JUDGMENT
G.T. Nanavati, J. - This reference has been made by the Tribunal, Ahmedabad Bench, under section 256(1) of the Income-tax Act, 1961 ('the Act'). The question referred to this Court is as under:
"Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that additional payment of Rs. 28,843 under section 45 of the Gujarat Sales-tax Act had to be made for an infraction of law?"
2. The assessee is a dealer under the Gujarat Sales-tax Act, 1969. During the accounting year corresponding to the assessment year 1973-74 the assessee was required to pay penalty of Rs. 28,843 under sub-section (5) of section 45 of that Act as it stood then, as it had not paid tax within the stipulated time. The assessee, treating it as payment of interest, had claimed deduction of that amount from its taxable income. The ITO allowed that deduction and determined the taxable income of the assessee accordingly. The Commissioner in exercise of his power under section 263 of the Act, revised the order of the ITO and directed the ITO to enhance the penalty, disallowing the claim of Rs. 28,843 as he was of the view that the said deduction was not permissible. According to him, the said payment was not in the nature of interest and even if it could be considered as payment of interest, it was not by way of interest on borrowed capital. Aggrieved by that order, the assessee preferred an appeal to the Tribunal. Before the Tribunal, fresh material was produced to show that the assessee was granted instalments for paying its tax dues and an application in that behalf was made on 22-7-1972 and according to the order passed in that behalf, the last instalment was to be paid by May 1972. Though the revenue objected to the admission of the new facts, the Tribunal admitted them in evidence as it was not likely to prejudice the revenue in any manner. Before the Tribunal, it was contended that although the word 'penalty' is used in the order granting time, the assessee could not be said to be in default and that the amounts charged in addition to the amounts due on account of sales-tax must be treated as interest charged on the arrears of sales-tax. This contention was rejected by the Tribunal in view of the decision of the Court in Commissioner Of Income-Tax, Gujarat v. Mihir Textiles Ltd, [1976] 104 ITR 167 wherein it has been held that if a sum is paid for infraction of the law, then it is a penalty. Infraction of law is not a normal incidence of business and, therefore, whatever is paid for infraction of law cannot be allowed as commercial loss. As regards grant of instalments, the Tribunal held that the instalments included payment of arrears of sales-tax and also penalty. Therefore, delay in making payment was not completely condoned by the sales-tax authorities even though they possessed power to remit whole or any part of penalty payable for default in paying sales-tax within time. The appeal filed by the assessee was therefore, dismissed. Thereupon, the assessee moved the Tribunal for referring the following question to this Court:
"Whether, on the facts and circumstances of the case, the sum of Rs. 28,843 being penalty for delay in paying sales-tax is allowable revenue expenditure under section 37 or section 28 of the Income-tax Act, 1961 in computing the total income of the assessee?"
The Tribunal reframed that question and the question which has been referred to us is as stated above.
3. What is submitted by the learned counsel for the assessee is that even if the sum which the assessee was required to pay is described as penalty, really and on true interpretation of section 45(5), it should be held that the sum which is required to be paid under that sub-section is really of compensatory nature and is not by way of penalty. He submitted that use of the word 'penalty' in that sub-section cannot be conclusively determinative of the true nature of payment made thereunder. Under that provision penalty is to be paid if there is no reasonable cause as is indicated by the words 'shall pay' and the measure of so-called penalty is relatable to the rate of interest and the period for which tax due is not paid. Thus, what the assessee is required to pay under that provision for default of not paying the tax within the stipulated period is really interest for the period for which tax is not paid.
