Commissioner of Income-tax Vs. Sutlej Cotton Mills Ltd. - Court Judgment

Excerpt:
- bhagabati prosad banerjee, j. 1. the tribunal has referred the following question of law under section 256(1) of the income-tax act, 1961, to this court :' whether, on the facts and in the circumstances of the case, the tribunal was justified in holding that the payment of rs. 10,778 under the emergency risks insurance act, 1971, for defaulted premium was not in the nature of penalty and it should, therefore, be allowed as business expenditure '2. in this proceeding, the assessment year involved is 1978-79 for which the relevant year of account is the year ended on march 31, 1978.3. the facts found by the tribunal as contained in the statement of case are as follows :' the assessee is a limited company. the assessment year involved is 1978-79, the relevant accounting period for which ended on march 31, 1978. in the course of assessment of the company for the assessment year 1978-79, the income-tax officer found that the company paid rs. 10,778 as shortfall of premium and rs. 1,353 as compounding fees for understating the insurable value of goods before the authorities of the emergency risks insurance. the company debited the said sum in its profit and loss account. but the income-tax officer was of the view that the sum of rs. 10,778 was in the nature of penalty and rs. 1,353 paid as compounding fees was not business expenditure. he, therefore, disallowed these two items.'4. the assessee appealed to the commissioner of income-tax (appeals) who confirmed the disallowance made by the income-tax officer.5. against the said order of the commissioner of income-tax (appeals), the assessee preferred a second appeal before the tribunal and the tribunal deleted both the disallowances by observing as under :'we find force in the submission of learned counsel for the assessee. a perusal of the copy of the ascertainment of the amount evaded by way of premium as made by the chief enforcement officer, emergency risks insurance, ahmedabad, copy of which is placed on record would show that the amount of rs. 10,778 was part and parcel of the liability to pay premium under the emergency risks insurance act, 1971, and, therefore, in our opinion, it could not be termed as a payment of penalty. the amount of rs. 1,353 was a payment by way of a further sum under sections 15/13 of the act for non-payment of the requisite premium and could not be said to be accretion of premium and regarded as an ordinary incident of business in view of the decision of the supreme court in the case of mahalakshmi sugar mills co, ltd. : [1980]123itr429(sc) and that of the allahabad high court in the case of j. k. cotton spinning and weaving mills co. : [1980]123itr911(all) . viewed thus, we delete the disallowance of rs. 12,131.'6. mr. a. c. moitra, learned advocate appearing on behalf of the revenue, relied on the decision of the supreme court in the case of haji aziz and abdul shakoor bros. v. cit : 1983ecr1942d(sc) in support of his contention that the amount of rs. 10,778 payable by the assessee under the provisions of the emergency risks insurance act, 1971, is a penalty and, therefore, not liable to be deducted. in this case, the supreme court considered the fact of payment of fines to release the goods after confiscation of the same by the customs authorities which were imported from abroad for selling them in india. in this connection, it was held by the supreme court that (headnote) :'if a sum is paid by an assessee in conducting his business because, in conducting it, he has acted in a manner which has rendered him liable to pay penalty, for an infraction of the law, it cannot be claimed as a deductible expense as it cannot be called a commercial loss incurred in carrying on his business. infraction of the law is not a normal incident of business.'7. on behalf of the applicant, a reference was made to the decision of the madhya pradesh high court in the case of simplex structural works v. cit : [1983]140itr782(mp) , wherein the high court considered the judgment of the supreme court in the case of haji aziz and abdul shakoor bros. : 1983ecr1942d(sc) and observed that (headnote) : 'if the amount of penalty is such an expenditure which the assessee would have been required to incur, even if he had not broken the law, such an expenditure cannot, in the true sense, be termed as penalty for an infraction of the law.' next, reliance was placed on the decision of the supreme court in the case of mahalakshmi sugar mills co. v. cit : [1980]123itr429(sc) , wherein the supreme court held that (headnote) : 'interest payable on an arfear of cess 'carries' interest, and if the cess is not paid within the prescribed period, a larger sum will become payable as cess. the enlargement of the cess liability is automatic under section 3(3). no specific order is necessary in order that the obligation to pay interest should accrue. the liability to pay interest is as certain as the liability to pay cess. as soon as the prescribed date is crossed without payment of the cess, interest begins to accrue. it is not a penalty, for which provision has been separately made by section 3(5) nor is it a penalty within the meaning of section 4 which provides for a criminal liability and a criminal prosecution. the penalty payable under section 3(5) lies in the discretion of the collecting officer or authority. in the case of penalty under section 4, no prosecution can be instituted unless, under section 5(1), a complaint is made by or under the authority of the cane commissioner or the district magistrate. in truth, the interest provided for under section 3(3) is in the nature of compensation paid to the government for delay in the payment of cess.'8. in the instant case, the tribunal found that the sum of rs. 10,778 was part and parcel of the liability to pay premium under the emergency risks insurance act, 1971. the assessee had to pay premium but it did not pay that and so there was a shortfall. this shortfall in the payment of premium was realised from the assessee. the tribunal took into consideration the order passed by the authority under the emergency risks insurance act, 1971, for the purpose of realising the shortfall and came to its decision. it observed that, on a perusal of the order passed by the chief enforcement officer, emergency risks insurance, ahmedabad, it was found that the sum of rs. 10,778 was part and parcel of the liability to pay premium under the emergency risks insurance act. in this case, what was realised was the shortfall in the premium. it was not paid in time. thereafter, an order was passed and, pursuant to that order, this shortfall was paid. in this particular case, there was no question of imposition of penalty for infraction of law and as such the said amount is allowable as business expenditure under section 37 of the income-tax act, 1961.9. we are of the view that the tribunal has correctly decided on this point. accordingly, the question of law referred in this case is answered in the affirmative and in favour of the assessee.10. there will be no order as to costs.suhas chandra sen, j. 11. i agree.