JUDGMENT
Sankar Prasad Mitra, J.
1. This is a reference under Section 66(1) of the Indian Income-tax Act, 1922. The assessment year is 1958-59. The relevant previous year is the year which ended on the 31st August, 1957. The assessee carried on business in the manufacture and sale of sugar. It had its mill at Deoria, Uttar Pradesh, and its registered office at Calcutta. For the assessment year 1958-59, by its letter dated 25th November, 1961, the assessee claimed a deduction of Rs. 34,355 as interest paid for arrears of sugarcane cess under the Uttar Pradesh Sugarcane Cess Act, 1956.
2. The Income-tax Officer rejected this claim. His first ground was that the liability related to the assessee’s accounting year which ended on the 31st August, 1957, and the assessee had not made any provisions for the said sum in its accounts for that year though the assessee’s method of accounting was mercantile. Secondly, he said that the amount in question was not allowable as a deduction since it was penal in nature for nonpayment of the cane cess on the due date.
3. Before the Appellate Assistant Commissioner the assessee based the claim for deduction of the said sum of Rs. 34,355 either under Section 10(1) or under Section 10(2)(xv) of the Act of 1922. The argument was that under the Uttar Pradesh Sugar cane Cess Act, 1956, interest was payable for delayed payment of cess and an additional amount was also payable for non-payment of cess in certain circumstances which though described as penalty in the Act was in effect an additional levy of cess. The Appellate Assistant Commissioner was of opinion that the claim aforesaid could not be rejected merely on the plea that the amount was not provided for in the assessee’s books of account in the relevant previous year. And as the liability for the payment of this amount was incurred during the year in question, the deduction should be allowed if otherwise permissible. The Appellate Assistant Commissioner found that the said sum of Rs. 34,355 was made up of two items, namely, (a) Rs. 16,443.68 and (b) Rs. 17,911.39. The first item was interest on arrears of cane cess for the period December 23, 1956, to August 31, 1957. The second item was the amount directed to be paid by way of penalty under Section 3(5) of the Uttar Pradesh Sugarcane Cess Act, 1956. The Appellate Assistant Commissioner held that the second item was inadmissible since it was a levy by way of penalty and this payment could not be said to have been incurred for commercial expediency. He, however, allowed the deduction of the first item, namely, the sum of Rs. 16,443.68.
4. It would be convenient at this stage to set out the provisions of Sections 3 and 4 of the Uttar Pradesh Sugarcane Cess Act, 1956. These provisions are as follows:
“3. (1) The State Government may by notification in the Official Gazette impose a cess not exceeding four annas per maund on the entry of the cane into the premises of a factory for use, consumption or sale therein:
Provided that the State Government may likewise remit in whole or in part such cess in respect of cane used or to be used in a factory for any limited purpose specified in the notification.
Explanation.–If the State Government, in the case of any factory situated outside Uttar Pradesh, so declare, any place in Uttar Pradesh set apart for the purchase of cane intended or required for use, consumption or sale in such factory shall be deemed to be the premises of the factory.
(2) The cess imposed under Sub-section (1) shall be payable by the owner of the factory and shall be paid on such date and at such place as may be prescribed.
(3) Any arrear of cess not paid on the date prescribed under subsection (2) shall carry interest at 6 per cent. per annum from such date to date of payment.
(4) The State Government may, for the purpose of assessment and collection of the cess, appoint officers and authorities and may also prescribe the manner in which the cess shall be assessed and collected.
(5) Where any person is in default in making the payment of the cess, the officer or authority empowered to collect the cess may direct that in addition to the amount of the arrears and interest a sum not exceeding 10 per cent. thereof shall by way of penalty be recovered from the person liable to pay the cess.
(6) The officer or authority empowered to collect the cess may forward to the Collector a certificate under his signature specifying the amount of arrears including interest due from any person, and on receipt of such certificate the Collector shall proceed to recover the amount specified from such person as if it were an arrear of land revenue.
(7) Any sum imposed by way of penalty under Sub-section (5) shall be recoverable in the manner provided in Sub-section (6) for the recovery of the arrears of cess.
4. Penalties.–If any person defaults in the payment of cess imposed under Sub-section (1) of Section 3, or contravenes any provision of any rule made under this Act, he shall, without prejudice to his liability therefor under Sub-section (5) of Section 3, be liable to imprisonment up to six months or to a fine not exceeding rupees five thousand or both and in the case of continuing contravention to a further fine not exceeding rupees one thousand for each day during which the contravention continues.”
5. Before the Tribunal the assessee contended that the penalty under the Cess Act was imposed under Section 4 and what was contemplated in Section 3(5) was not penalty but an additional interest charged for non-payment of the cess and interest in due time. The assessee did not dispute the proposition that payment by way of penalty could not be allowed as a deduction provided that this penalty was imposed for contumacious conduct or for violation of any law. The Tribunal held that under Section 3(5), the intention was to penalise the defaulter in addition to the interest charged for non-payment in time while Section 4 provided for imprisonment or fine not only for default of payment of cess but also for contravention of the other provisions of the statute. The Tribunal agreed with the Appellate Assistant Commissioner that the amount of Rs. 17,911 could not be allowed as a deduction and dismissed the appeal.
