Vildirect: IncomeTax-caselaws-1983-VIL-64-ITAT-CHD

1983-VIL-64-ITAT-CHD

Equivalent Citation: TTJ 018, 249,

Income Tax Appellate Tribunal CHANDIGARH

Date: 02.08.1983

SHADI SINGH KASHMIRA SINGH.

INCOME TAX OFFICER.

BENCH

Member(s) : S. K. CHANDER., F. C. RUSTAGI.

JUDGMENT

This appeal by the assessee is directed against the order of the CIT (A) dt. 19th September, 1981 relating to asst. yr. 1979-80. The issue before us is whether on the facts and in the circumstances of the case, the assessee is entitled to deduction of the sum of Rs. 26,445, as expenditure wholly and exclusively laid out for the purpose of the business.

2. For determination of this issue, the facts to be kept in focus are as under: The assessee is a registered firm constituted of six partners having license for running country liquor vends at Samrala for the accounting period relevant to the asst. yr. 1979-80. It had to pay an annual licence fee of Rs. 58,62,000, for this monthwise within the stipulated period on or before the dates fixed by the Excise Department. Under s. 36 (b) of the Punjab Excise Act, 1914, the authority granting any licence, permit or pass under this act, was vested with the powers of cancelling or suspending the licence, permit or pass issued if any duty or fee payable by the holder thereof be not duly paid. The assessee failed to pay some of the monthwise payments due and thereby incurred the applicability of s. 36(b) of the Act. However, in order to continue the business and avoid revocation or cancellation or suspension of the licence granted to the assessee, it paid Rs. 26,445, due to the default of non-payment of the stipulated amounts.

3. The return of income for the assessment year under appeal was filed declaring income of Rs. 2,04,481. During the course of assessment proceedings, the ITO noticed the debit of Rs. 26,445, made on account of the above mentioned payment and holding that it was penalty paid by the assessee did not allow the same as a deduction in computing the total income of the assessee. In appeal, his order was confirmed by the CIT (A) relying upon the ratio decidendi of the Punjab And Haryana High Court judgment in the case of Cineramas vs. CIT 1977 CTR (P&H) 145 : (1977) 110 ITR 762 (P&H).

4. Before us, the ld. counsel for the assessee submitted that under sub-s. (2) of s. 80 of the Punjab Excise Act, 1914, the cancellation or suspension of any licence, etc., under s. 36(a), (b) or (c) of this Act may be forgone or revoked by and at the sole discretion of the authority having power to cancel or suspend it on payment by the holder of such licence of such penalty as such authority may fix. He contended, however, that though the amount charged for forgoing to cancel the licence used in this sub-section of s. 80 is termed as penalty yet in essence it is not by way of punishment particularly when the payment is with regard to default committed u/s 36(b) of this Act. For this proposition, he placed reliance upon the judgment of the Punjab and Haryana High Court in the case of M/s Dwarka Dass & Co. vs. The Excise and Taxation Commissioner 1969 Current Law Journal 290 (P&H). He emphasised that the quantum of such penalty is linked with the approximate quantum of loss which the licensee may suffer in case the order cancelling the licence for the remaining period thereof is not revoked. It was thus contended that the critertion for levying so called penalty u/s 80(2) of this Act is the likely loss to be suffered by the assessee and it is not a damage paid by the assessee.

5. Referring to the judgment of the Punjab and Haryana High Court in the case of Cineramas vs. CIT 1977 CTR (P&H) 145 relied on by the ld. CIT (A), he contended that in that case there was dispute on penalty paid by the assessee and as such the ratio of that case was not applicable to the facts of the case of the assessee. It was argued that delay in payment of the monthwise instalments due was contemplable expense of the trade of the assessee and such payment was incidental to the carrying on of the trade of the assessee. The amount was paid to preserve the profit making apparatus. In view of this, the ratio decidendi of the Supreme Court judgment in the case of CIT vs. Delhi Safe Deposit Co. Ltd. (1982) 26 CTR (SC) 411 : (1982) 133 ITR 759 (SC) was clearly applicable to the facts of the case of the assessee. In nut shell, it was contended that the payment was made by the assessee as expenditure incidental to carrying on the business and to preserve the profit earning apparatus which made the expenditure as wholly and exclusively laid out for purpose of the business of the assessee and as such deductible in computation of the total income accruing and arising to the assessee therefrom.

6. The revenue supporting the orders of the authorities below reiterated its reliance on the judgment of the Punjab and Haryana High Court in the case of Cineramas referred to supra. It was further contended that the judgment in the case of Dwarka Dass & Co. Referred to supra, cited by the ld. counsel for the assessee is not applicable. It was contended that the case was also covered by the Supreme Court Judgment in the case of Haji Aziz and Abdul Shakur Brother vs. CIT (1961) 41 ITR 350 (SC). Reliance was also palced upon judgment of the Punjab and Haryana High Court at Simla in the case of CIT vs. Himalaya Rasin Turpentine Mfg. Co. (1953) 24 ITR 132 (Punj). The ld. departmental representative contended that the judgment of the Supreme Court in the case of Delhi Safe Deposits Co. Ltd. does not deal with the infraction of law and is hence not applicable to the facts of the case of the assessee. It was, therefore, contended that the assessee has not made out any case for an interference in the order of the CIT (A). The appeal may be dismissed.

