Law: Income Tax Act, 1961

Section: 37

Income-tax----Business expenditure---Sales tax---Raw materials used for purpose other than specified---Penalty---Comprises both elements of compensation and penalty--Amount paid to be bifurcated---Element of compensation to be allowed---Failure to comply with requirements of notice or to file return--¬Penalty---No element of compensation involved---Not allowable as deduction---Indian Income Tax Act, 1961, S.37(1)---Madhya Pradesh General Sales Tax Act, 1958, Ss.8(2), & 17(3)---[CIT v. Malwa Vanaspati and Chemical Co. Ltd. (1982) 135 ITR 221 reversed]. The amount that the assessee is required to pay under section 17(3) of the Madhya Pradesh General Sales Tax Act, 1958, is by reason of the fact that he has, without sufficient cause, failed to comply with the requirements of a notice or to furnish a return. The provision is intended to have penal consequences upon an assessee who fails to comply with the provisions of the statute without sufficient cause. There is no element of compensation involved in the payment under section 17(3) and the assessee is not titled to deduction thereof under section 37(1) of the Income Tax Act, 1961. Commissioner of Income-tax v. Malwa Vanaspati and Chemical Co. Ltd. (1982) 135 ITR 221 affirmed on this point. Where an assessee uses the raw material purchased at the lower rate of sales tax specified in section 8(1) of the Madhya Pradesh General Sales Tax Act, 1958, for a purpose other than that specified in that section, he has to pay an amount to be determined as stated in subsection (2) of that section. That amount cannot be less than the difference between the tax on the sale of such raw material at the full rate and the amount at the lower rate by reason of subsection (1). The amount to be paid by the assessee under section 8(2) comprises both the elements of compensation and penalty; compensation in so far as payment of tax at the full rate is obligatory; and something more up to 25 per cent. thereof as is determined by the Commissioner; to tile latter extent the amount would partake of the character of penalty. The amount payable under section 8(2) is allowable as business expenditure under section 37(1) of the Income Tax…

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