JUDGMENT
G.G. Sohani, J.
1. By this reference under Section 256(1) of the Income-tax Act, 1961 (hereinafter referred to as “the Act”), the Income-tax Appellate Tribunal, Indore Bench, has referred the following questions of law to this court for its opinion :
“(1) Whether, on the facts and in the circumstances of the case, the
Tribunal was right in upholding the disallowance of Rs. 13,714, being
penalty for late payment of provident fund ?
(2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in disallowing a sum of Rs. 25,960 being penalties of sales tax for filing the delayed returns, which were in the nature of interest ?
(3) Whether, on the facts and in the circumstances of the case, the Tribunal was right in upholding the disallowance of Rs. 11,973, being the payment of penalty on estate duty ?
(4) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in upholding the disallowance of Rs. 55,679, being the bank charges debited by the bank to the assessee’s account during the relevant previous year ?”
2. The material facts giving rise to this reference, briefly, are as follows:
The assessee is a public limited company. The assessment year in question is 1978-79. During that year, the assessee had to pay certain amounts on account of penalties imposed on the assessee due to delay in payment of provident fund, delay in filing the return of sales tax and delay in payment of excise duty. The assessee contended before the Inspecting Assistant Commissioner that the amount of penalty paid by the assessee as aforesaid was allowable expenditure. The Inspecting Assistant Commissioner rejected that claim and also disallowed the claim for bank charges amounting to Rs. 55,679 debited by the bank to the assessee’s account during the relevant accounting year. The Inspecting Assistant Commissioner held that these charges related to earlier years and hence the claim of the assessee in that behalf could not be allowed. On appeal, the findings of the Inspecting Assistant Commissioner were upheld by the Commissioner of Income-tax (Appeals) and the Tribunal. Hence, at the instance of the assessee, the aforesaid questions of law have been referred to this court for its opinion.
3. As regards the first three questions, the matter, in our opinion, is covered by the decision of this court in CIT v. Malwa Vanaspati & Chemical Co. Ltd. [1982] 135 ITR 221. Following the decision of the Supreme Court in Haji Aziz & Abdul Shakoor Brothers v. CIT [1961] 41 ITR 350, a Division Bench of this court has held in Malwa Vanaspati & Chemical Co. Ltd.’s case [1982] 135 ITR 221, that penalties imposed on an assessee for contravention of statutory provisions could not be held to be expenditure wholly and exclusively laid out for the purpose of the business. Learned
counsel for the assessee was unable to point out any reason for taking a view different from that taken by this court in Malwa Vanaspati & Chemical Co. Ltd.’s case [1982] 135 ITR 221. Following that decision, therefore, our answers to questions Nos. (1), (2) and (3) referred to this court are in the affirmative and against the assessee.
4. Before we proceed to answer question No. (4), it is necessary to refer to certain facts which are relevant. The assessee had a cash credit (hypothecation) account with the State Bank of India. In accordance with the terms and conditions of the agreement entered into by the assessee with the bank, the assessee had to bear the expenditure on salary of the godown-keeper and watchman employed by the bank. On March 11, 1978, the bank informed the assessee that the assessee had become liable to pay an amount of Rs. 63,813.46 incurred by the bank in connection with the salary of the godown-keeper and watchman from October, 1973, to December, 1977, and that amount was accordingly debited to the cash credit account of the assessee. Out of these charges, the amount of Rs. 55,679 pertaining to the years earlier to the assessment year in question was disallowed. On behalf of the Department, it was contended by Shri Mukati that the original agreement entered into by the assessee with the bank was not produced by the assessee, But from a perusal of the order of the Tribunal, it is clear that it was not disputed before the Tribunal on behalf of the Revenue that the bank had, during the assessment year in question, debited the amount of Rs. 63,813.46 which included the amount of Rs. 55,679 pertaining to earlier years to the cash credit account of the assessee on account of salary paid by the bank to the godown-keeper and the watchman and that due to heavy work, the payment could not be debited by the bank during the earlier years. The contention advanced on behalf of the Revenue before the Tribunal was that the assessee was maintaining accounts on mercantile basis, that the salary of the godown-keeper and the watchman had become payable at the end of the month and hence the claim on that account should have been made by the assessee in the month or year when the salary had become payable. Upholding this contention, the Tribunal observed as follows :
“The salary to the godown-keeper and watchman became payable in the month in which the work was done. Under the circumstances, such salary should have been claimed in the year when the services were rendered by those employees. Simply because debit entries by the bank could not be made in those years, the claim cannot be allowed in the year of account.”
5. It is thus clear that the fact that the assessee had a cash credit account with the State Bank of India, that the goods were pledged with the bank to secure that account and that the bank had debited the account in question to the cash credit account of the assessee during the assessment year in question, were not in dispute before the Tribunal. The Tribunal observed that no material was produced before it to show as to how the said salary was allowable in the year of account. In our opinion, in view of the fact that the amount of salary to the godown-keeper and watchman was paid by the bank which sought to recover that amount from the assessee during the assessment year in question, by debiting it to the cash credit account of the assessee, the Tribunal was not justified in holding that claim for payment of salary should have been made in the year when the services were rendered by the godown-keeper and the watchman. The Tribunal erred in assuming that the godown-keeper and the watchman employed by the bank for preservation of goods pledged by the assessee with the bank were employees of the assessee. The Tribunal failed to appreciate that what was claimed by the assessee was not salary paid to its employees, but the amount recovered by the bank from the assessee during the assessment year on account of expenditure incurred by the bank for the preservation of goods pledged with the bank. The bank was entitled to recover that amount from the assessee and was also entitled to retain the goods pledged for expenses incurred by the bank in respect of the possession or for the preservation of the goods pledged, as provided by Section 173 of the Contract Act. In the circumstances of the case, therefore, the Tribunal, in our opinion, was not justified in upholding the disallowance of Rs. 55,679, being the amount of bank charges debited by the bank to the assessee’s account during the relevant previous year. Our answer to question No. (4) referred to this court, is, therefore, in the negative and in favour of the assessee.
6. Reference answered accordingly. In the circumstances of the case, parties shall bear their own costs of this reference.
