Divan, C.J.
1. In this case, at the instance of the revenue, the following four questions have been referred to us by the Tribunal :
'(1) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the payment of betterment charges to the Ahmedabad Municipal Corporation under the provisions of the Town Planning Act, 1954, made by the assessee was allowable as deduction under section 37 of the Income-tax Act
(2) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law was allowable that the penalty of Rs. 9,700 paid for infringement of customs laws was allowable as business expenditure
(3) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the payment of damages for delay in payment of provident fund contribution was allowable as business expenditure
(4) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in allowing the carry forward of the development rebate of Rs. 3,81,492 in respect of the assessment year 1966-67, though reserve created for that purpose fell short of the required amount, but by treating the excess of the reserve created for the assessment year 1967-68 as setting off the shortfall in the required reserve for assessment year 1966-67 ?'
2. The facts leading to this reference are as follows. We are concerned in the present case with the assessment year 1967-68. The assessee is a limited company and manufactures cotton textiles and sells the same. Before the Income-tax Officer it was urged, (1) that the expenditure incurred on payment of betterment charges to the Ahmedabad Municipal Corporation should be allowed as admissible expenditure in computing the assessable income of the assessee. It was urged, (2) that the amount of Rs. 9,700 paid by way of penalty of infraction of customs laws should be allowed as business expenditure; (3) that an amount of Rs. 4,100 paid by way of penalty for delay in making payment of provident fund contribution of Rs. 82,033 for the period from August, 1965, to October, 1965, should be allowed as business expenditure; (4) that the development rebate of Rs. 3,81,492 which included the development rebate of Rs. 72,125 being cost of electric fittings, in respect of assessment year 1966-67, should be allowed in the year of assessment, that is, 1967-68. It was claimed on behalf of the assessee that no reserve was created in respect of electric fittings of Rs. 74,125 in the year of installation and hence of the required reserve, but since the reserve created in respect of assessment year 1967-68 was in excess of the required for that year, such excess being more than the shortfall of the reserve relating to the assessment year 1966-67, full development rebate for the year 1966-67 should be allowed. The Income-tax Officer rejected all the four contentions. When the matter was carried in appeal by the assessee, the Appellate Assistant Commissioner confirmed the order of the Income-tax Officer regarding the betterment charges, regarding payment of penalty for infringement of customs laws and payment of penalty for delay in payment of provident fund contribution. However, as regards development rebate, the Appellate Assistant Commissioner held that the Income-tax Officer ought to have allowed development rebate of Rs. 3,81,492 by treating the excess of development rebate reserve created for assessment year 1967-68 as setting off the shortfall in the amount of the required reserve in respect of the assessment year 1966-67. Against the decision of the Appellate Assistant Commissioner, appeals were filed both by the assessee and the revenue. The Tribunal held that the betterment charges should be treated as admissible as business expenditure. As regards the payment of penalty of Rs. 9,700 for infringement of customs laws, the Tribunal held that the penalty was admissible as business expendi ture. As regards the payment ofpenalty or damages under the Provident Funds Act for late payment of the provident fund dues, the Tribunal held that that amount was also admissible as business expenditure. As regards the development rebate the Tribunal confirmed the order of the Appellate Assistant Commissioner by treating the excess of development reserve in the year 1966-67. Thereafter, at the instance of the revenue the four questions set out hereinabove have been referred to us.
3. As regards question No. (1), the point sought to be canvassed therein is now covered by a decision of this Bench delivered in Income-tax Reference No. 9 of 1974, decided by us on November 10, 1975. For the reasons stated by us in that judgment, it must be held that the payment of betterment charges to the Ahmedabad Municipal Corporation under the provisions of the Bombay Town Planning Act,1954, is not allowable as a deduction under section 37 of the Income-tax Act, 1961 and hence question No. (1) referred to us in the present case must be answered in the negative and against the assessee, that is, in favour of the revenue.
