Citation Codes

Equivalent Citations

citation codes

Case Number

Income-tax Reference No. 26 of 1968

Advocates

— Mr. G.C Sharma with Mr. V. Kumaria and Mr. Randhir-Chawla, Advocates.
— Mr. M.L Dhawan with Mr. Dharam Pal Aneja, Advocates.

Judges

Chief Justice Hardayal Hardy
Mr. Justice Prakash Narain

Acts

clause (c) of sub-section (1) of Section 3 of the Validating Act
Section 10 (2) (xv) of the Indian Income-tax Act, 1922.
Section 3 of the Validating Act and that section
Provinces Sugar Factories Control Act, 1938;(ii)
provision in Section 3 of the Validating Act
2-12-1961. Section 2 (a) of the Validating Act
INCOME TAX ACT 1922
State Act). Section 3 of the Validating Act
Section 12 (2) of the Income-tax Act, 1922
SECTION 84 ESTATE DUTY ACT 1953
S. 256 (1) of the Income-tax Act, 1961
SECTION 167 SEA CUSTOMS ACT
Section 2 (a) of the Validating Act
section 3 of the Validating Act
(c) of sub-section (1) of Section 3
Section 3 (5) of the State Act
Section 3 of the State Act
sub-section (5) of Section 3
Purchase) Act, 1953; and(iii)
(Validation) Act 4 of 1961,
(Validation) Act, 1961
INCOME TAX ACT 1961

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Smart Summary

Judgment Summary — Hardayal Hardy, C.J.

Factual and Procedural Background

This reference arises under Section 256(1) of the Income-tax Act, 1961 regarding whether a penalty paid by the assessee for delayed payment of cess and purchase tax under the U.P. Sugarcane Cess Act, 1956 was an allowable business expenditure.

The assessee is the Upper Duab Sugar Mills Ltd., Shamli, which manufactured and sold sugar, distillery products, power, alcohol and spirit. For the relevant previous year (year of account ended 30 September 1961; assessment year 1962–63) the company paid large sums by way of cane cess and cane purchase tax and, in addition, paid a penalty on delayed payments. The opinion records the penalty figure in two places: an initial statement that the penalty amounted to Rs. 97,028/04 and the specific question referred to the Court which asked whether the Tribunal was justified in holding that "the sum of Rs. 97,021 was an allowable deduction."

Procedurally: the assessee claimed deduction of the penalty in assessment proceedings; the Income-tax Officer and the Appellate Assistant Commissioner disallowed the deduction. On appeal the Tribunal allowed the deduction, relying in part on the fact that the U.P. Sugarcane Cess Act, 1956 had been declared invalid by the Supreme Court (Diamond Sugar Mills Ltd. case). The Commissioner obtained a reference under Section 256(1) and the Court heard the legal question whether the Tribunal was justified in treating the penalty as an allowable deduction.

Legal Issues Presented

Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the penalty (referred to in the record as approximately Rs. 97,021 / Rs. 97,028.04) was an allowable deduction for the purposes of computing the assessee's income under the relevant provisions of the Income-tax law.

Arguments of the Parties

Revenue's Arguments (as summarised in the opinion)

Reliance on authorities holding that an expense incurred by way of penalty for breach of law cannot be considered wholly and exclusively laid out for the purposes of business (not deductible under Section 10(2)(xv) of Income-tax Act, 1922).
Cited Supreme Court and High Court decisions (including Haji Aziz and Abdul Shakoor Bros. and a decision reported at 51 ITR 65) to support the proposition that fines/penalties for breach of law are not allowable deductions.
Invoked additional authorities on the general tests of deductibility (commercial expediency, whether expenditure was voluntarily entered into to facilitate carrying on the business) to show that the present payment did not meet the criteria for allowable business expenditure.