6. The following question has been referred to this court:
” Whether, on the facts and in the circumstances of the case, the sum of Rs. 17,911 being the amount paid under Section 3(5) of the U. P. Sugarcane Cess Act, 1956, for default in making the payment of cess in due time was allowable as a deduction either under Section 10(1) or Section 10(2)(xv) of the Indian Income-tax Act, 1922 ?”
7. On behalf of the assessee it has again been argued before us that the payment which is made under Section 3(5) of the Uttar Pradesh Sugarcane Cess Act, 1956, is not really a penalty imposed for contumacious conduct or violation of any law. It is in the nature of additional interest charged for non-payment of cess in due time.
8. Learned counsel for the assessee draws our attention to the assessee’s submission before the Tribunal that the assessee was unable to pay the cess as it had not sufficient funds at its disposal and it should not be said that the assessee was guilty of any crime or any violation of law for which he was subjected to any penal provision under the law. Learned counsel then says that it was, therefore, found to be commercially expedient to pay the additional amount under Section 3(5) to enable the assessee to make payment when sufficient funds were available. Counsel for the assessee submits that the Tribunal misdirected itself in law by not taking into account these important factors.
9. Alternatively, Mr. Debi Pal, learned counsel for the assessee, urged that in computing commercial profit under Section 10(1) expenses incidental to the carrying on of the assessee’s business should be allowed as deductions even though no express provisions therefor had been made under Section 10(2).
10. Reliance was placed on a judgment of the Allahabad High Court in Central Trading Agency v. Commissioner of Income-tax, [1965] 56 I.T.R. 561 (All.). We do not propose to deal with this judgment in this reference as it was not a case of penalty for infraction of statute or violation of law but a case of contractual penalty.
11. In Haji AZIZ & Abdul Skakoor Bros. v. Commissioner of Income-tax, the
assessee carried on the business of importing dates from abroad and selling
them in India. It imported dates from Iraq partly by steamers and partly
by country craft. These imports were made when import of dates by
steamer was prohibited. The customs authorities confiscated the dates
under Section 167 of the Sea Customs Act (item 8). The assessee was given
an option under Section 183 of that Act to pay a fine. The assessee paid
the fine and had the dates released. In its computation of profits the
assessee sought to deduct the amount paid as fine as an allowable expenditure under Section 10(2)(xv) of the Act of 1922. The Supreme Court has
held, inter alia, that no expense which was paid by way of penalty for a
breach of the law, even though it might involve no personal liability, could
be said to be an amount wholly and exclusively laid out for the purpose of the business of the assessee within the meaning of Section 10(2)(xv) of the Income-tax Act. At page 360 their Lordships of the Supreme Court observed :
” The distinction sought to be drawn between a personal liability and a liability of the kind now before us is not sustainable because anything done which is an infraction of the law and is visited with a penalty cannot on grounds of public policy be said to be a commercial expense for the purpose of a business or a disbursement made for the purposes of earning the profits of such business.”
12. To our mind the case before us has to be decided in the light of these observations of the Supreme Court. In fact, there is a direct authority of the Allahabad High Court on this point. In Mahabir Sugar Mills (P.) Ltd. v. Commissioner of Income-tax, [1969] 71 I.T.R. 87 (All.) it has been held that penalty paid under Section 3(5) of the U. P. Sugarcane Cess Act, 1956, for non-payment of arrears of sugarcane cess levied under the said Act, is not allowable as business expenditure under Section 10(2)(xv) of the Act of 1922. We respectfully agree with this view.
13. We may now cite another judgment of the Supreme Court on Section 10(1) as the alternative argument of the assessee’s counsel herein was based on that sub-section. In Badridas Daga v. Commissioner of Income-tax, Venkatarama Iyer J., speaking for the Supreme Court, has said :
” ………when a claim is made for a deduction for which there is no specific provision in Section 10(2), whether it is admissible or not will depend on whether, having regard to accepted commercial practice and trading principles, it can be said to arise out of the carrying on of the business and to be incidental to it. If that is established, then the deduction must be allowed, provided of course there is no prohibition against it, express or implied, in the Act.”
14. When we apply these principles to the facts before us, we cannot uphold the assessee’s claim for deduction on the basis of Section 10(1). Any payment made under Section 3(5) of the Uttar Pradesh Sugarcane Cess Act, 1956, cannot be said to arise out of the carrying on of the business of the assessee or to be incidental to it. An infraction of law is not a normal incident of trade.
15. In the premises aforesaid, the answer to the question referred to us is in the negative. The applicant will pay to the Commissioner the costs of this reference.
Sabyasachi Mukharji, J.
I agree.