4. Similarly, we find that question No. (4) referred to us in now covered by a decision of this High Court in Additional Commissioner of the Income-tax v. Shri Subhlaxmi Mills Ltd. It has been there held that by virtue of the Explanation of section 34(3)(a) of the Income-tax Act, 1961, with retrospective effect, the deduction is not to be denied by reason only that the amount debited to the profit and loss account of the relevant previous year and credited to the reserve account exceeds the amount of the profit of such previous year as shown in the profit and loss account and, therefore, irrespective of the result of the profit and loss account as shown by the books of the assessee, the reserve fund can be credited merely by book entires, that is,by debiting the amount of the reserve to the profit and loss account of the relevant previous year and crediting the amount to the reserve account. The debiting of the profit and loss account must be made before the profit and loss account is closed, that is, entries should be made regarding the reserve at the time of making up the profit and loss account. The legislature has clearly indicated that the assessee must ordinarily be allowed the benefit if development rebate as a deduction in respect of the previous year in which the ship was acquired or the machinery or plant was installed and this can be done only if the profit and loss account, before it was finally made up, shows the necessary debit entry for purposes of creation of the reserve and the corresponding credit entry for the reserve account. If this is not done, the condition for getting the benefit of development rebate will not be satisfied and development rebate cannot be allowed. In view of this decision in Additional Commissioner of Income-tax v.Shri Subhlaxmi Mills Ltd. It is obvious that in the instant case the development rebate reserve was not created in the year of installation so far as the relevant portion of the machinery was concerned and hence the development rebate in respect of that particular item was not allowable. Question No. (4) is, therefore, answered in the negative and against the assessee and in favour of the revenue though the point on which the question is now being decided was not presented before any of the authorities until now.
5. We will now turn to question Nos. (2) and (3) which now survive and in both cases the main question to be considered is, what is the nature of the amount which was demanded from the assessee, in one case by the customs authorities and in the other case by the provident fund authorities. So far as the customs authorities are concerned, the order passed by the Deputy Collector of Customs, Bombay, on June 18, 1966, has been brought on the record of this reference as exhibit I, and it shows that certain items of spare parts for powerlooms which had been installed by the Ahmedabad Jaya Bharat Cotton Mills Ltd., Ahmedabad (that being the name in which the assessee-company was functioning at the relevant time), were not covered by the specific endorsement for the importation of those spare parts on the face of general licences which had been issued in favour of the assessee. The licences which were produced before the customs authorities were general licences without specific endorsement to cover the import of loom spares and the spares imported were not as per list 'B' of appendix 50 and according to the customs authorities these licences were not valid to cover the goods imported. The customs authorities held that as the importers were not in possession of a valid licence, the importation contravened the provisions of section 111(d) of the Customs Act 1962, read with section 3 of the Imports and Exports (Control) Act, 1947, and after calling upon the assessee to show cause why penal action should be taken against them under section 112 of the Customs Act, 1962, and goods confiscated under section 111(d) of the Customs Act, ultimately it was ordered by the Deputy Collector of Customs that the offending goods of the value of Rs. 9,734 should be contiscated under section 111(d) of the Customs Act, 1967. However, the Deputy Collector of the Customs gave an option to the assessee under section 125 of the Customs Act to pay in lieu of such confiscation, a fine of Rs. 9,700 and clear the goods for home consumption. This option was to be exercised (sic) from the date of order or within such extended period as may be allowed on the good and sufficient cause being shown to the satisfaction of the adjudicating authority. It appears that the assessee paid the fine of Rs. 9,700 and cleared the goods for home consumption. Thereafter, it has been contended that this amount of Rs. 9,700 should be allowed as a business expenditure.
