Dalmia Cement (Bharat) Ltd. vs Inspecting Assistant ...
1990 Latest Caselaw 11 Del

ORDER.

Per Shri K. S. Vishwanathan, Vice President - In this appeal by the assessed, a public limited company, several points are raised and they are decided seriatim in the following paragraph :

2. The first ground contains the assesseds grievance in the disallowance of Rs. 6,99,947 levied by way of penalty under section 22(2) of the Tamil Nadu General Sales Tax Act. Facts leading to the levy of penalty are as follows :

3. The assessed has a unit in Tamil Nadu manufacturing cement. The cement is sold by the assessed within the State as well as outside the State. White forwarding the goods to the customers, the assessed was also including the freight in the bills. There has been a dispute between the Sales-tax Department and cement companies whether the element of freight included in the bill could be considered for the purpose of Central Sales Tax as well as the State General Sales Tax. The view taken by the authorities was that as the sale price of cement has been fixed under the Cement Control Order, 1967 on for destination basis which included freight, the amount of freight formed a part of the sale price. As the Cement Control Order had statutory force, it prevailed over the contracts of sale under which freight was payable by the buyers and, therefore, sales tax was chargeable on the element of freight included in the sale price. On this basis the authorities were levying sales tax year after year. The company had been appealing against such levy but it was unsuccessful.

4. In the matter of Central Sales-tax the Supreme Court had upheld the view of the Department in their decision in Hindusthan Sugar Mills Ltd. v. State of Rajasthan [1979] 43 STC 13. However, it was the assesseds case that there was a distinction in statutory provisions and rules between Central Sales Tax Act and the Tamil Nadu General Sales Tax Act. The assessed along with other cement companies had taken up this matter by way of revision before the Madras High Court and the High Court in their order in Ramco Cement Distribution Co. (P.) Ltd. v. State of Tamil Nadu [1982] 51 STC 171 held in favor of the assessed. This order was passed on 23rd of December, 1981. However, the High Court had accepted the oral petition of the Sales Tax Departments leave for appeal before the Supreme Court. We understand the matter is pending there.

5. Although the assessed was contesting the levy of sales tax on the element of freight, nevertheless they were collecting such amounts from their customers and depositing them with the department as part of sales-tax. The assesseds sales-tax assessment for the financial year 1979-80 was completed on 27-3-1981. He had included the freight element and the assessed had also paid the tax but had filed appeals. For the financial year 1980-81 the Deputy Commissioner, sales-tax had made a draft of the order but did not finalise it since the matter was pending before the High Court. Later on, he finalised the order on 31-8-82 and in this order he excluded the freight element from the levy.

6. Following the order of the High Court which was pronounced on 23-12-1981, the assessed did not collect from the customers sales-tax on freight element. So, there was no question of payment to the Sales-tax Department.

7. Under section 21 of the Tamil Nadu Sales-tax Act dealers are prohibited from collecting by way of tax on sales any amount which is not due to the Government by way or sales-tax. Now, for the financial year 1980-81 the assessed had till 23rd of December, 80 collected the sales-tax on the element of freight and this amounted to Rs. 69,99,466. This has also been paid to the Government as sales-tax. Now, in view of the fact that the assessed company was contesting the levy of the sales-tax and it became ultimately exempt by virtue of the High Court decision on 23-12-81, the Department concluded that this amount collected was in contravention of the prohibition contained in the Sales-tax Act. The Department passed an order on 23-9-1982 levying a penalty for contravening the section. The penalty amounted to 10% of the amount collected. The assessed had appealed but we are told that the appeal is still pending.

8. In the income-tax proceedings, for the assessment year 1983-84 the assessed claimed this levy as a business expenditure. It was not allowed, the Income-tax Officer holding that the levy was in the nature of a penalty which cannot be admitted as a business expenditure. He further held that it was not for the Income-tax Department to go into the question whether the levy of penalty was justifying on the facts or not. He, therefore, rejected the claim for deduction of the expenditure.

9. The assessed appealed. The Commissioner of Income-tax (A) also agreed with the Income-tax Officer. According to him, principle set down by the Supreme Court in the case of Haji Aziz & Abdual Shakoor Bros. v. CIT [1961] 141 ITR 350 would govern this case. If a sum is paid by an assessed conducting his business because in conducting it he had acted in a manner which rendered him liable for penalty, it cannot be claimed as a deductible expenditure. He further agreed with the Income-tax Officer that the Income-tax authorities cannot go into the merits of the circumstances leading to the imposition of penalty under different statue. Thus, he upheld the disallowance.