Assessee's Arguments (as summarised in the opinion)

The State Act (U.P. Sugarcane Cess Act, 1956) had been declared invalid by the Supreme Court; therefore amounts collected became refundable to assessees.
Parliament then enacted the U.P. Sugarcane Cess (Validation) Act, 1961 (replacing an earlier ordinance). The Validating Act defined "cess" to include "any sums recoverable under any such Act by way of interest or penalty", and a deeming provision in Section 3 treated earlier impositions, assessments and collections of cess as having been validly imposed, assessed or collected in accordance with law.
Consequently, the assessee argued that interest and penalty formed part of "cess" under the Validating Act and that the payment made (penalty/interest) should be treated in that context (i.e., as part of the validated cess) and thus had to be viewed in assessing deductibility.
Assessee also relied on interpretation principles about the word "includes" (citing Commissioner of Income-tax A.P. v. Taj Mahal Hotel) and a Madhya Pradesh decision (Joara Sugar Mills) to support the contention that the deeming provision created an artificial imposition that should be treated as "in accordance with law".

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Diamond Sugar Mills Ltd. and another v. The State of U.P. (Supreme Court, 13-12-1960)	The U.P. Sugarcane Cess Act, 1956 was declared invalid by the Supreme Court.	Used as factual background: this decision led to large sums being collected and subsequently to the Validating Act; the Tribunal relied on this decision in allowing the deduction.
Haji Aziz and Abdul Shakoor Bros. v. Commissioner of Income-tax (41 ITR 350)	Held that a fine paid by way of penalty for breach of law is not an allowable deduction under S.10(2)(xv) of the Income-tax Act, 1922; expenses by way of penalty for breach of law are not "wholly and exclusively" for business.	Relied on by the Revenue (Mr. Sharma) to support the proposition that the penalty is not deductible.
Moore v. Stewarts & Lloyds (6 Tax Cases 501)	Observation that statute did not require showing that any profit was actually earned by the expenditure in question.	Referred to as part of general authorities on the test for deductibility; cited for the principle that the absence of a direct profit does not by itself defeat deductibility if other tests are met.
Hughes v. Bank of New Zealand (1938 I.T.R 636 H.L)	Un-remunerative expenditure may still be deductible if wholly and exclusively made for the purposes of the trade.	Referred to as part of the jurisprudence explaining the "wholly and exclusively" test; court noted the principle but applied it to conclude the penalty did not meet this test.
Atherton v. British Insulated & Helsby Cables Ltd. (10 Tax Cases 155)	Expenditure voluntarily incurred on grounds of commercial expediency, indirectly facilitating carrying on of business, may be wholly and exclusively for the purposes of trade.	Referred to as illustrating that commercial expediency can bring expenditure within deductible category; the Court nonetheless found the present penalty was not paid on such grounds.
Eastern Investments Ltd. v. C.I.T. (20 I.T.R 1)	Interest deductible if transaction voluntarily entered into to facilitate carrying on of business and made on grounds of commercial expediency; the case helps frame the inquiry though it concerned Section 12(2).	Used to illuminate the test of commercial expediency and voluntary entry into transactions; Court applied the principle to conclude the penalty payment was not of this character.
Commissioner of Income-tax, Bombay North v. Chandulal Keshavlal & Co. (38 I.T.R 601)	In deciding deductibility, consider commercial expediency and ordinary commercial trading; payment may benefit third parties and still be deductible if part of legitimate commercial undertaking.	Referred to for the proposition that commercial expediency and legitimate commercial undertaking are relevant tests; Court considered these tests and found they were not satisfied here.
Commissioner of Income-tax, Kerala v. Malayalam Plantations Ltd. (53 I.T.R 140)	"For the purpose of the business" has wide scope — may include preservation/protection of business, payment of statutory dues as a pre-condition to carry on business, etc.	Cited to show breadth of "for the purposes of business" but the Court held that even with a wide meaning, limits exist; the penalty did not fall within permissible scope.
Raman and Raman Ltd. v. Commissioner of Income-tax, Madras (46 ITR 400)	Test is whether the businessman acted reasonably in the interest of his business, uninfluenced by extraneous considerations.	Referred to in assessing whether payment was reasonable commercial expenditure; Court concluded the penalty was not such a reasonable business expenditure.
Sree Meenakshi Mills Ltd. v. Commissioner of Income-tax, Madras (63 ITR 207)	Primary motive for incurring an expenditure need not be directly to earn income for it to be deductible under S.10(2)(xv).	Referred to as part of the authorities on what may qualify as deductible expenditure; Court nonetheless determined the penalty originated from breach of statutory obligation and was not deductible.
Commissioner of Income-tax, Bihar & Orissa v. Prafulla Kumar Malik	Payments that are penalties for acts opposed to public policy (not damages) are not deductible under Section 10(2)(xv) because they are not incidental to business.	Referred to as authority that payments by way of penalty (especially for public policy breaches) are not deductible; aided the Court's conclusion against deductibility.
Mahabir Sugar Mills (P) Ltd. v. Commissioner of Income-tax, U.P. (71 ITR 87)	Penalty under Section 3(5) of the State Act for non-payment of arrears of sugar-cane cess was held not deductible under Section 10(2)(xv).	Relied upon as a directly analogous decision holding such penalty payments non-deductible; influenced the Court's view that penalties for breach are not allowable deductions.
Deoria Sugar Mills Ltd. v. Commissioner of Income-tax, West Bengal (77 ITR 834)	Affirmed the principle (as in Mahabir) that infraction of law is not a normal incident of trade and related penalties are not deductible.	Referred to as reinforcing the principle that penalties for legal infractions are not normal trade incidents and are not deductible.
The Commissioner of Income-tax v. M/s. Mahalaxmi Sugar Mills Ltd. (Income-tax Reference No. 40 of 1971)	Held that penal interest imposed for delayed deposit of cess was not deductible as expenditure "wholly and exclusively" for business; origins of liability flow from statute.	Specifically cited and applied by analogy: Court noted penal interest and penalty arising from statutory default could not be said to be wholly and exclusively for business.
Commissioner of Income-tax A.P. v. M/s. Taj Mahal Hotel, Secundrabad (AIR 1972 SC 168)	Interpretation: the word "includes" in interpretation clauses is often used to enlarge meaning; items listed in "includes" are to be comprehended along with the natural meaning.	Cited by the assessee to argue that "includes" in the Validating Act's definition of "cess" should bring interest and penalty within the meaning of "cess"; Court considered the argument but rejected the contention that penalty thereby became part of cess for all purposes vis-à-vis deductibility.
M/s. Joara Sugar Mills Private Ltd. v. State of Madhya Pradesh and others (AIR 1964 M.P. 118)	Held (per the opinion's summary) that deeming provision created an artificial imposition and made imposition/assessment/collection "in accordance with law".	The Court stated it did not see how Joara assisted the assessee, given the specific wording of clause (c) of sub-section (1) of Section 3 of the Validating Act; the decision was not held to be persuasive for the assessee.