6. Under section 111 of the Customs Act, 1962, it has been provided that the goods falling within one or the other clauses of section 111 when brought from a place outside India shall be liable to be confiscated and clause (d) of section 111 refers to goods which are imported or attempted to be imported or are brought within the Indian customs waters for the purpose of being imported, contrary to any prohibition imposed by or under the Act or any other law for the time being in force. Under the Imports and Exports (Control) Act, 1947, import of any article into India without necessary import licence is prohibited and that is why under section 111(d) the spare parts for the looms which were not covered by the relevant licence were held liable to confiscation. Under section 125 of the Customs Act, 1962, it has been provided that whenever confiscation of any goods is authorised by the Customs Act, the officer adjudging it may, in the case of any goods, the importation or exportation whereof is prohibited under the Act or under any law for the time being in force, and shall, in the case of any other goods, give to the owner of the goods an option to pay in lieu of confiscation such fine as the said officer thinks fit. In the instant case the adjudicating authority was not bound to give to the assessee an option to pay fine in lieu of confiscation but he exercised the discretion under the first part of section 125(1) of the Customs Act and gave the assessee option of paying the fine in lieu of confiscation and the amount of fine was Rs. 9,700. The main question that we have to consider is, whether in view of the decision of the Supreme Court in Haji Aziz and Abdul Shakoor Bros. v. Commissioner of Income-tax, the amount of Rs. 9,700 paid as fine in lieu of confiscation of the goods can be claimed as a business expenditure. It is true, as pointed out by the learned Advocate-General appearing for the assessee, that the main controversy before the Supreme Court in Haji Aziz and Abdul Shakoor Bros. v. Commissioner of Income-tax was regarding the allowability of such expenditure as a deduction under section 10(2)(xv) of the Indian Income-tax Act, 1962, corresponding to section 37(1) of the Income-tax Act, 1961. In that case also the item of expenditure which was under consideration before the Supreme Court was the amount paid to the customs authorities in lieu of confiscation. The facts of the case were that the assessee concerned carried on the business of importing dates from abroad and selling them in India. The assessee 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 by steamer were confiscated by the customs authorities under section 167 of the Sea Customs Act which was then in force and the assessee being given the option under section 183 to that Act to pay a fine in lieu of confiscation, paid the fine and had the dates released. In computing its profits the assessee sought to deduct the amount paid as fine as an allowable expenditure under section 10(2)(xv) of the Indian Income-tax Act, 1922. The Supreme Court held 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 out for the purpose of the business of the assessee within the meaning of section 10(2)(xv) of the Income-tax Act, and the fine paid by the assessee was not allowable deduction under the section. However, it must be pointed out that while discussing the law on the point, Kapur J., delivering the judgment of the Supreme Court, has stated the legal position on a review of the authorities as follows :
'A review of these cases shows that expenses which are permitted as deductions are such as are made for the purpose of carrying on the business, i.e., to enable a person to carry on and earn profit in that business. It is not enough that the disbursements are made in the course of or arise out of or concerned with or made out of the profits of the business but they must also be for the purpose of earning the profits of the business. As was pointed out in von Glehn's case, an expenditure is not deductible unless it is a commercial loss in trade and 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 contemplate 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 loss 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....... Can it be said that a penalty paid for an infraction of the law, even though it may involve no personal liability in the sense of a fine imposed for an offence committed, is wholly and exclusively laid for the business in the sense as those words are used in the cases that have been discussed above In our opinion, 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 business. 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 purpose of earning the profits of such business'.
7. It is true, as the learned Advocate-General has pointed out, that ultimately even at the end of the passage which we have quoted, the Supreme Court has indicated that they were deciding the point with reference to the provisions of section 10(2)(xv) of the Act of 1922 and not to section 10(1) equivalent to section 28(i) of the Act of 1961. However, the portion which we have underlined above clearly indicates that penalty incurred by an assessee in proceedings launched against him for a infraction of the law cannot be considered to be a commercial loss and if it is not a commercial loss, it cannot be claimed while making up the profit and loss account of the firm. It is well-settled by a series of decisions of the Supreme Court that even though a particular item of expenditure may not fall within any one of the specific sections provided for deduction, from section 28 onwards, while calculating the profits and gains of business or profession and from the commercial point of view, that item of expenditure has to be taken into account and while making up the profit and loss account of a business, that item od expenditure may be allowed under section 28(i) because what is to be taxed is the profits and gains as understood in the ordinary commercial sense but the passage from the decision of the Supreme Court which we have extracted above clearly indicates that penalties incurred by an assessee in proceedings launched against him for an infraction of law are not commercial losses and they cannot be deducted since they fall on the assessee in some character other than that of a trader. Infraction of law is not a normal incident of the business, and, therefore, whatever has to be paid for an infraction of the law cannot be allowed as a commercial loss. In our opinion, these words in the passage set out by Kapur J. in Haji Aziz and Abdul Shakoor Bros. v. Commissioner of Income-tax clearly bring out the legal position regarding all such penalties.