10. The assessed is on further appeal before us. Shri Hari Hari Lal, learned counsel for the assessed, submitted that the real ratio to be followed in such case is give by the Supreme Court in the case of CIT v. H. Hirjee [1953] 23 ITR 427. What we have to see is the nature and purpose of legal proceedings. If the nature of liability was such that it falls on the assessed in his capacity as a trader. Was it incurred when he was carrying out his regular business and in the course of the business. If these two questions get a positive answer, then he submitted, it must be held it was a liability falling on the assessed as a trader. If the liability falls on a person as a trader, he submitted, it was unnecessary to see whether the proceedings were criminal or civil and further whether the assessed succeeded or lost. The test is whether the transaction in respect of which the proceedings are taken arose out and is incidental to the assesseds business. He submitted that it was in course of the assesseds business that had to include an element of freight and in view of the assesseds business that he had to include an element of freight and in view of the then prevailing notions of the Sales-tax Department, he had to collect and pay sales-tax thereon. This was done by him purely in his capacity as a trader.

11. Dealing with the other decision of the Supreme Court in Haji Aziz Abdul Shakoor Bros. case (supra) he submitted that in that case there was clearly a breach of law and the expenditure did not fall in the category or in the character of trader as the judgment itself shows. He further submitted that it is not necessary for the purpose of section 37 of the Income-tax Act that a finding should be given whether the levy of penalty was correct or not. It may be correct as far as Income-tax enactment was concerned. But a finding to be given is whether the liability arose for the assessed in his capacity as a trader by looking into all facts and circumstances of the case. The question to be asked is could the assessed have done otherwise.

12. Shri Agarwal for the department pointed out that it is undisputed that what is levied is by way of a penalty that is a breach of the statutory provisions. Where a liability arises on account of the breach of any statutory provisions such whether the assessed had been guilty of infraction or not. He relied on the decision of Bombay High Court in the case of Jairamdas Bhagchand v. CIT [1988] 171 ITR 545.

13. We have considered the submissions. We can take it as law of this country that an assessed who in course of his business has committed a breach of law, the expenditure consequent to the breach would not be allowable as a deduction. The Supreme Court in Haji Aziz & Abdul Shakoor Bros. case (supra) has held as follows :

"If a sum is paid by an assessed 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 deduction expense. It must be a commercial loss and in its nature must be contemptible as such. Such penalties which are incurred by an assessed in proceedings launched against him for an infraction of the law cannot be called commercial losses incurred by an assessed 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 assessed is 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 assessed 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.... Cant it be said that a penalty paid for an infraction of law, even though it may involve no personal liability in the sense of a fine imposed for an offence committed, is wholly and exclusively laid for the business in the sense as those words are used in the case that have been discussed above ? In our opinion, 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 same principle has been laid down by the Supreme Court again in CIT v. Dhanrajgirji Raja Narasingirji [1973] 91 ITR 544. Two things are clear from these authorities. First, any expenditure arising from infraction of law would not be deductible. Further when a penalty is levied for contravention of any specific statutory provision, it cannot be falling on the assessed as a trader. Since the test is the expenses should be for the purpose of enabling a person to carry on trade would only be permitted as deduction. Even though the levy may involve no personal liability, it could not be admitted as deduction since it cannot be said to be wholly and exclusively laid out for the purpose of business. Thus, the authorities cited on both sides have not laid down different parameters.

14. Having found that the ratio to be applied is what is stated in Haji Aziz & Abdul Shakoor Bros. case (supra), we should apply now the same to the facts of the case. Before we do that, we must point out one distinguishing feature from all the reported cases and the case before us. In the case of Haji Aziz & Abdul Shakoor Bros. (supra) the facts were that the assessed was carrying on a business of importing dates from abroad. These were imported partly by steamer and partly by country crafts. Import of date by steamer was prohibited under the Sea Customs Act. When the assessed in contravention of this provision imported dates in steamer, the goods were confiscated and when he exercised his option to pay a fine in lieu of confiscation, the dates were released. The fine paid was claimed as deduction and negatived by the Supreme Court. The facts would show that the assessed could have avoided importing dates by steamer and still carried on business. Thus, the fact was a voluntary breach of rules which resulted in levy of the fines. Similar is the position of most of the cases where a claim for deduction of a penalty had failed. In the case of CIT v. Malwa Vanaspati & Chemical Co. Ltd. [1982] 135 ITR 221 (MP) the assessed was penalised for evasion of sales-tax. Therein the assessed was levied a penalty under section 8(2) of the Madhya Pradesh Sales Tax Act which stipulates that where any raw material purchased by a registered dealer for manufacture of goods within the State is used for a different purpose, then the assessed shall pay a penalty. It would be seen that here also the assessed had paid less purchase tax on raw materials on the pretext of using it in its own manufacture within the State but acted contrary. There was, therefore, deliberation and volition involved. It was open for the assessed to have avoided such a transaction. The Gujarat High Court has taken a similar view in the case of CIT v. Mihir Textiles Ltd. [1976] 104 ITR 167. The assessed had imported certain spare parts on a general license under which they could not have done so. The penalty levied was clearly for a breach of the Sea Customs Act. The Gujarat High Court affirmed the same stand in another case, i. e. Garden Silk Weaving Factory v. CIT [1983] 144 ITR 613 wherein the assessed exported goods manufactured by it and was granted import license. It altered and forged the licenses and improperly imported goods. This resulted in a penalty of Rs. 4 lakhs. This is clearly a case of breach of law. The Andhra Pradesh High Court in the case of Sri Satyanarayana Rice Mills v. CIT [1985] 155 ITR 676 was concerned with the violation of law by a rice mill in failing to deliver work levy rice. The resultant confiscation of rice was found to be a penalty and not admissible as deduction. The Bombay High Court in T. Khemchand Tejoomal v. CIT [1986] 161 ITR 492 upheld the departments claim of disallowance in a case where the assessed secured a license for importing automobile spare parts but imported goods which were not covered by the license. This case is interesting in the distinction brought out by Bombay High Court themselves from an earlier decision of the High Court in the case of CIT v. Pannalal Narottamdas & Co. [1968] 67 ITR 667. In the latter case it may be recalled that the Bombay High Court had treated an assessed under more or less identical circumstances as an innocent victim and held that the penalty levied would be admissible. The soundness of this decision had been doubted by the Supreme Court in the case of Indian Aluminium Co. Ltd. v. CIT [1971] 79 ITR 514 and clearly dissented by the Gujarat High Court in Mihir Textiles Ltd.s case (supra). In T. Khemchand Tejoomals case (supra) they had pointed out at page 496 that in Pannalal Narottamdas & Co.s case (supra) the assessed had purchased bills of lading from certain other parties. It was clearly implied therein that the import license was not in the assesseds name but in some body elses name and the actual import was done by a third party and the assessed merely purchased the documents. Thus, it was a case of innocent victimisation.

