V.G Oak, C.J:— The question for consideration in this Income-Tax reference is whether penalty paid under Sub-section (5) of section 3 of the U.P Sugarcane Cess Act, 1956 (hereafter referred to as the “Cess Act”), is a permissible deduction under section 10(2)(xv) of the Indian Income-Tax Act, 1922. The Mahabir Sugar Mills (Private) Ltd. is the assessee. It is a private limited company. It used to run a sugar mill. The assessee used to purchase sugarcane. It had to pay cess to the Government under the Cess Act. Cess was assessed against the company in due course. The company did not pay the cess within the prescribed time. The assessee had, therefore, to pay a sum of Rs. 14,664 as penalty under Sub-section (5) of section 3 of the Cess Act. The assessee claimed this sum of Rs. 14,664 as a permissible expense and commercial loss. This claim was disallowed by the Income-Tax Officer. The assessee appealed and succeeded. The Appellate Assistant Commissioner held that the sum of Rs. 14,664 ought to be accepted as a permissible expenditure under section 10(2)(xv) of the Indian Income-Tax Act, 1922. The department appealed to the Income-Tax Appellate Tribunal, Allahabad. The appeal was allowed. The Tribunal reversed the decision of the Appellate Assistant Commissioner and restored the decision of the Income-Tax Officer. At the instance of the assessee the Income-Tax Appellate Tribunal has referred the following question to this court:
“Whether, on the facts and in the circumstances of the case, the sum of Rs. 14,664 paid as penalty under section 3(5) of the U.P Sugarcane Cess Act, 1956, on the arrears of sugarcane cess is an allowable deduction in computing the profits of the assessee?”
2. Sections 3 and 4 of the Cess Act have been quoted in the statement of the case and the appellate order of the Tribunal. Cess is imposed under sub-section (1) of section 3 of the Cess Act. Sub-section (2) of section 3 lays down that the cess imposed under sub-section (1) must be paid within the prescribed time. Sub-section (3) provides for charging interest on cess not paid within the prescribed time. Sub-section (5) of section 3 states:
“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.”
3. Section 4 of the Cess Act lays down that a person making default in the payment of cess becomes criminally liable. In Indian Aluminium Company Ltd. v. Commissioner of Income-Tax [1967] 64 I.T.R 330. the Indian Aluminium Company Ltd. was the assessee. It carried on the manufacture of aluminium products. It entered into an agreement with a business concern of Canada. The assessee paid a total sum of Rs. 2,50,808 without deducting tax and thereby contravened section 18(3B) of the Indian Income-Tax Act, 1922. The Income-Tax Officer treated the assessee as a defaulter under section 18(7) of the Indian Income-Tax Act, 1922 in respect of the sum of Rs. 1,24,199 which ought to have been deducted. It was held that the payment of Income-Tax amounting to Rs. 1,24,199 directly arose on the application of sub-section (7) of section 18 of the Act. The payment was in the nature of punishment as the assessee was under a statutory obligation to deduct that amount at source. Since the liability arose out of an infraction of the statutory provision, it was not deductible from the profits and gains of the assessee's business under section 10(2)(xv) of the Indian Income-Tax Act, 1922.
4. In Senthikumara Nadar & Sons v. Commissioner of Income-Tax it was held by the Madras High Court that payments of penalties for infraction of liability fall outside the scope of permissible deductions under section 10(2)(xv) of the Indian Income-Tax Act, 1922.
5. In J.K Cotton Spinning and Weaving Company Ltd. v. Commissioner of Income-Tax [1955] 28 I.T.R 78. the assessee-company submitted a return showing its assessable income at Rs. 42,510. The Income-Tax Officer found that the assessee's assessable income was Rs. 8,17,137. The assessee's managing director was thereafter served with a notice to show cause why criminal proceeding should not be taken against him. The assessee paid a sum of Rs. 7,50,000, and compounded the offence. It was held by this court that the payment of Rs. 7,50,000 could not be said to have been made wholly and exclusively for the purpose of the business within the meaning of section 10(2)(xv) of the Indian Income-Tax Act, 1922, and could not be excluded in determining the assessable income of the company.
