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TMI Blog1972 (1) TMI 11X X X X Extracts X X X X X X X X Extracts X X X X ..... bunal was justified in holding that the sum of Rs. 97,021 was an allowable deduction?" There is no dispute as to facts which lie in a short compass. The company which will hereafter be referred to as the assessee is the Upper Doab Sugar Mills Ltd., Shamli. It derives income from manufacture and sale of sugar, distillery products, power alcohol and spirit. During the previous year, the company had besides one sugar mill, two distilleries, one at Shamli and the other at Pilkbani. During that year the assessee paid cane cess to the tune of Rs. 12,53,059 and cane purchase tax amounting to Rs. 16,66,890. Over and above these payments a penalty of Rs. 97,028.04 was paid on delayed payments of the cess and purchase tax. It was claimed that the payments were made in accordance with the instructions contained in a letter, dated 7th October, 1959, from the Deputy Secretary to the Government of Uttar Pradesh. During the course of assessment proceedings the assessee claimed deduction of the amount of penalty but both the Income-tax Officer and the Appellate Assistant Commissioner held against it and the amount was disallowed. The reason given was that the penalty was levied for the failure t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and exclusively laid out for the purposes of business of the assessee within the meaning of section 10(2)(xv) of the Act and hence the fine paid by the assessee was not an allowable deduction. It was also observed that the expenses which are permitted as deductions are only those as are made for the purposes of carrying on the business, i.e., that which enable the person concerned to carry on and earn profit in that business. In John Moore v. Stewarts & Lloyds Ltd. Lord Pearson observed at page 507 that the statute did not require the party claiming deduction to show that any profit was in fact earned by the expenditure in question. In Hughes v. Bank of New Zealand, Lord Thankerton observed at page 644 that "expenditure in course of the trade which is unremunerative is none-the-less a proper deduction if wholly and exclusively made for the purposes of the trade. It does not require the presence of a receipt on the credit side to justify the deduction of an expense." The real test as was observed by Viscount Cave L.C. in Atherton v. British Insulated & Helsby Cables Ltd. is that a sum of money expended not of necessity and with a view to a direct and immediate benefit to the trade ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; it may take in not only the day to day running of a business but also the rationalisation of its administration and modernisation of its machinery; it may include measures for the preservation of the business and for the protection of its assets and property from expropriation, coercive process or assertion of hostile title ; it may also comprehend payment of statutory dues and taxes imposed as a precondition to commence or for the carrying on of a business ; it may comprehend many other acts incidental to the carrying on of the business. However wide the meaning of the expression may be, its limits are implicit in it. The purpose shall be for the purpose of the business, that is to say, the expenditure incurred shall be for the carrying on of the business and the assessee shall incur it in his capacity as a person carrying on the business. In Raman and Raman Ltd. v. Commissioner of Income-tax, the learned judges of the Madras High Court held that the test to find out whether a particular expenditure is wholly or partly justified is not to see whether it was necessary, nor to see whether the officer, if he were to do the business himself, would incur it to the extent to which i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Mahalakshmi Sugar Mills Ltd. (Income-tax Reference No. 40 of 1971) decided on 25-10-1971. Prithvi Raj J., who wrote the judgment (Hardy C.J. concurring), observed : "But, in the case before us what is to be seen is whether the assessee by infringing the provisions of the statute and not depositing the cess in time whereby penal interest was imposed on him could claim that the amount deposited by way of penal interest was in any manner closely related to the assessee's business as a result whereof the expenditure incurred by way of penal interest could be said to be laid out or expended wholly or exclusively for the purpose of the assessee's business. We are unable to answer the question in favour of the assessee as the origin of the liability flows from a statute and in meeting his liability of depositing the penal interest it cannot be said that the assessee was laying out or expending the amount wholly and exclusively for the purpose of his business." It is no doubt true that in the case decided by this court, the Bench was concerned with payment of penal interest but it appears to us that the same consideration would also apply to payment of penalty which was imposed on the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... person, (a) from questioning in accordance with the provisions of any State Act and rules made thereunder the assessment of any cess for any period, or (b) from claiming refund of any cess paid by him in excess of the amount due from him under any State Act and the rules made thereunder." Counsel for the assessee referred to the definition of "cess" as given in section 2(a) of the Validating Act which has already been reproduced above and submitted that in the Validating Act, 'cess' meant 'cess' payable under any State Act and included any sums recoverable under any such Act by way of interest or penalty. According to the learned counsel, the words "interest" or "penalty" therefore, formed part of the term "cess" and when therefore the assessee paid in addition to what was earlier described as "cess", he also paid interest and penalty in addition to cess. In the State Act the word "cess" was not defined. All that section 3 of the State Act said was that the State Government may by notification in the official gazette impose cess not exceeding four annas per maund on the entry of the cane into the premises of a factory for use, consumption or sale therein. It was under sub-section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... became liable to payment of interest and in some cases also to pay penalty. The cess and also the interest and/or penalty were imposed, assessed or collected before the third day of February, 1961. On 13th December, 1960, the Supreme Court delivered its majority judgment. The result was that the entire amount of cess, interest and/or penalty that had been collected by the State Government had to be refunded. The President therefore passed an Ordinance validating the recovery of the cess, interest and/or penalty and this Ordinance was replaced by Parliament by the Validating Act which mentioned the 3rd day of February, 1961, as the deadline and provided that cess, interest and/or penalty that had been imposed, assessed or collected in accordance with law, as if the provisions of the State Act and of notifications, orders and rules issued or made thereunder, in so far as such provisions related to the imposition, assessment and collection of such cess had been included in and formed part of section 3 of the Validating Act and that section should be deemed to have been in force at all material times when such cess was imposed, assessed or collected. The deeming provision in section 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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