Court's Reasoning and Analysis

The Court proceeded by first setting out undisputed facts: the assessee paid cess and purchase tax under the State Act and, on default, paid interest and a penalty for delayed payment. The Tribunal allowed deduction on the basis that the State Act had been declared invalid by the Supreme Court and that the later Validating Act, by defining "cess" to include "interest or penalty" and by its deeming provision, effectively validated those collections so as to render the sums refundable.

The Court analysed three inter-related strands of legal material: (1) the statutory scheme of the State Act and the Validating Act; (2) the nature of the liability (cess vs. interest vs. penalty) under the State Act; and (3) the settled authorities on what constitutes an expenditure "wholly and exclusively" laid out for purposes of business (the deductible-expenditure test).

On statutory construction, the Court noted:

Under the State Act, "cess" was the original obligation; interest became payable only if cess was not paid on the prescribed date; penalty became payable where default continued.
The Validating Act contained a deeming provision (Section 3) that all cesses "imposed, assessed or collected" before 3 February 1961 should be deemed validly imposed, assessed or collected; it also defined "cess" to include sums recoverable by way of interest or penalty.
However, the Court held that the expressions "penalty" and "interest" were at all material times separate and different from the term "cess" under the State Act; the liability for interest/penalty arose because cess was unpaid. The Validating Act's definition did not convert the separate nature of penalty/interest into being "cess" in circumstances such that the penalty could be treated as an ordinary business expenditure.