8. It may be pointed out that in Commissioners of Inland Revenue v. Alexander von Glehn & Co., Ltd., the court of Appeal in England held that certain amount which had to be paid for infringement of the Customs (War Powers) Act, 1915, in England were not admissible deductions in arriving at the profits of trade for excess profits duty purposes. Lord Sterndale M.R. has observed at page 238 :
'It is perhaps a little difficult to put distinction into very exact language, but there seems to me to be a difference between a commercial loss in trading and a penalty imposed upon a person or a company for a breach of law which they have committed in that trading.'
9. Rowlatt J., against whose decision the matter was taken in appeal before the Court of Appeal, had followed his own earlier decision in Commissioners of Inland Revenue v. E.C. Warnes Co., Ltd. and it is held by Lord Sterndale M.R. that the decision in Commissioners of Inland Revenue v. E.C.Warnes & Co., Ltd., was correct. In E.C.Warnes case, the assessee company carried on the business of oil merchants and was sued for a penalty on an information by the Attorney-General under section 5(1) of the Customs (War Powers) Act, 1915, for breach of certain orders and proclamations relating to the requirements of the Board of Customs and Estate with respect to consignment of oil shipped by the company to proclamations relating to the requirements of the Board of Customs and Estate with respect to a consignment of oil shipped by the company to Norway. The action was settled by consent on the agreement of the company to pay a mitigated penalty of Pounds 2,000,such sum to cover the costs of the Crown, and on all imputations as to the company's moral culpability being withdrawn, and judgment was entered for the crown accordingly. In defending the proceedings, the company incurred legal costs amounting to Pounds 560 18s. 10d. On these facts Rowlatt J. held that the mitigated penalty and costs were not a loss connected with and rising out of the company's trade within the meaning of rule 3, Case 1, Schedule D, Income Tax Act, 1842, and that they were, therefore, not deductible in arriving at the profits of the company's trade for excess profits duty purposes. While deciding this case in E.C.Warnes & Co., Ltd. Case, Rowlatt J., following the earlier decision of the House of Lords in Strong& Co., of Romsey Ltd. v. Woodifield, where it was observed that it is impossible to frame any formula which shall describe what is a loss connected with or arising out of a trade, observed :
'That statement I adopt, and I am not sure that I gain very much by going through a number of analogies; but it seems to me that a penal liability of this kind cannot be regarded as a loss connected with or arising out of a trade. I think that a loss connected with or arising out of a trade must, at any rate, amount to something in the nature of a loss which is contemplable, and in nature of a commercial loss. I do not intend that to be an exhaustive definition, but I do not think it is possible to say that when a fine, which is what it comes to, has been inflicted upon a trading body, it can be said that that is ' a loss connected with or arising out of' the trade within the meaning of this rule. As I say, it is impossible to say what is such a 'loss', but I have a clear view that this is not, and I can say no more than that.'
10. It must be pointed out that in Haji Aziz and Abdul Shakoor Bros. case Kapur J., speaking for the Supreme Court, had considered the English decisions in Strong & Co., of Romsey Ltd. v. Woodifield and Commissioners of Inland Revenue v. Alexander von Glehn & Co. and actually the passage which we have quoted above refers to E.C. Warnes & Co., Ltd's case and culled out the legal principle from that decision.
11. In view of the decision in Haji Aziz and Abdul Shakoor Bros. v. Commissioner of Income-tax it is not possible for us to accept the contention urged on behalf of the assessee that any amount paid by way of penalty in lieu of confiscation of goods to the customs authorities can be claimed as a deduction under section 28(i) of the Act of 1961 corresponding to section 10(1) of the Act of 1922. The reason is that this is not a commercial loss at all and cannot be said to be expenses for the purpose of enabling the assessee to carry on and earn profit in that business. Though such expenditure may be connected with the business, it is not really incidental to the business itself or as Rowlatt J. has said in E.C. Warnes & Co. Ltd., case 'not a loss connected with or arising out of the trade'. Even if the wider category or the more general category covered by section 28(i) as explained by the Supreme Court in Badridas Daga v. Commissioner of Income-tax is to be considered, it must be something in the nature of a loss which is contemplated and in the nature of a commercial loss. Since the Supreme Court has said that the penalty paid to the customs authorities is not a commercial loss, it cannot be claimed as a deductible expenditure under section 28(i) of the Income-tax Act, 1961. This is the position which emerges from an examination of the decision of the Supreme Court in Haji Aziz and Abdul Shakoor Bros. v. Commissioner of Income-tax.