7. However, in the rejoinder the ld. counsel for the assessee made a distinction between infraction of law liable to punishment and infringement of rules incidential to the carrying on of the business of the assessee and the payment thereof and contended that his submissions hold the field to enable the assessee to have the deduction of the sum in dispute in computing its total income.

8. We have given careful consideration to the rival submissions and we are of the considered opinion for the reasons that we record below that the assessee in entitled to the deduction of the disputed amount in computing the total income for the year under appeal. K.J. Aiyer's Judicial Dictionary, 8th Edition, 1980, defines 'penalty' as a sum payable as a punishment for a default or by way of securing the purpose of a collateral object. In Shrouds, Judicial Dictionary of Words and Pharses 4th Edition, by John S. James, published by Sweet and Maxwell Ltd. At page 1973, penalty is described as an ambiguous word. There are instances given of penalty in various statutes and related judicial pronouncements. Sec. 36(b) of the Punjab Excise Act, 1914 provides for cancellation or suspension of any licence by the authority granting such licence if any duty or fee payable by the holder thereof be not duly paid. It is important to note that this cancellation or suspension is for the default of not duly paying any duty or fee payable by the holder. The authority so empowered to cancel or suspend the licence, however, is also vested with the powers to forgo such cancellation or suspension at his sole discretion on payment by the holder of such licence of such penalty as such authority may fix. Therefore, the word 'penalty' in so far as the infraction of s. 36(b) of this Excise Act is concerned is for non-payment of duty or fee only. This payment of duty or fee is to enable an assessee to continue to have a licence without which the business cannot be carried on. In other words, licence is the basis or infrastructure or apparatus for the assessee to carry on the business. But this penalty does not connote punishment by way of pure infringement of any law unconnected and unincidental to the carrying on of the business of the assessee. The Hon'ble Punjab and Haryana High Court in the case of Dwarka Dass & Co. referred to supra has very clearly held that the penalty that can be imposed u/s 36(c) r/w s. 80(2) is not in the nature of punishment. With the observations when we refer back to the provisions of s. 36(c) of this Act, we find that the infringement u/s 36(c) is of more serious nature as it is related to any breach by the holder of a licence or by his servants or by anyone acting on his behalf with his express or implied permission of any of the terms and conditions of such licence. We observe a clear distinction between a simple non-payment of a licence fee by the licensee and a clear breach of the conditions of licence, in other words, violation of the statutory law as contained in s. 36(c). Therefore, if the breach of s. 36(c) and the payment thereof mentioned u/s 80(2) is not in the nature of punishment, the payment for not paying the duty or fee payable as mentioned in s. 36(b) of that Act is much less a punishment. This is merely a payment without which the assessee could not be able to continue the business.

9. The revenue brought in aid the ratio decidendi of the Supreme Court judgment in the case of Haji Aziz and Abdul Shakur Brothers vs. CIT (1961) 41 ITR 350 (SC) and the Punjab High Court judgment in the case of CIT vs. Himalaya Rosin Turpentine Mfg. Co. (1953) 24 ITR 132 (Punj) mentioned supra. However, we find that both these judgments were different on facts and different on the infringement of the law and the rules and regulations. These are, however. considered by the Punjab and Haryana High Court in the case of Cineramas vs. CIT 1977 CTR (P & H) 145 : (1977) 111 ITR 762 (P & H) on which the CIT(A) relied to support the ITO disallowing the claim of the assessee. The Hon'ble Punjab and Haryana High Court in the case of Cineramas has stated that penalties and damages paid in connection with infractions and breaches of law cannot be expenditure laid out or expended wholly and exclusively for the assessee's business. However, the court has in this very judgment held that all that is necessary is that the expenditure must be in some way connected with the trade and it must be an ordinary or contemplable incident of trade so as to bring it within the ambit of expenditure wholly and exclusively laid out for the purpose of the business considerations paid for the sole object of maintaining its business and profit earning apparatus. The Hon'ble Supreme Court in the case of CIT vs. Delhi Safe Deposits Co. Ltd. (1982) 26 CTR (SC) 411 : (1982) 133 ITR 756 (SC), has laid down the general test of admissibility of an expenditure as wholly and exclusively laid out for the purposes of the business and that text is if it is incurred by the assessee as incidental to his trade for the purpose of keeping the trade going and of making it pay and not in any other capacity than that of a trader. From what we have stated above, it is very clear that but for making the payment as done by the assessee, the profit yielding apparatus of the assessee would not have been with the assessee because u/s 36(b), the authority granting the licence was vested with the powers of cancellation as well as suspension of such a licence. If the licence had been cancelled or suspended the business of the assessee would have come to an end. In the context of this, the payment made by the assessee is by a trader and it was incidental to the trade of the assessee inextricately linked with the carrying on of the business of the assessee. We, therefore, hold that the amount claimed by the assessee was expenditure wholly and exclusively laid out for the purposes of the business of the assessee and was admissible as deduction in computing the total income for the year under appeal. The authorities below erred in not allowing it. We set aside the orders of the authorities below and direct the ITO to allow the claim of the assessee.

10. Appeal allowed.

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