Law:

Section:

Section 37(1) of the Income-tax Act, 1961 [Corresponding to section 10(2)(xv) of the Indian Income-tax Act, 1922] - Business expenditure - Allowability of - Whether no expense which is paid by way of penalty for a breach of law can be said to be an amount wholly and exclusively laid for purpose of business - Held, yes - Whether, therefore, amount paid as penalty under section 3(5) of the U.P. Sugarcane Cess Act, 1956, on arrears of sugarcane cess was not a permissible deduction under section 10(2)(xv) of 1922 Act - Held, yes FACTS The assessee-company, which was running a sugar mill, used to purchase sugar cane. It had to pay cess to the Government under the Cess Act. Cess was assessed against the company in due course. The company did not pay the cess within the prescribed time. The assessee had, therefore, to pay certain amount as penalty under sub-section (5) of section 3 of the Cess Act. The assessee claimed this sum as a permissible expense and commercial loss. This claim was disallowed by the ITO. The assessee appealed and succeeded. The AAC held that the sum ought to be accepted as a permissible expenditure under section 10(2)(xv). On second appeal the Tribunal reversed the decision of the AAC and restored the decision of the ITO. On reference : HELD As explained by the Supreme Court in the case of Haji Aziz & Abdul Shakoor Bros. v. CIT [1961] 41 ITR 350 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 the business. The Tribunal was right in holding that the sum was not a permissible deduction under section 10(2)(xv) of 1922 Act. Note : Decision was in favour of the revenue. CASES REFERRED TO CIR v. Alexender Von Glehn & Co. Ltd. [1920] 12 Tax Cas. 232 (HL), Gabdulal Tulsiram, In re [1952] 21 ITR 330 (All.), Haji Aziz and Abdul Shakoor Bros. v. CIT [1961] 41 ITR 350 (SC), Indian Aluminium Co. Ltd. v. CIT [1967] 64 ITR 330 (Bom.), J.K. Cotton Spinning and Weaving Co. Ltd. v. CIT [1955] 28 ITR 78 (Bom.) and Sree Meenakshi Mills Ltd. v. CIT [1963] 49 ITR 156 (Mad.). JUDGMENT V.G. Oak, CJ.-The question for consideration in this income-tax reference is whether…

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