TMI Blog1974 (8) TMI 25X X X X Extracts X X X X X X X X Extracts X X X X ..... 28 of the Income-tax Act, 1961 ? (2) Whether, on the facts and in the circumstances of the case, the assessee was entitled to claim the admissible extra-shift allowance for double shift working at the full 50% of the normal depreciation in accordance with rule 8 of the Income-tax Rules, 1922, as applicable to the assessment years 1960-61 and 1961-62 and in accordance with the note appended to item III of Appendix I of rule 5 of the Income-tax Rules, 1962, read with the proviso to the said rule as applicable to assessment years 1962-63 and 1963-64, as if the sugar factory had worked normal as well as double, shifts throughout the relevant previous years ? and (3) (a) Whether there was evidence before the Tribunal to come to the finding of fact that there was no direct connection between the contribution of Rs. 43,051 made by the assessee to the Congress Parliamentary Board and the business of sugar factory carried on by the assessee ? (b) If the answer to question (a) be in the affirmative, whether on the facts and in the circumstances of the case the Tribunal is right in holding that the said contribution was not deductible in arriving at the, assessee's real business prof ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... these amounts as provided in section 10(2)(xv) of the Indian Income-tax Act, 1922, and section 37 of the Income-tax Act, 1961. In any case, the aforesaid amounts were commercial expenses which had to be taken into account in arriving at the taxable profit and gains of the assessee's business sought to be taxed under section 10 of the 1922 Act and section 28 of the 1961 Act. The Income-tax Appellate Tribunal repelled both the pleas raised on behalf of the assessee and held that the aforementioned expenditure was neither allowable as deduction under section 10(2)(xv) of the 1922 Act/section 37 of the 1961 Act, nor under section 10(1) of the 1922 Act/section 28 of the 1961 Act. The first question referred by the Tribunal relates merely to the assessee's claim for the deduction of the aforesaid expenditure under section 10(1) of the Indian Income-tax Act, 1922/section 28 of the Income-tax Act, 1961. It is now well-settled that under the head, "Profits and gains of business or profession", mentioned in section 10(1) of the Indian Income-tax Act, 1922/section 28 of the Income-tax Act, 1961, what is chargeable to income-tax is the profits and gains of business properly so called and n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the meaning of this rule ? " The aforesaid statement of law was approved in the case of Commissioners of Inland Revenue v. Alexander Von Glehn and Company Ltd. where the assessee paid a penalty of pound 3,000 and claimed the sum as deduction in arriving at its profits. The Special Commissioners found that the penalty and costs had been incurred by the assessee in the course of carrying on their trade, and were incidental thereto, and as such were admissible deductions. Rowlatt J., however, held it to be a non-deductible item. On appeal the judgment of Rowlatt J. was affirmed by the Court of Appeal. Lord Sterndale was of the opinion that it was immaterial whether technically the proceedings were criminal or not. The money that was paid was paid as penalty and it did not matter if in the information it was called a forfeiture. In this connection Lord Sterndale, at page 566, made the following observations : " During the course of the trading this company committed a breach of the law. As I say, it has been agreed that they did not intend to do anything wrong in the sense that they were willingly and knowingly sending these goods to an enemy destination ; but they committed a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ched 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 Toss 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 are permitted but not if they are merely connected with the business." These observations indicate that in the opinion of the Supreme Court, a disbursement made by an assessee by way of penalty for infraction of the law which infraction took place in connection with the assessee's trade or business, is still not a disbursement made in the capacity of a trader, i.e., with the object of earning profits. Such disbursement is really not incidental to the business itself and cannot be said ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t in making the payment of the cess, the officer or authority empowered to collect the cess may direct that in addition to the amount of the arrears and interest a sum not exceeding 10% thereof shall by way of penalty be recovered from the person liable to pay the cess." According to sub-section (7), any sum imposed by way of penalty under sub-section (5) shall be recoverable in the manner provided in sub-section (6), for the recovery of the arrears of cess. The scheme underlying section 2 clearly indicates that the penalty under sub-section (5) is levied not in connection with or in consequence of any trading activity but it is levied because a person contravenes the provisions of sub-section (2) of section 2 by not paying the cess imposed upon him under sub-section (1) within the prescribed time. In other words, the liability to pay the penalty under sub-section (5) is incurred for contravention of a statutory provision and as the defaulter violates the mandate of law and fails to discharge his public obligations. Accordingly, in the instant case, it cannot be said that the assessee incurred the liability to pay the penalty in connection with the running of its business, or th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Orissa case the penalty was levied under the contract itself. Learned judges pointed out that the real effect of the levy of penalty in that case was to reduce the price of rice and paddy supplied by the assessee. That disbursement was, therefore, made by the assessee under the trade contract itself. That was not a case where a penalty had been imposed for any infraction of a statutory provision. Any expenditure incurred by an assessee under a normal trade contract would surely be a commercial or trading expenditure. The case cited by the learned counsel for the petitioner, therefore, is distinguishable on facts. Learned counsel for the assessee also cited the case of Commissioner of Income-tax v. Birla Cotton Spinning and Weaving Mills Ltd. That, however, was a case where the question that arose for consideration was whether expenditure incurred by an assessee in engaging lawyers in proceedings before the Investigation Commission was an allowable deduction under section 10(2)(xv) of the 1922 Act. The court held that the earning of profits and payment of taxes are not isolated and independent activities of a business. These are continuous activities which take place from year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cond shift under rule 8. This court held that the factory having not worked for the full year was entitled to the claim of proportionate rebate and not to the full rebate as claimed. Following these decisions the second question referred to us has also to be answered in the negative and against the assessee. During the accounting year relevant to the assessment year 1963-64, the assessee paid a sum of Rs. 43,051 to the Congress Parliamentary Board. It claimed that this expenditure had to be allowed as deduction in computing its taxable profits, as the same had been laid out for its business. According to the assessee this expenditure had been incurred in order to protect its property and business from the evil forces of lawlessness and political chaos, which were expected to gain strength if, in the general election, the Congress party was not returned to power. The income-tax authorities disallowed this claim on the ground that there was no direct connection between the aforesaid contribution made by the assessee and the running of its business. It is obvious that according to the submissions made before the Income-tax Appellate Tribunal, the assessee contributed this amount wi ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