On deductibility, the Court reviewed and applied authorities establishing the governing test: an expenditure must be "wholly and exclusively" laid out for the purposes of the business, or be voluntarily entered into as a matter of commercial expediency to facilitate the carrying on of business. The Court cited and considered multiple authorities (both for the general tests and for the specific proposition that penalties are not deductible).

Balancing the statutory analysis and the case law, the Court concluded that the penalty was imposed because of failure to comply with a statutory obligation; it did not arise as an expenditure made on grounds of commercial expediency nor as an expense properly incurred in the ordinary running or preservation of the business. The penalty therefore could not be said to be "wholly and exclusively" for the purposes of the business and was not deductible.

Holding and Implications

Holding: The Court answered the referred question in favour of the Revenue and against the assessee: the penalty paid for delayed payment of cess/purchase tax was not an allowable deduction.

Implications:

Direct effect: the Tribunal's allowance of the deduction was overturned; the assessee loses the claim for deduction of the penalty and is ordered to pay the costs of the reference proceedings (including counsel's fee of Rs. 300, as recorded).
The opinion does not purport to lay down a novel legal principle beyond applying established authorities: it applies existing precedent that penalties imposed for breach of legal/statutory obligations are not deductible as business expenditure where they do not satisfy the "wholly and exclusively" test or arise from commercial expediency. No broader new precedent or expanded principle is announced beyond these applications discussed in the judgment.

Costs: The assessee was ordered to pay the costs of these proceedings; counsel's fee Rs. 300.

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The Commissioner Of Income-Tax (Central), New Delhi Petitioner v. M/S. Upper Doab Sugar Mills Limited, Shamli

Hardayal Hardy, C.J:— The question raised in this reference under S. 256 (1) of the Income-tax Act, 1961 relates to imposition of penalty amounting to Rs. 97028/04 for delayed payment of cess and purchase tax levied under the U.P Sugarcane Cess Act, 1956.

The Tribunal had held that the amount was an allowable expenditure under Section 10 (2) (xv) of the Income-tax Act, 1922. The assessment related to the assessment year 1962-63, the year of account being the year ended on 30th September, 1961. As the assessment order was made by the Income-tax Officer after the coming into force of the Income-tax Act, 1961 in response to a notice issued under that Act, the Commissioner's application for reference was made under Section 256 (1) of the said Act and the following question of law was referred to this Court:—

“Whether on the facts and in the circumstances of the case, the Tribunal was justified in holding that the sum of Rs. 97,021 was an allowable deduction.?”

There is no dispute as to facts which lie in a short compass. The company which will hereafter be referred to as the assessee is the Upper Duab Sugar Mills Ltd Shamli. It derives income from manufacture and sale of sugar, distillery products, power and alcohol and spirit. During the previous year, the company had besides one sugar mill, two distilleries, one at Shamli and the other at Pilkhani. During that year the assessee paid cane cess to the tune of Rs. 12,53059/- and cane purchase tax amounting to Rs. 16,66890/-. Over and above this payments a penalty of Rs. 97028/04 was paid on delaying payments of the cess and purchase tax. It was claimed that the payments were made in accordance with the instructions contained in a letter dated 7th October 1959 from the Deputy Secretary to the Government of Uttar Pradesh.

During the course of assessment proceedings the assessee claimed deduction of the amount of penalty but both the Income-tax Officer and the Appellate Assistant Commissioner held against it and the amount was disallowed. The reason given was that the penalty was levied for the failure to make the payment on the prescribed date and as such it could not be said that the amount was wholly and exclusively laid for the purpose of the business and that a penalty imposed on an assessee for breach of law during the course of the trade is not an allowable deduction for computing the statutory income under the Income-tax Act.

On further appeal to the Tribunal the relief claimed by the assessee was allowed on the basis that the U.P Sugarcane Cess Act, 1956 which will hereafter be referred to as the State Act, under which the said amount was paid as penalty, was declared invalid by the Supreme Court in the case of Diamond Sugar Mills Ltd. and another v. The State of U.P State on 13-12-1960.

