1. V. G. OAK, C. J.-The question for consideration in this income-tax reference is whether penalty paid under subsection (5) of section 3 of the U. P. Sugarcane Cess Act, 1956 (hereafter referred to as the "Cess Act"), is a permissible deduction under section 10(2)(xv) of the Indian Income-tax Act, 1922.
2. The Mahabir Sugar Mills (Private) Ltd. Is the assessee. It is a private limited company. It used to run a sugar mill. The assessee used to purchase sugarcane. 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 bad, therefore, to pay a sum of Rs. 14,664 as penalty under subsection (5) of section 3 of the Cess Act. The assessee claimed this sum of Rs.
3. 14,664 as a permissible expense and commercial loss. This claim was disallowed by the Income- tax Officer. The assessee appealed and succeeded. The Appellate Assistant Commissioner held that the sum of Rs. 14,664 ought to be accepted as a permissible expendi--ture under section 10(2)
(xv) of the Indian Income-tax Act, 1922. The Department appealed to the Income-tax Appellate Tribunal, Allahabad. The appeal was allowed. The Tribunal reversed the decision of the Appellate Assistant Commissioner and restor--ed the decision of the Income-tax Officer. At the instance of the assessee the Income-tax Appellate Tribunal has referred the following question to this Court: "Whether, on the facts and fn the circumstances of the case, the sum of Rs. 14,664 paid as penalty under section 3(5) of the U. P. Sugarcane Cess Act, 1956, on the arrears of sugarcane cess is an allowable deduction in computing the profits of the assessee?"
4. Sections 3 and 4 of the Cess Act have been quoted in the statement of the case and the appellate order of the Tribunal, Cess is imposed under subsection (1) of section 3 of the Cess Act. Subsection
(2) of section 3 lays down that the cess imposed under subsection (1) must be paid within the prescribed time. Subsection (3) provides for charging interest on cess not paid within the prescribed time. Subsection (5) of section 3 states: "Where any person is in default 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 percent. Thereof shall by way of penalty be recovered from the person liable to pay the cess."
5. Section 4 of the Cess Act lays down that a person making default in the payment of cess becomes criminally liable.
6. " . . . . . An expenditure is not deductible unless it is a commercial loss in trade and a penalty imposed for breach of the law during the course of trade cannot be described as such. If a sum is paid by an assessee conducting his business, because in conducting it he has acted in a manner which has rendered him liable to penalty, it cannot be claimed as a deductible expense. It must be a commercial loss and in its nature must be contemplable as such. Such penalties which are incurred by an assessee in proceedings launched 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 loss 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 . . . . . No expense which is paid by way of penalty for a breach of the law can be said to bean amount wholly and exclusively laid for the purpose of the business."
7. Mr. P. N. Pachauri appearing for the assessee points out that section 3 of the Cess Act provides for charging interest and imposing penalty. He urged that liability to pay interest and liability to pay penalty have got the same character. It was further pointed out that the company was not in a position to pay the cess within the prescribed time. The company might have had its difficulties.
8. But the fact remains that penalty has been imposed under subsection (5) of section 3 of the Cess Act. Subsection (2) of section 3 of the Cess Act required the company to pay the cess within the prescribed time. Penalty was imposed for its failure to pay cess within the prescribed time. The default also rendered the company liable to prosecution under section 4 of the Cess Act.
9. As explained by the Supreme Court in the case of Haji Aziz and Abdul Shakoor Brothers, 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 of Rs.
10. 14,664 was not a permissible deduction under section 10(2)(xv) of the Indian Income-tax Act, 1922.
11. We answer the question referred to this Court in the negative. The Commissioner of Income-tax will get his costs of the reference which we assess at Rs. 200.