SIMPLEX STRUCTURAL WORKS Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THIS is a common reference made by the Income-tax Appellate Tribunal in respect of two assessees, M/s. Simplex Structural Works and M/s. Simplex Engineering Company, for the assessment year 1973-74. The questions of law relating to the case of M/s. Simplex Structural Works [R. A. No. 46 (Jab.)/76-77] are as follows:

(2.) WHETHER, on the facts and in the circumstances of the case, and particularly in view of the finding by the Sales Tax Officer that the penalty of Rs. 42,900 was imposed under Section 10A at the difference of the tax at the prescribed rate minus the rate of tax paid by him (the assessee), was the Tribunal right in law in holding that, what was paid, was not in fact sales tax, but penalty ?"

(3.) A perusal of the schemes of the aforesaid provisions of the State Act and the Central Act go to show that a registered dealer gets the benefit of concessional rate of tax if he purchases the goods for the purposes mentioned in Section 8(1) of the State Sales Tax Act and Section 8(3) of the Central Sales Tax Act. In case he is unable to utilise the goods for these purposes after purchasing them at a concessional rate of tax, he becomes liable to penalty. The maximum amount of penalty under the State Act is one and one-quarter times the amount of tax payable at full rate, and under the Central Act one and a half times the amount of tax payable at the full rate. We are, however, here concerned with cases where the amount of penalty imposed is only the difference between the tax payable at the full rate and the tax payable at the concessional rate. Had the assessee purchased the goods without giving out that they were purchasing the goods for the purposes for which the concessional rate is admissible, they would have been required to pay the tax at the full rate as part of the price and the amount of tax so paid would have been undoubtedly allowed to them as business expenditure under Section 37(1) of the I.T. Act. The only distinction in the cases before us is that the assessees gave out at the time of purchase that they intended the goods for purposes for which concessional rate of tax is allowed; but as they did not utilise the goods for those purposes, they were later made to pay as penalty the difference in tax which they would have been required to pay had they purchased the goods without making the representation that the goods were needed for the said purposes. Properly understood, when the penalty imposed under Section 8(2) of the State Act or under Section 10A of the Central Act is only the difference between the tax payable at the full rate and the tax payable at the concessional rate, the real nature of such a penalty is merely the balance amount of sales tax which ought to have been paid by the assessee at the time of purchase of goods. Although termed as penalty the amount so paid is really sales tax and should be allowed as business expenditure under Section 37. The decision of the Supreme in the case of Haji Aziz and Shakoor Bros, [1961] 41 ITR 350 (SC), does lay down that infraction of the law is not a normal incident of business and that if penalty is incurred for contravention of any specific statutory provision, it cannot be said to be a commercial loss falling on the assessee as a trader. This decision, however, does not prohibit us from examining the true nature of penalty imposed in a given case. If the amount of penalty is such an expenditure which the assessee would have been required to incur, even if he had not broken the law, such an expenditure cannot in true sense be termed as penalty for infraction of the law. As pointed out by us, the assessees here would have been required to pay the tax at the full rate as part of sale price had they, at the time of making the purchases, disclosed the purpose for which the goods were used, The amount of tax so paid would have been allowed as business expenditure under Section 37. The penalties imposed under Section 8(2) of the State Act and under Section 10A of the Central Act in the cases before us do not require the assessees to pay more than what they should have paid as tax in obedience to the law. It is this factor which distinguishes these cases from the Supreme Court case of Haji Aziz and Shakoor Bros. [1961] 41 ITR 350 (SC). The learned standing counsel for the Department also relied upon a decision of a Division Bench of this court in CIT v. Malwa Vanaspati & Chemical Co. Ltd. [1982] 135 ITR 221 (MP), which lays down that penalty paid under Section 8(2) of the State Act cannot be allowed as a business expenditure under Section 37(1) of the I.T, Act. In that case, however, the penalty imposed under Section 8(2) was not merely the difference in the tax at the full rate and the tax at the concessional rate. The learned judges specifically observed that the assessee did not produce any material to show that the penalty imposed under Section 8(2) was the minimum and comprised only of the difference in tax between the amount of tax at the full rate and the amount of tax at the concessional rate. The decision of this court in Malwa Vanaspati Chemical Co.'s case [1982] 135 ITR 221 (MP), therefore, cannot be applied to the facts of the instant case.