JUDGMENT
1. Following question of law has been referred for opinion of this court by the Income Tax Appellate Tribunal, Chandigarh Bench, Chandigarh, arising out of its order dated 16-3-1988 in ITA No. 529 and CO No. 49/Chd. of 1985, in respect of assessment year 1976-77:
Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in deleting the addition made by the Income Tax Officer on account of the fine paid to the Excise department keeping in view the decision of the Hon’ble Supreme Court in the case of Haji Aziz & Abdlil ShakoorBros. v. CIT, Bombay City 11 ?
2. The assessee claimed deduction of Rs. 31,433 paid as fine for belated payment of excise duty instalment. This was disallowed by the assessing officer as well as the appellate authority but the Tribunal reversed the said view and ‘ allowed the same with the following observations:
6. So far as the assessee’s cross-objection is concerned, in the assessment order the Income Tax Officer himself had stated that from the scrutiny of record, it was found that the fine was incurred by the assessee for making belated payments of the said Excise Duty. Now making belated payments would indirectly benefit the assessee inasmuch as the money would remain available to the assessee and, therefore, any penalty levied on this count could be claimed as a legitimate business expenditure. In the case of Dwarka Dass & Co. v. Excise and Taxation Commissioner 1969 Current Law Journal 290, it was held that a penalty under Section 18(2) of the Punjab Excise Act was not in the nature of punishment and the option to pay the penalty was in the nature of enabling provision which could have some relation with the approximate quantum of loss which the licensee might suffer in case of an order cancelling the licence for the remaining period. Further this Bench had an occasion to consider this matter in the case of Shadi Singh Kashmira Singh v. ITO (1983) 15 TLR 485 (Chg. -Trib.) and it was held therein that the payments made in respect of default under Section 36B of the Punjab Excise Act, 1914, was incidental to trade and was allowable as such. In these circumstances, we are of the opinion that the amount paid can be considered to be legitimate business expense of the assessee, though technically it may be called penalty. We, accordingly allow the cross-objection and delete the disallowance.
3. We have heard learned counsel for the revenue.
4. We find that the view taken by the Tribunal is in consonance with the judgment of the Hon’ble Supreme Court in Prakash Cotton Mills (P) Ltd. v. CIT , wherein the question was deduction claimed on account of interest paid for delayed payment of sales tax and ES1 contribution. It was observed that where the amount paid is in the nature of compensation, the same will be allowable irrespective of the nomenclature used. Relevant observations are
…Therefore, whenever any statutory impost paid by an assessee by way of damages or penalty or interest is claimed as an allowable expenditure under Section 37(l) of the Income Tax Act, the assessing authority is required to examine the scheme of the provisions of the relevant statute providing for payment of such impost notwithstanding the nomenclature of the impost as given by the statute, to find whether it is compensatory or penal in nature. The authority has to allow deduction under Section 37(l) of the Income Tax Act, wherever such examination reveals the concerned impost to be purely compensatory in nature. Wherever such impost is found to be of a composite nature, that is, partly of compensatory nature and partly of penal nature, the authorities are obligated to bifurcate the two components of the impost and give deduction to that component which is compensatory in nature and refuse to give deduction to that component which is penal in nature. (p. 690)
4.1 In the present case, it has been clearly found that though termed as fine, the payment was not in the nature of punishment but was by way of compensation.
4.2 As regards judgment of the Hon’ble Supreme Court in Haji Aziz & Abdul ShakoorBros. v. CIT , the same is distinguishable, as therein, anv amount paid which was in the nature of penalty for breach of law, was held not to be allowable as permissible deduction. The said case did not deal with a situation where though called penalty or fine, the payment was in effect intended to compensate the loss on account of delay in making the payment and was not by way of penalty for breach of law-
5. For the above reasons, the question referred is answered against the revenue and in favour of the assessee.
6. Reference is disposed of accordingly.