In view of this decision the amount collected became refundable to the assessee among other persons. The U.P Legislature therefore passed the U.P Sugarcane Cess (Validation) Act 4 of 1961, which will hereafter be referred to as the Validating Act, replacing the Ordinance issued earlier on 2-12-1961. Section 2 (a) of the Validating Act runs as follows:—

“‘cess’ means the cess payable under any State Act and includes any sums recoverable under any such Act by way of interest or penalty.”

The Commissioner of Income-tax sought reference of the question of law mentioned above and obtained an order to that effect.

Mr. Sharma on behalf of the Commissioner referred to two decisions, one by the Supreme Court and the other by the High Court of Orissa reported in 41 ITR 350 and 51 ITR 65 respectively. The first is the case of Haji Aziz and Abdul Shakoor Bros. v. Commissioner of Income-tax, Bombay City II (1). There the assessee which carried on the business of importing dates from abroad and selling them in India, imported dates from Iraq partly by steamer and partly by country crafts at a time when the import of dates b y steamer was prohibited. The dates which were imported by steamer were confiscated by the Customs authorities under Section 167 of the Sea Customs Act and the assessee was given an option to pay a fine and have the dates released. The assessee paid the fine and while computing its profits sought to deduct the amount paid as fine as an allowable expenditure under S. 10 (2) (xv) of the Income-tax Act, 1922. It was held by their Lordships of the Supreme Court that no expense which was incurred by way of penalty for a breach of the law could be considered as an amount wholly and exclusively laid out for the purposes of business of the assessee within the meaning of S. 10 (2) (xv) of the Act and hence the fine paid by the assessee was not an allowable deduction. It was also observed that the expenses which are permitted as deductions are only those as are made for the purposes of carrying on the business i.e that which enable the person concerned to carry on and earn profit in that business.

In Moore v. Stewarts & Lloyds (6 Tax Cases 501) (2), Lord Pearson observed at page 507 that the statute did not require the party claiming deduction to show that any profit was in fact earned by the expenditure in question. In Hughes v. Bank of New Zealand (1938 I.T.R 636 H.L) (3) Lord Thankerton observed at page 644 that “expenditure in course of the trade which is un-remunerative is non-the-less a proper deduction if wholly and exclusively made for the purposes of the trade. It does not require the presence of a receipt on the credit side to justify the deduction of an expense.” The real test as was observed by Viscount Cave L.C in Atherton v. British Insultated & Helsby Cables Ltd. (10 Tax Cases 155 at 191) (4) is that a sum of money expended, not of necessity and with a view to direct and immediate benefit to the trade, but voluntarily and on the ground of commercial expediency and in order indirectly to facilitate the carrying on of the business, may yet be expended wholly and exclusively for the purposes of the trade.

In Eastern Investments Ltd. v. C.I.T (20 I.T.R 1) (5) the Supreme Court was concerned with deduction of interest under Section 12 (2) of the Income-tax Act, 1922 and it was urged that it was not expenditure incurred for the purpose of earning the income, profits and gains of the assessee and secondly that even if it was so it was at any rate not expenditure incurred solely for that purpose. It was held that the only question that should be considered was whether the transaction was voluntarily entered in order indirectly to facilitate the carrying on of the business of the assessee and was made on the ground of commercial expediency. If that was so, it would fall within the purview of Section 12 (2) and the interest paid would be a permissible deduction under that sub-section. The case of course did not relate to Section 10 (2) (xv) but the principle laid down is of help in the decision of such cases.

In Commissioner of Income-tax, Bombay North v. Chandulal Keshavlal & Co. (38 I.T.R 601) (6), the Supreme Court observed that in deciding whether a payment of money is a deductible expenditure one has to take into consideration questions of commercial expediency and the principles of ordinary commercial trading. If the payment of expenditure is incurred for the purpose of the trade it does not matter that the payment may enure to the benefit of third party. Another test is whether the transaction is properly entered into as a part of the assessee's legitimate commercial undertaking in order to facilitate the carrying on of its business; and it is immaterial that a third party also benefits thereby.