In support of his submissions, the learned counsel for the assessee has relied upon the decision of the Karnataka High Court in the case of Deputy Commissioner Of Income Tax v. Jayant Paper Mills Ltd.* [1984] 150 ITR 26 . The question which was referred to it under section 256(1) was whether, on the facts and circumstances of the case, the Tribunal was right in law in holding that the amount of Rs. 52,944 paid by the assessee as penalty for non-payment of sales-tax was an allowable deduction in computing its business income. The penalty was paid by the assessee under section 13(2) of the Karnataka Sales-tax Act, 1957. What was contended on behalf of the assessee was that what was paid under that provision by the assessee was not penalty in the real sense of the term and it was only compensation for delay in payment of tax due. Interpreting section 13(2) of the said Act, the Karnataka High Court held that penalty payable under section 13(2) for delay in pay- ment of tax is a statutory liability and is not for infraction of any law. The reason given in support of the conclusion is that the Act gives no discretion to the authorities to waive or reduce that penalty. Follow- ing the judgment of the Supreme Court in Mahalaxmi Sugar Mills Co. v. Cit, Delhi. [1980] 123 ITR 429 , the Karnataka High Court held that it is an allowable deduction as business expenditure. The learned counsel emphasised that, in substance, the provisions contained in section 13(2) are similar to the provisions contained in section 45(5) of the Gujarat Act and, therefore, this Court should follow that decision. Section 13 of the Karnataka Act provides for payment of penalty for default in making payment of tax within the prescribed time and that the measure of penalty is certain percentage of amount of tax remaining unpaid for the period of default. Section 45(5) has also made a similar provision and adopted similar measure for the purpose of determining penalty. But, in our opinion, mere similarity of the two provisions is not sufficient for taking the same view as the real nature of payment under section 45(5) will have to be determined not only by reference to that particular section but also by referring to other relevant sections and the scheme of the Act. Decision of the Madras High Court in Shakhti Sugars Ltd. v. Asstt. CTO [1993] 59 STC 52 was also relied upon. In that case, construing similar provisions in the TN Gen. Sales-tax Act, 1959, the Court held that though the word 'penalty' has been used in section 24(3), what has been provided for is nothing more than interest which is claimed by the State, because the amounts of taxes which should have gone to the coffers of the State are being retained by the dealer. It is only by way of compensation for deprivation of use of such moneys, which rightly belong to the State, that a payment to the State, which has been described as penalty, has been provided for. What is required to be noted is that section 24 of the Act deals with payment and recovery of tax and, in that context, and in the context of other provisions providing for penalty, the Madras High Court held that though the word 'penalty' has been used in section 24, what is really provided for is payment of interest by a defaulting assessee.
The learned counsel for the assessee also relied upon the decision in Gujarat Travancore Agency v. CIT [1989] 177 ITR 455 , wherein the Supreme Court has observed that 'in case of proceeding under section 271 (1)(a ) of the Act, however, it seems that the intention of the Legislature is to emphasise the fact of loss of revenue and to provide a remedy for such loss, although, no doubt, an element of coercion is present in the penalty'. The Supreme Court also observed that the terms in which the penalty falls to be measured are significant. Heavy reliance was placed on these observations and it was submitted that the purpose for which section 45(5) has been enacted is to compensate for loss of revenue and penalty is required to be measured by reference to the amount of tax and the rate at which penalty is to be paid is 1 per cent of the amount of tax per month for the first three months and one and half per cent of the amount of tax per month thereafter. This clearly indicates that penalty is really in the nature of interest.
The learned counsel for the assessee also drew our attention to CIT v. Udaipur Distillery [1986] 160 ITR 444 (Raj.) , Commissioner Of Income-Tax v. Western Indian State Motors [1987] 167 ITR 395 (Raj.) and Commissioner Of Income-Tax v. Western Indian State Motors [1988] 174 ITR 116 (Raj.) . But these were all cases where a provision was made for payment of interest on arrears of tax. Therefore, they are not quite relevant for the purpose of deciding the question which has arisen before us.
4. We will now refer to the three decisions which have been relied upon by the learned counsel for the revenue. In Commissioner Of Income-Tax v. Hyderabad Allwyn Metal Works Ltd. [1988] 172 ITR 113 , the Andhra Pradesh High Court construing section 36(3) has held that levy under section 36(3) of the Bombay Sales-tax Act, 1959 though called 'penalty' is a composite provision providing for levy of penalty and also compensation for late payment. This decision was relied upon with a view to show that similar provision has been construed by the Andhra Pradesh High Court as not merely compensatory in nature and that penalty provided therein is not merely in the nature of payment of interest for late payment. It was also submitted, relying upon this decision, that such a composite payment cannot be regarded as expenditure incurred wholly and exclusively for the purpose of business and was, thus, even otherwise not deductible under the Act.
In Organo Chemical Industries v. Union of India AIR 1979 SC 1803, the Supreme Court construed the nature of damages under section 14B of the Employees' Provident Fund and Miscellaneous Act, 1952 and held that it is meant to penalise the defaulting employer as also to provide reparation for the amount of loss suffered by the employees. The Supreme Court construed that provision as a warning to the employer in general not to commit a breach of the statutory requirements of section 6 of the Act and also as a provision for compensation or redress to the beneficiaries. The Supreme Court also emphasised use of the word 'default' in that section. The learned counsel for the revenue, relying upon these observations, submitted that the provision with which we are concerned is also in the nature of a warning to the defaulting assessees and use of the words 'default' and 'penalty' in the section also indicates that the Legislature intended to provide for penalty and not for interest.
