upon by the learned counsel for the Revenue. In CIT vs. Hyderabad Allwyn Metal Works Ltd. (1988) 72 CTR (AP) 2 : (1988) 172 ITR 113 (AP), the AP High Court construing S. 36(3) has held that levy under S. 36(3) of the Bombay ST Act, 1959 though called 'penalty' is a composite provision providing for levy of penalty and also compensation for late payment. This decision was relied upon with a view to show that similar provision has been construed by the AP High Court as not merely compensatory in nature and that penalty provided therein is not merely in the nature of payment of interest for late payment. It was also submitted, relying upon this decision, that such a composite payment cannot be regarded as expenditure incurred wholly and exclusively for the purpose of business and was thus even otherwise not deductible under the IT Act. In Organo Chemical Industries vs. Union of India AIR 1979 SC 1803, the Supreme Court construed the nature of damages under S. 14B of the Employees' Provident Fund and Miscellaneous Act, 1952 and held that it is meant to penalise the defaulting employer as also to provide reparation for the amount of loss suffered by the employees. The Supreme Court construed that provision as a warning to the employer in general not to commit a breach of the statutory requirements of S. 6 and also as a provision for compensation or redress to the beneficiaries. The Supreme Court also emphasised use of the word 'default' in that section. The learned counsel for the Revenue, relying upon these observations, submitted that the provision with which we are concerned is also in the nature of a warning to the defaulting assessees and use of the words 'default' and 'penalty' in the section also indicates that the legislature intended to provide for penalty and not for interest. In CIT vs. Mihir Textiles Ltd. (supra) which decision has been relied upon by the learned counsel for the Revenue, it is held that an amount of duty would be deductible as expenditure falling under s. 28(1) of the IT Act only if it is an expenditure connected with or arising out of trade and is something in the nature of a loss which is contemplable and is in the nature of a commercial loss. Infraction of law is not a normal incident of business. An amount paid by way of penalty in lieu of confiscation of goods by the customs authorities cannot, therefore, be claimed as a deduction under S. 23(1) or S. 37(2) of the IT Act. In that case, this Court also held that damages payable under S. 14 of the Employees' Provident Funds and Family Pension Fund Act, 1952 are a payment for infraction of law and in that sense, a penalty. This Court further held that the amount paid as damages for delay in payment of tax is not deductible as business expenditure. The Bombay High Court had an occasion to consider similar section occurring in the Bombay ST Act, 1959 in the case of Jairamdas Bhagchand vs. CIT (1988) 73 CTR (Bom) 20 : (1988) 171 ITR 545 (Bom) and, therein, it has been held that an examination of the scheme of the ST Act leaves no manner of doubt that S. 36 in terms deals with penalty. For taking this view, the Bombay High Court relied upon the marginal note, use of the word 'penalty' in that section and the scheme of the Act.