In Commissioner of Income-tax, Kerala v. Malayalam Plantations Ltd. (53 I.T.R 140) (7) certain amounts were paid by way of estate duty under Section 84 of the Estate Duty Act, 1953 (before amendment in 1958) by a resident company incorporated outside India on the death of share-holders not domiciled in India. The question before the Supreme Court was whether the amounts paid were expenditure under Section 10 (2) (xv) of the Income-tax Act, 1922. Their Lordships held that the expression “for the purpose of the business” is wider in scope than the expression “for the purpose of earning profits”. Its range is wide; it may take in not only the day to day running of a business but also the rationalisation of its administration and modernisation of its machinery; it may include measures for the preservation of the business and for the protection of its assets and property from expropriation, coercive process or assertion of hostile title; it may also comprehend payment of statutory dues and taxes imposed as a pre-condition to commence or for the carrying on of a business; it may comprehend among others acts incidental to the carrying on of the business. However wide the meaning of the expression may be, its limits are implicit in it. The purpose shall be purpose of the business, that is to say, the expenditure incurred shall be for the carrying on of the business and the assessee shall incur it in his capacity as a person carrying on the business.

In Raman and Raman Ltd. v. Commissioner of Income-tax, Madras (46 ITR 400) (8). The learned Judges of Madras High Court held that the test to find out whether a particular expenditure is wholly or partly justified is not to see whether it was necessary, nor to see whether the officer, if he were to do the business himself would incur it to the extent to which it was incurred but to find out whether the businessman when he expended the money was acting reasonably in the interest of his own business un-influenced by irrelevant or extraneous considerations.

In Sree Meenakshi Mills Ltd. v. Commissioner of Income-tax, Madras (63 ITR 207) (9), the Supreme Court observed that in order that an expenditure may be admissible as a deduction under S. 10 (2) (xv) it is not necessary that the primary motive in incurring it must be directly to earn income thereby.

The next case is the case of Commissioner of Income-tax, Bihar & Orissa v. Prafulla Kumar Malik. This case was a case of systematic breach of a contract which prevented the Government of Orissa from equitably distributing an essential commodity. The payment for the breach was not in the nature of damages for breach of contract but penalty for committing an act opposed to public policy. The amount could not therefore be deducted under Section 10 (2) (xv) for it was said that payments by way of penalty are not incidental to business and cannot be deducted.

Mr. Sharma did not rest his case entirely on the two decisions reported in 41 ITR 350 & 51 ITR 65 but he also cited three other decisions. The first case cited by him is a decision of Allahabad High Court in Mahabir Sugar Mills (P) Ltd. v. Commissioner of Income-tax. U.P (71 ITR 87) (10). This case related to payment of penalty under Section 3 (5) of the State Act for non-payment of arrears of sugar-cane cess levied under that Act. The amount was held not to be deductible as business expenditure under Section 10 (2) (xv) of the Indian Income-tax Act, 1922. What the Chief Justice V.G Oak, who wrote the judgment of the Bench said was that no expense which was paid by way of penalty for breach of law even though it might not involve 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 Act.

The second case relied upon by the counsel for the Revenue is a decision of Calcutta High Court in Deoria Sugar Mills Ltd v. Commissioner of Income tax West Bengal (77 ITR 834) (11). The case of Mahabir Sugar Mills (10) was relied upon, in this decision and what was said was that an infraction of law is not a normal incident of trade.

The third case is a decision of this Court in The Commissioner of Income-tax v. M/s. Mahalaxmi Sugar Mills Ltd. (Income-tax Reference No. 40 of 1971) decided on 25.10.1971 (12). Prithvi Raj J. who wrote the Judgment (Hardy C.J concurring) observed:—

“But in the case before us what is to be seen is whether the assessee by infringing the provisions of the statute and not depositing the cess in time whereby penal interest was imposed on him could claim that the amount deposited by way of penal interest was in any manner closely related to the assessee's business as a result whereof the expenditure incurred by way of penal interest could be said to be laid out or expended wholly or exclusively for the purpose of assessee's business. We are unable to answer the question in favour of the assessee as the origin of the liability flows from a statute and in meeting his liability of depositing the penal interest it cannot be said that the assessee was laying out or expending the amount wholly and exclusively for the purpose of his business.”