In Mihir Textiles Ltd.'s case (supra) which decision has been relied upon by the learned counsel for the revenue, it is held that an amount of duty would be deductible as expenditure falling under section 28(1) of the Act only if it is an expenditure connected with or arising out of trade and is something in the nature of a loss which is contemplated and is in the nature of a commercial loss. Infraction of law is not a normal incident of business. An amount paid by way of penalty in lieu of confiscation of goods by the customs authorities cannot, therefore, be claimed as a deduction under section 23(1) or section 37(2) of the Act. In that case, this Court also held that damages payable under section 14 of the Employees' Provident Funds and Family Pension Fund Act, 1952 are a payment for infraction of law and in that sense, a penalty. This Court further held that the amount paid as damages for delay in payment of tax is not deductible as business expenditure.
The Bombay High Court had an occasion to consider similar section occurring in the Bombay Sales-tax Act, in the case of Jairamdas Bhagchand v. CIT [1988] 171 ITR 545 and, therein, it has been held that an examination of the scheme of the Sales-tax Act leaves no manner of doubt that section 36 in terms deals with penalty. For taking this view, the Bombay High Court relied upon the marginal note, use of the word 'penalty' in that section and the scheme of the Act.
5. It is in the light of these decisions that we have to consider whether the payment which is required to be made under section 45(5) is for infraction of the law or is really by way of compensatory interest. Section 45 as it stood at the relevant time read as under:
"45.(1) Where any dealer or commission agent becomes liable to pay purchase tax under the provisions of sub-section (1) or (2) of section 16, then, the Commissioner may impose on him, in addition to any tax payable,—
(a)
if he has included the purchase price of the goods in his turnover of purchases as required by sub-section (1) of section 16, a sum by way of penalty not exceeding half the amount of tax, and
(b)
if he has not so included the purchase price as aforesaid, a sum by way of penalty not exceeding twice the amount of tax.
(2) If, while assessing the amount of tax due from a dealer under section 41, it appears to the Commissioner that such dealer—
(a)
has failed to apply for registration as required by section 29, or
(b)
has, without reasonable cause, failed to comply with the notice under section 41, or
(c)
has concealed the particulars of any transaction or deliberately furnished inaccurate particulars of any transaction liable to tax,
the Commissioner may impose upon the dealer by way of penalty, in addition to any tax assessed under section 41, a sum not exceeding one and one-half times the amount of the tax.
(3) If a dealer fails to present his licence, recognition or, as the case may be, permit for cancellation as required by section 35 or 36, the Commissioner may impose upon the dealer by way of penalty, a sum not exceeding two thousand rupees.
(4) If a dealer fails without sufficient cause to furnish any declaration or any return as required by section 40, the Commissioner may impose upon the dealer by way of penalty a sum not exceeding two thousand rupees.
(5) If a dealer does not, without reasonable cause, pay tax within the time he is required by or under the provisions of this Act to pay it, he shall subject to the provisions of sub-section (4) of section 65, pay by way of penalty, in addition to the amount of tax, a sum equal to—
(a)
one per cent of the amount of tax per month for the first three months after the last date by which he should have paid that tax, and
(b)
one and half per cent of the amount of tax per month thereafter, during the time he continues to make default in the payment of tax:
Provided that the Commissioner, subject to such conditions as may be prescribed, and an appellate authority in an appeal under section 65, may remit the whole or any part of the penalty payable in respect of any period.
(6) Where a dealer has failed to pay the whole of the amount of tax as required by sub-section (2) of section 47 or the whole of the extra amount of tax as required by sub-section (3) of that section or where, in the case of a dealer, the amount of tax assessed or reassessed for any period under section 41 or section 44 exceeds the sum already paid by a dealer in respect of such period prior to such assessment or reassessment by more than twenty per cent of the sum so paid, the dealer shall be deemed to have failed to pay the tax to the extent of the difference between the amount payable as aforesaid and the amount paid and the dealer shall pay by way of penalty on the amount of difference a sum calculated in accordance with the provisions of sub-section (5) and the provisions of sub-section (5) shall, so far as may be, apply thereto:
Provided that where in assessing the amount of tax from any dealer under section 41 in respect of any period the time taken for making an order of assessment exceeds eighteen months from the date of expiry of the time prescribed for the payment of tax under section 47, the Commissioner shall remit the amount of penalty payable by the dealer for the period between the date of expiry of the said period of eighteen months and the date of payment of tax specified in the notice under sub-section (4) of section 47:
Provided further that where the Commissioner is satisfied that the difference between the amount payable as assessed or reassessed and the amount paid, has taken place not without a reasonable cause, the Commissioner may remit the whole or part of the penalty, payable in respect of any period by any dealer.