12. However, it was urged by the learned Advocat-General, relying on the decision of the Bombay High Court in Commissioner of Income-tax v. Pannalal Narottamdas & Co., that the sum of Rs. 9,700 was part of the cost of the goods imported by the assessee and should be allowed as such business expenditure. In the case decided by the Bombay High Court in Commissioner of Income-tax v. Pannalal Narottamdas & Co. the assessee in the course of its business purchased bills of lading and other shipping documents from certain parties in respect of some consignments of goods imported by them from a foreign country. When the goods arrived in India and were sought to be cleared through customs by the assessee on the basis of the documents purchased by it, it was found that the imports were unauthorised and the goods were liable to be confiscated and a penalty was liable to be imposed under section 167(8) of the Sea Customs Act. The assessee paid an amount of Rs. 31,302 was deductible expenditure in the relevant year of account. The Tribunal in that case found that the assessee had purchased the documents of title in good faith and had paid consideration thereon and thereafter it had to pay the additional penalties in order not to lose the goods which had become its property. In the circumstances the penalty which was paid by the assessee was regarded as part of the cost of the goods imported by it and, accordingly, a proper deduction under section 10(1) of the Act of 1922. The High Court on these facts held that, on the facts and circumstances of the case, the actual cost of the goods to the assessee was not only what it had paid to the importers but in additon thereto what it had to pay by way of penalty in order to save the goods from being confiscated and lost to it. The penalty paid by it could, therefore, be regarded as part of the cost of the goods to it. It can also be regarded as an amount expended by it wholly and exclusively for the purposes of the business, because unless the said amount was expended, the goods could not have been saved from confiscation. V. S. Desai J., delivering the judgment of the Division Bench, had observed at page 672 :
'Under section 10(1) of the Indian Income-tax Act, tax is made payable in respect of the profits or gains of business. Profits or gains of business would be the excess of the sale price over the cost price and in determining the profits or gains, therefore, the cost has to be deducted from the proceeds realised on sale of the goods. On the facts and circumstances of the present case, the actual cost of the goods to the assessee was not only what it had paid to the importers, but in addition thereto what it had to pay by way of penalty, in order to save the goods from being confiscated and lost to it. The penalty paid by it could, therefore, be regarded as part of the cost of the goods to it. It can also be regarded as an amount expended by it wholly and exclusively for the purposes of the business, because unless the said amount was expended, the goods could not have been saved from confiscation. It may be pointed out that, in cases where the penalty has to be incurred because of the fault of the assessee himself, as for instance, for the reason of his having carried on his business in an unlawful manner or in contravention of certain rules and regulations, the penalty paid by the assessee for such conduct thereof, could not be regarded as wholly laid out for the purpose of the business, because the incurring of the said expenses has not been necessitated by the business but by the conduct of the assessee in trying to carry out the business in an unlawful manner (see Haji Aziz and Abdul Shakoor Bros. v. Commissioner of Income-tax). In the present case, however, on the finding of the Tribunal, the penalty has been imposed not for the fault of the assessee but he had to bear the same for the purpose of getting his goods released from the customs authorities. In the present case, therefore, the expenses incurred by the assessee could be regarded as wholly and exclusively incurred for the purpose of his business.'
13. With great respect to the learned judges of the Bombay High Court who decided the case of Commissioner of Income-tax v. Pannalal Narottamdas & Co., we are unable to agree with their reasoning. In our opinion, in view of the clear cut observations of the Supreme Court in Haji Aziz and Abdul Shakoor Bros. v. Commissioner of Income-tax, before we consider the question whether a particular amount is to be deducted as a commercial loss, that amount must be an item of commercial loss and the Supreme Court has clearly stated approving the decisions of the Court of Appeal in England in von Glehn's case, that any amount which is paid by way of penalty for infraction of law cannot be considered to be a commercial loss. If it is not an item of commercial loss, it cannot be said to be an item which is to be deducted before arriving at the profits and gains of a particular business and it is only the profits and gains of the busniess arrived at from a commercial point of view which can be taxed under section 10(1) of the Act of 1922, equivalent to section 28(i) of the Act of 1961. With utmost respect, therefore, to the learned judges of the Bombay High Court who decided this case in Commissioner of Income-tax v. Pannalal Narottamdas & Co., we hold that this item of Rs. 9,700 cannot be claimed as a deduction either under section 28(i) or under section 37(2). To be fair to the learned counsel for the assessee, he has not urged before us that the item should be treated as deductible allowance under section 37(1) of the Act but all that he has been contending for is that it should be treated as a deductible allowance under section 28(i) of the Act of 1961. He has urged before us that the assessee here is not a smuggler, but is an actual consumer of imported goods and all that has happened was that a technical breach came to be committed when spares for consumption were imported under general licences not specifically endorsed for importation of those particular spare parts for looms. He contended before us that looking to the nature of the infraction of law, we should treat it as cost falling under section 28(i) of the Act. However, in view of the language used by the Supreme Court in connection with these penalties payable for infraction of the law, we are unable to accept the contention of the learned Advocate-General.