It is no doubt true that in the case decided by the Court, the Bench was concerned with payment of penal interest but it appears to us that the same consideration would also apply to payment of penalty which was imposed on the assessee because he delayed the payment of cess and purchase tax.

Counsel for the assessee contended on the other hand that the State Act which required the assessee to pay the amount of cess was eventually declared invalid by a majority judgment of the Supreme Court on the ground that it was ultra vires and beyond the competence of the State legislature. Meanwhile Uttar Pradesh Government had assessed or collected under the State Act large sums of money and therefore Parliament in exercise of its powers passed a Validating Act known as the U.P Sugarcane Cess (Validation) Act, 1961 replacing the earlier Ordinance to validate the imposition and collection of cess on sugarcane under the State Act, namely,

(i) The United Provinces Sugar Factories Control Act, 1938;

(ii) The U.P Sugarcane (Regulation of Supply and Purchase) Act, 1953; and

(iii) The U.P Sugarcane Cess Act, 1956 (which we have previously described as the State Act). section 3 of the Validating Act reads as under: —

“3. Validation of imposition and collection of cesses under State Acts during a certain period.

(1) Notwithstanding any judgment, decree or order of any court, all cesses imposed, assessed or collected or purporting to have been imposed, assessed or collected under any State Act before the 3rd day of February, 1961 shall be deemed to have been validly imposed, assessed or collected in accordance with law, as if the provisions of the state acts and of all notifications, orders and rules issued or made thereunder, in so far as such provisions relate to the imposition, assessment and collection of such cess had been included in and formed part of this section and this section had been in force at all material times when such cess was imposed, assessed or collected; and accordingly: —

(a) no suit or other proceeding shall be maintained or continued in any court for the refund of any cess paid under any State Act;

(b) no court shall enforce a decree or order directing the refund of any cess paid under any State Act; and

(c) any cess imposed or assessed under any state Act before the 3rd day of February, 1961 but not collected before that date, may be recovered (after assessment of the cess, where necessary) in the manner provided under that Act.

(2) For the removal of doubts it is hereby declared that nothing in sub-section (1) shall be construed as preventing any person —

(a) from questioning in accordance with the provisions of any State Act and rules made thereunder the assessment of any cess for any period, or

(b) from claiming refund of any cess paid by him in excess of the amount due from him under any State Act and the rules made thereunder.”

Counsel for the assessee referred to the definition of “cess” as given in Section 2 (a) of the Validating Act which has already been re-produced above and submitted that in the Validating Act “cess” meant “Cess” payable under any State Act and included any sums recoverable under any such Act by way of interest or penalty. According to the learned counsel, the words “interest” or “penalty” therefore formed part of the term “cess” and when therefore the assessee paid in addition to what was earlier described as “cess”, he also paid interest and penalty in addition to cess. In the State Act the word “Cess” was not denned. All that Section 3 of the State Act said was that State Government may by notification in the official gazette impose 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. It was under sub-section (2) of that section that it was laid down that the cess imposed under that section shall be payable by the owner of the factory on such date and at such place as may be prescribed. sub-section (3) of that section provided that any arrear of cess not paid on the date prescribed under sub-section (2) shall carry interest at 6 per cent per annum from such date to date of payment. Sub-section (5) provided that where any person was in default in making the payment of cess the officer or authority empowered to collect the cess may direct that in addition to the amount of 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. Section 4 provided for imprisonment upto six months or fine not exceeding Rs. 5,000 or both and in the case of continuing contravention to a further fine not exceeding Rs. 1,000 for each day during which the contravention continued in case any person defaulted in the payment of cess imposed under Section 3 or contravened any provision of any rule made under that Act. This liability for imprisonment was without prejudice to the liability of the defaulter under sub-section (5) of Section 3 of the Act.

The argument advanced by the learned counsel was that since the State Act had been declared invalid there was no liability on the part of the assessee to pay the cess or interest or penalty. It is only the Validating Act that gave the definition of the term “cess” and included “interest” or “penalty” in the definition. Counsel referred to the meaning of the word “Includes” in the case of Commissioner of Income-tax A.P v. M/s. Taj Mahal Hotel, Secundrabad (AIR 1972 SC 168) (13). It was there said that the word “includes” is often used in interpretation clauses in order to enlarge the meaning of the words or phrases occurring in the body of the statute. When it is so used, these words and phrases must be construed as comprehending not only such thing as they signify according to their nature and import but also those things which the interpretation clause declares that they shall include.”