(7) Wherever any person fails without sufficient cause to furnish any information required by section 38, the Commissioner may, by an order in writing, impose upon the dealer by way of penalty a sum not exceeding two thousand rupees.
(8) If any dealer contravenes the provisions of section 57, the Commissioner may direct to pay by way of penalty a sum not exceeding ten per cent of the amount of the bill or cash memorandum in respect of which such contravention has been made.
(9) If the Commissioner has reason to believe that any person is liable to a penalty under any of the provisions of this section, he shall serve on him a notice requiring him on a date and at a place specified in the notice to attend and to show cause why a penalty as provided in such provision should not be imposed on him.
(10) The Commissioner shall thereupon hold an inquiry and shall make such order as he thinks fit."
According to the marginal note or heading, this section provides for imposition of penalty in certain cases and bar to prosecution. But this section does not make any provision for such a bar and we find a provision to that effect in section 75 of that Act. Sub-section (3) of that section provides that no prosecution for an offence under that Act, shall be instituted in respect of the same facts on which a penalty has been imposed by the Commissioner under any provisions of that Act. On an analysis of this section, it can be seen that sub-sections (1) to (8) provide for levy of penalty for different types of defaults or contravention of the provisions of the Act. Sub-section (9) provides for serving a notice upon the assessee to show cause why penalty should not be imposed on him. Sub-section (10) provides for making of order imposing penalty. Sub-section (5) provides for a statutory liability to pay penalty if tax is not paid within the prescribed time without a reasonable cause. The proviso to this sub-section empowers the Commissioner and the appellate authority to remit whole or any part of penalty payable under that provision. Thus, provision has been made to deal with a situation arising out of default on the part of the assessee to pay tax within specified time without reasonable cause. It, thus, appears from the context in which the word 'penalty' has been used that the Legislature really intended it to be penalty and not compensatory payment in the nature of or by way of interest. Moreover, use of the words 'reasonable cause' in sub-section (5), in our opinion, would be incon- sistent if the Legislature really intended payment under that section as compensatory interest. If it was intended as a compensation for loss of use of money, we would not have found the words 'without reasonable cause' in the sub-section as even if there is 'reasonable cause', the loss or deprivation will still be there. Interest by way of compensation would be payable irrespective of any cause because, whatever be the cause, in such cases, the assessee retains the amount which he ought to have paid to the State and, thus, the State is deprived of the use of that money. Therefore, making payment dependent upon reasonable cause and giving power to the Commissioner to remit whole or any part of the penalty, in our opinion, are clearly indicative of the true nature of payment contemplated by that sub-section. Considering the scheme of the provisions, it becomes clear that payment intended under that sub section is really by way of penalty and not by way of interest. We, therefore, respectfully agree with the view taken by the Bombay High Court in Jairamdas Bhagchand's case (supra). With respect, we are unable to agree with the view taken by the Karnataka High Court in Mandya National Paper Mill's case (supra).
It is no doubt true, as contended by the learned counsel for the assessee, that penalty is provided for non-payment of tax within time and such nonpayment is not made an offence, that the measure of penalty is made dependent upon duration of non-payment of tax and the rate at which penalty is to be paid is linked with the rate of interest which was in all probability prevalent at that time. Though measure of penalty is a relevant circumstance for determining the true nature of such payment, merely because penalty is measured in these terms, it cannot be said that, in all such cases, payment cannot be regarded as penalty and should be regarded as interest. Penalty is to be paid till default continues. Making of such a provision by the Legislature is not unknown. It appears to us that to make the provision of penalty reasonable, it has been provided that penalty shall be payable for the period for which default continues. For the same reasons, it appears to us that it is made payable at certain percentage of the amount of tax due as in the case of interest. Therefore, these two factors which are heavily relied upon by the learned counsel for the assessee cannot, in our opinion, persuade us to take the view that the true nature of payment to be made under section 45(5) is that it is interest and not penalty.
For the reasons stated above, we are of the opinion that the Tribunal was right in holding that additional payment of Rs. 28,843 made under section 45 was made for infraction of the law and was, therefore, not allowable expenditure.
6. In the result, the question referred to us is answered in the affirmative, that is, against the assessee and in favour of the revenue. There will be no order as to costs.