14. We find that in J. S. Parkar v. V. B. Palekar, Tulzapurkar J., to whom the matter was referred on difference between Deshpande and Mukhi JJ., has taken a view similar to the view that we are taking in the instant case. He held that before any loss can be claimed as a deductible loss, it must be a trading loss or commercial loss arising out of carrying on of business or it must be incidental to the business and such loss must also fall on the assessee in his character as a trader. He held that where the property obtained out of the smuggling business is confiscated by the customs authorities, the loss consequent upon confiscation of goods for infraction of law suffered by him must be regarded as loss falling upon him in some character other than that of a trader. He again claimed deduction while computing his business income under section 28. It may be pointed out that in this case of J. S. Parkar v. V. B. Palekar, the earlier decision of the Bombay High Court in Commissioner of Income-tax v. Pannalal Narottamdas & Co., was not referred to at all either at the Bar or in the course of the judgment.
15. In Soni Hinduji Kushalji & Co. v. Commissioner of Income-tax, the Andhra Pradesh High Court has held that when a claim for deduction of a trading or commercial loss is made by an assessee, the loss must be one that springs directly form the business of trade which the assessee carries on or is incidental to the business that he carries on and not every sort or kind of loss which has absolutely no nexus or connection with his trade or business. It was held by the Andhra Pradesh High Court that if the customs authorities make an order of confiscation of smuggled goods under the Sea Customs Act, it is only a proceeding in rem. A proceeding in rem, in the strict sense of the term, is an action taken directly against the property and even if the offender is not known the customs authorities have the power to confiscate the contraband gold. Therefore, by no process of reasoning can the confiscation of the contraband gold by the customs authorities be said to be a trading or commercial loss connected with or incidental to the assessee's business in gold, silver and jewellery. It was further held that infraction or violation of the law is not a normal incident of a trade or business and, therefore, the penalty by way of confiscation of the contraband gold is not a commercial loss so as to be allowed as a permissible deduction.
16. In Laxshmi Narayan Gouri Shanker v. Commissioner of Income- tax, the Patna High Court has held that the expenses in the nature of penalty for infraction of law is not a commercial loss falling on an assessee as a trader. It is not incidental to the carrying on of business nor can it be said to be expended wholly and exclusively for carrying it on. In that case an assessee incurred a loss by reason of penalty for release of confiscated goods and personal penalty for infraction of the Sea Customs Act and claimed to deduct it as business expenditure. The assessee's action which resulted in the penalty was an isolated act and the Tribunal found that the action was not done in good faith. The Patna High Court on these facts held that, on the facts and circumstances of the case, the loss was not fit to be taken into account under section 10(1) of the Indian Income-tax Act, 1922, nor was it a permissible deduction by way of expenditure or disbursement under section 10(2)(xv) of the Act.
17. We find that the conclusion which we have arrived at independently on an examination of the authorities on the point is also the conclusion which has been reached by Tulzapurkar J. in J. S. Parker v. V. B. Palekar and Andhra Pradesh High Court and by the Patna High Court. We are thus fortified in the conclusion that we have arrived at. We regret that we cannot agree with the conclusion on the law point reached by the Bombay High Court in Commissioner of Income-tax v. Pannalal Narottamdas & Co. In view of this conclusion we answer question No. (2) in the negative, that is, against the assessee and in favour of the revenue.