6. In the case of Gabdulal Tulsiram, In re3 the assessee carried on money lending business. It was required under the War Risks (Goods) Insurance Ordinance to get his full quantity of stock insured. Year after year he used to get his goods insured for an amount far below the actual value of the stock. Ultimately he was caught. The offence under the ordinance was compounded by the assessee upon payment of a sum of Rs. 16,895 to the Central Government. The Appellate Tribunal allowed deduction of the amount which would have been payable as premia for war risks insurance, but disallowed the balance amounting to Rs. 11,265. It was held by this court that the sum of Rs. 11,265 was not money wholly and exclusively expended for the purpose of business. It was not, therefore, deductible under section 10(2)(xv) of the Indian Income-Tax Act, 1922.
7. In Sree Meenakshi Mills Ltd. v. Commissioner of Income-Tax [1963] 49 I.T.R 156. it was held by the Madras High Court that where an assessee commits an offence, the expense he incurs in an infructuous attempt to vindicate himself cannot be said to have been laid out or expended for the purpose of earning income from business.
8. In Commissioners of Inland Revenue v. Alexander Von Glehn & Co. Ltd. [1920] 12 Tax Cas. 232. the respondent company carried on business as general produce merchants and exported goods to Russia and Scandinavia. The company was sued for penalties under the Customs (War Powers) Act, 1915, upon information by the Attorney-General in respect of infringements of that Act in the course of its trade. The matter was settled by consent upon the company agreeing to pay a penalty of £3,000 on condition that the record was withdrawn. It was held that the mitigated penalty was not on admissible deduction in arriving at the profits of the company's trade for excess profits duty purposes.
9. In Haji Aziz and Abdul Shakoor 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 steamer and partly by country craft at a time when import of dates by steamer was prohibited. The dates which were imported were confiscated under section 167 of the Sea Customs Act. The assessee was given an option under section 183 of that Act to pay a fine. Fine was paid, and the dates were released. It was held by the Supreme Court that no expense which was paid by way of penalty for a breach of law even though it might involve no personal liability could be said to be an amount wholly and exclusively laid for the purpose of the business of the assessee within the meaning of section 10(2)(xv) of the Indian Income-Tax Act, 1922. The fine paid by the assessee was not an allowable deduction under that section. The matter was explained by their Lordships on pages 359 and 360 thus:
“…an expenditure is not deductible unless it is a commercial loss in trade and a penalty imposed for breach of the law during the course of trade cannot be described as such. If a sum is paid by an assessee conducting his business, because in conducting it he has acted in a manner which has rendered him liable to penalty, it cannot be claimed as a deductible expense. It must be a commercial loss and in its nature must be contemplable as such. Such penalties which are incurred by an assessee in proceedings launched against him for an infraction of the law cannot be called commercial losses incurred by an assessee in carrying on his business. Infraction of the law is not a normal incident of business and, therefore, only such disbursements can be deducted as are really incidental to the business itself. They cannot be deducted if they fall on the assessee in some character other than that of a trader. Therefore, where a penalty is incurred for the contravention of any specific statutory provision, it cannot be said to be a commercial Joss falling on the assessee as a trader, the test being that the expenses which are for the purpose of enabling a person to carry on trade for making profits in the business are permitted but not if they are merely connected with the business… no expense which is paid by way of penalty for a breach of the law can be said to be an amount wholly and exclusively laid for the purpose of the business.”
10. Mr. P.N Pachauri appearing for the assessee points out that section 3 of the Cess Act provides for charging interest and imposing penalty. He urged that liability to pay interest and liability to pay penalty have got the same character. It was further pointed out that the company was not in a position to pay the cess within the prescribed time. The company might have had its difficulties. But the fact remains that penalty has been imposed under Sub-section (5) of section 3 of the Cess Act. Sub-section (2) of section 3 of the Cess Act required the company to pay the cess within the prescribed time. Penalty was imposed for its failure to pay cess within the prescribed time. The default also rendered the company liable to prosecution under section 4 of the Cess Act. As explained by the Supreme Court in the case of Haji Aziz and Abdul Shakoor Brothers, no expense which is paid by way of penalty for a breach of the law can be said to be an amount wholly and exclusively laid for the purpose of the business. The Tribunal was right in holding that the sum of Rs. 14,664 was not a permissible deduction under section 10(2)(xv) of the Indian Income-Tax Act, 1922.
11. We answer the question referred to this court in the negative. The Commissioner of Income-Tax will get his costs of the reference which we assess at Rs. 200.