The argument does not seem to have any force. The original liability of the assessee was to pay cess and therefore the State Government went on imposing, assessing and collecting cess from various sugarcane factory owners. Some of them did not pay the amount of cess and became defaulters. They therefore become liable to payment of interest and in some cases also to pay penalty. The cess and also the interest and/or penalty were imposed, assessed or collected before the third day of February, 1961. On 13th December 1960 the Supreme Court delivered its majority judgment. The result was that the entire amount of cess, interest and/or penalty that had been collected by the State Government had to be refunded. The President therefore passed an Ordinance validating the recovery of the cess, interest and/or penalty and this Ordinance was replaced by Parliament by the Validating Act which mentioned the 3rd day of February 1961 as the dead line and provided that cess, interest and/or penalty that had been imposed, assessed or collected in accordance with law, as if the provisions of the state act and of notifications, orders and rules issued or made thereunder, in so far as such provisions related to the imposition, assessment and collection of such cess had been included in and formed part of section 3 of the Validating Act and that section should be deemed to have been in force at all material times when such cess was imposed, assessed or collected. The deeming provision in section 3 of the Validating Act provided that all cesses imposed, assessed or collected before the 3rd day of February, 1961 shall be deemed to have been validly imposed, assessed or collected according to law. It also gave retrospective effect to the provision as if section 3 of the Validating Act was in force at all material times when the cess was imposed, assessed or collected.

Clause (c) of sub-section (1) of Section 3 also provided that any cess imposed or assessed under any State Act before the 3rd day of February 1961 but not collected before that day, may be recovered (after assessment of the cess, where necessary) in the manner provided under the State Act. The result of this provision was that it is the cess that was imposed or assessed under any State Act before the 3rd day of February 1961 but which had not been collected before that day that was to be recovered in the manner provided under the State Act provided necessary assessment of the cess was made because it is only after the assessment of the cess under the State Act that the collection of the cess had to be made in such a case.

In the present case, it was the amount of cess under the State Act that had to be collected and the counsel for the assessee conceded that under the State Act interest or penalty did not form part of the cess. It is only when cess was not paid on the prescribed date that the factory owner became liable to pay interest and when payment was not still made by the factory owner he also became liable to pay penalty.

The assessee therefore cannot take advantage of the definition of the term “cess” in the Validating Act because since cess, interest and/or penalty were all parts of the proceedings under the State Act a comprehensive definition of the term “cess” was given in the Validating Act. The expressions “penalty” and/or “interest” did not under any circumstances become part of the term “cess” and were at all material times separate and different from that expression. The liability of the factory owner to pay interest and or penalty arose only when payment of cess was not made on due date but neither penalty nor interest became part of the term “cess”.

Counsel for the assessee referred to a decision of Madhya Pradesh High Court in M/s. Joara Sugar Mills Private Ltd. v. State of Madhya Pradesh and others (AIR 1964 M.P 118) (14) and submitted that the deeming provision in section 3 of the Validating Act only creates an artificial imposition of cess for a period before the commencement of the Act and makes the imposition, assessment and collection thereof “in accordance with law”. It does not give retrospective validity to any State Act imposing a cess. We do not see how this decision can be of any assistance to the argument of the learned counsel, more so, in view of clause (c) of sub-section (1) of Section 3 of the Validating Act which clearly refers to the State Act. The deeming provisions in the Validating Act is in our view retrospective to the extent mentioned therein.

The imposition of penalty was on account of failure on the part of the assessee to comply with a statutory obligation and as such any payment made by the assessee was not incidental to its business nor was there any commercial expediency for its payment.

The result is that the question is answered in favour of the Revenue and against the assessee. The assessee will also pay costs of these proceedings. Counsel's fee Rs. 300.

The Commissioner Of ... v. M/S. Upper Doab Suga...