18. Turning now to question No. (3), in order to appreciate the contentions regarding this point, it is necessary to refer to some of the provisions of the Employees' Provident Funds and Family Act, 1952. Under section 6 of the Act, contribution which shall be paid by the employer to the fund and other matters may be provided for in the Scheme framed under the Act. Under section 8(a) any amount due from an employer in relation to an establishment to which any Scheme applies may, if the amount is in arrear, be recovered by the appropriate Government in the same manner as an arrear of land revenue. Section 14 of the Act provides for penalties and under section 14(2A) whoever contravenes or makes default in complying with any provision of the Act or of any condition subject to which exemption was granted under section 17 shall, if no other penalty is elsewhere provided by or under the Act for such contravention or non-compliance, be punishable with imprisonment which may extend to three months, or with fine which may extend to on thousand rupees, or with both. Section 14-B of the Act provides for power to recover damages and it provides that where any employer makes default in the payment of any contribution to the Fund, the Central Provident Fund Commissioner or such other officer as may be authorised by the Central Government by notification in the official Gazette, in this behalf, may recover from the employer such damages, not exceeding the amount of arrears, as the Commissioner or the officer may think fit to impose and the proviso is material :
'Provided that before levying and recovering such damages the employer shall be given a reasonable opportunity of being heard.'
19. As contemplated by the provisions of the Act, the Employees' Provident Funds Scheme, 1952, was framed by the Central Government in exercise of the powers conferred by section 5 of the Act and rule 76 of the Scheme is material for the purposes of this judgment. Under that rule, punishment for failure to pay contribution, etc., has been prescribed and it says that if any person fails to pay any contribution which he is liable to pay under the Scheme, he shall be punishable with imprisonment which may extend to six months or with fine which may extend to one thousand rupees, or with both. Thus, if an employer fails to pay the requisite amount of contribution to the provident fund in respect of the employees employed by him, he incurs double liability. He becomes liable to be tried and shall be punishable with imprisonment which may extend to six months or with fine which may extend to one thousand rupees, or with both. He also becomes liable under section 14-B to make payment of what are known as damages in addition to the contribution amount by the damages are not to exceed the amount of the arrears and the damages are being worked out in accordance with the particular sale notified by the Central Government. The question that we have to consider in the present case is as to what is the nature of the payment which the employer has to make when an order under section 14-B to pay the damages for making a default in the payment of contribution is passed. In this connection there is a decision of the Patna High Court in R.B.H.M. Jute Mills (Private) Ltd. v. Regional Provident Fund Commissioner, Bihar. The question before the Patna High Court in that particular case was whether the levying of these damages under section 14-B of the Provident Funds Act, 1952, amounted to double jeopardy and whether the guarantee of article 20, clause (2) of the Constitution, could be availed of. At page 52 of the report, Ramaswami C.J. has observed :
'On behalf of the petitioner Mr. P. R. Das addressed the argument that the imposition of damages under section 14-B by the appropriate Government is unconstitutional since there is a violation of the guarantee under article 20(2) of the Constitution that no person shall be prosecuted or punished for the same offence more than once. It was submitted on behalf of the petitioner that section 14-B deals with the same offence as rule 76, and the appropriate Government cannot legally impose punishment of damages upon the petitioner after he was prosecuted and punished under rule 76 of the Scheme for the same breach of the statutory obligation. The contention of the petitioner is that the infliction of damages by the appropriate Government under section 14-B is penal in its character. The opposite viewpoint was presented by the Government Pleader and it was contended that the amount of damages imposed under section 14-B is not penalty or punishment within the meaning of article 20(2) of the Constitution. In my opinion the amount of damages under section 14-B is penal in its character and is, therefore, tantamount to 'punishment' within the meaning of article 20(2) of the Constitution. The reason is that the amount of damages imposed under section 14-B is not transferred to the account of the provident fund of the employees who may be adversely affected. On the contrary, the amount is transferred to the general revenues of the appropirate Government. In other words, the infliction of the damages under section 14-B is not meant to provide compensation or redress to the employees whose interests may be injured. It is not meant to provide reparation to such employees and the quantum of damages imposed has no relation to the amount of loss suffered by the employees. I consider that the infliction of the damage under section 14-B is penal in its nature. It is a warning to employers in general not to commit a breach of the statutory rule. It is a documentum, as the Roman lawyers called it. The object of the legislature in enacting section 14-B is clearly to punish the recalcitrant employer and not to provide compensation for the employees. I consider that the expression 'damages' occurring in section 14-B is in substance a penalty imposed on the employer for the breach of the statutory obligation.'
20. It may be pointed out that the contention on behalf of the petitioner was rejected on the ground that there was no double jeopardy in view of the decision of the Supreme Court in Maqbool Hussain v. State of Bombay, but regarding the nature of the payment made under section 14-B, the Patna High Court was very clear that this is in the nature of a penalty. With respect, we agree with the reasoning of the learned judges of the Patna High Court because when payment is made, it is not in lieu of any penalty. Payment of damages does not exonerate the person from being tried in a criminal court. It is well-settled law that for one and the same action, different penalties under different provisions of the law may be incurred by one and the same individual, for example, when some person is knocked down and fatally injured as a result of rash and negligent driving, and offence punishable under section 304-A for causing death by rash and negligent act may be said to have been committed. At the same time an offence punishable under section 279 for the rash and negligent driving itself can be said to have been committed. In the same manner two different penalties have to be paid by the individual who makes late contribution. Now, one penalty is damages payable under section 14-B because the words are 'where an employer makes default in payment of any contribution' in proper time, he has to pay the damages under section 14-B. Therefore, the damages which are paid are for the default committed in contributing the provident fund dues in proper time. The same Act also exposes the employer concerned to an action in a criminal court where he can be tried and punished and where he is exposed to punishment which may extend to six months or fine up to one thousand rupees or with both as provided in rule 76 of the Scheme. The fact that one and the same action exposes the offender to two different penalties does not mean that only one out of the two is a penalty and the other is not. Under these circumstances, the contention urged on behalf of the assessee by the learned Advocate-General that in view of the clear provisions of rule 76, the amount of damages payable by the employer who commits default in making contributions in due time cannot be said to be a penalty, must be rejected. In any event it must be said that this amount has to be paid for an infraction of the law and in that sense it is a penalty. In connection with question No. (2) we have already observed that once the court comes to the conclusion that the particular amount was paid by way of penalty for infraction of the law, that amount is not a deductible expenditure either under section 37(1) of the Act of 1961 or under section 28(i) of the same Act. In view of that conclusion it necessarily follows that the amount of damages, namely, the sum of Rs. 4,700 paid for dealy in making payment of provident fund contribution cannot be allowed as a business expenditure. Before concluding with this aspect of the case we may point out that the Mysore High Court has followed the conclusion of the Patna High Court that the amount paid under section 14-B of the Provident Funds Act is a penalty and that decision is R. Fernandes v. State of Mysore.
21. Mr. Kaji, for the revenue, has referred us to several decisions not directly on the point but throwing some light on the question that we have to consider while dealing with this aspect of damages paid under section 14-B. In Commissioner of Income-tax v. Mahalaxmi Sugar Mills Ltd., the question was of penal interest paid for failure to pay cess on sugar cane in time. The same was the question before the Delhi High Court in Commissioner of Income-tax v. Upper Doab Sugar Mills Ltd. In Deoria Sugar Mills Ltd. v. Commissioner of Income-tax it was a question of penalty for non-payment of arrears of sugarcane cess and in Mahabir Sugar Mills P., Ltd. v. Commissioner of Income-tax, the question was also a question of penalty paid in respect of non-payment of arrears of sugarcane cess. Since we have come to our own independent conclusion in the light of the nature of the amount paid as damages, it is not necessary for us to refer to these different decisions which touch on the question before us only incidentally.
22. Under these circumstances we hold that the amount of damages paid for delay in the payment of provident fund contribution was not allowable as business expenditure and the Tribunal was, therefore, not justified in law in arriving at its conclusion on this aspect of the assessee's case. Question No. (3) must, therefore, be answered in the negative and against the assessee and in favour of the revenue.
23. In the light of the above discussion, we answer the questions referred to us as under :
Question No. (1). In the negative, against the assessee and in favour of the revenue.
Question No. (2). In the negative, against the assessee and in favour of the revenue.
Question No. (3). In the negative, against the assessee and in favour of the revenue.
Question No. (4). In the negative, against the assessee and in favour of the revenue.
24. The assessee will pay the costs of this reference to the Commissioner.