15. A number of cases can be multiplied to show and it can be shown on an analysis that in all cases the assessed had voluntarily committed the breach. Further, the assessed had alternatives of avoiding the committing of the breach.

16. It is in this aspect that the present case is distinguishable from all those cases. If one were to ask one selves : did the assessed have an alternative, could he continue doing business without committing this alleged breach ? The answer would be that the assessed could not have continued the business. As stated earlier, the view of the Sales-tax Department including the Sales Tax Tribunal and the Board of Revenue was that element of freight in the price is subject to sales-tax. It may be that the assessed had a different view. It may be, they were pursuing their remedies. But when the entire department was of the view that it was taxable, the assessed had no alternative but to collect the equal amount from the customers and passed it on to the Government as sales-tax. They can refuse to do so only at their own peril. They could not have ignored the repeated findings of the sales-tax authorities on this point. Therefore, when they were collecting the amount and paying sales-tax thereon, they were only discharging their obligations as a dealer under the Tamil Nadu Sales-tax Act should do. Contemporaneously, when these events happened, no body could say that the assessed had committed a default. The scenario changed after the decision of the Madras High Court. Only the Sales-tax Department dropped the idea of collecting sales-tax thereon. So, the Sales-tax Department has turned round that accused the assessed of having collected unauthorisedly and in contravention of section 21 of the Sales-tax Act. Thus, it would be seen from the facts that this was a case where on the facts and circumstances an assessed, however, righteous he wants to be, however legal is business, would be conducted only in the same way he was done. There was no alternative. Either he should have collected the tax and paid or he would have faced penalties as the law was then understood by the Sales-tax Department before the pronouncement of the decision by the High Court.

17. The distinction we are trying to draw in this. In this case unlike or other previous cases, there was no alternative at all for the assessed to do the business. What was considered to be legal and valid over-night became illegal and invalid. The penalty has been levied under such circumstances. In our opinion, such a penalty will fall on the assessed only in his capacity as a trader and, therefore, it will be fully liable. It may be that after the Sales-tax Department has become wise by the judgment of the High Court, the action of the assessed viewed in hind sight was illegal. But that would not alter the position that what the assessed did was correct and legal as it was understood at that time.

18. We would not be understood to have pronounced on the correctness or otherwise of the levy of penalty by the Sales-tax Department. That may be corrected as far as the Sales-tax Act is concerned. What we are concerned is to apply the test laid down by the Supreme Court in Haji Aziz &Abdul Shakoor Bros. case (supra). Applying that test, we give a finding that the assessed had acted only as a trader and the expenditure was wholly and exclusively connected with the carrying on of the business in a legal manner as it was understood contemporaneously. The assessed is entitled to the deduction.

19. The rest of the grounds raised by the assessed in his appeal are all covered by the earlier decision of the Tribunal.

20. In ground No. 2 the question is whether any part of the expenditure incurred on the maintenance of the cars provided for the Directors could be disallowed. There is no difficulty in holding that it can be disallowed. With regard to the quantum of disallowance we find that the Income-tax Officer has disallowed 1/3rd which under the circumstances is very reasonable. No interference is called for.

21. The next is the unclaimed balance amounting to Rs. 20,429. There is separately a balance of Rs. 1,750 being unclaimed wages and bonus. In our opinion, it is not possible to bring to tax Rs. 1,750 because the liability of the assessed to pay this amount to the employees is preserved under other statutes. Therefore, it cannot be brought to tax under sec. 41(1). With regard to Rs. 20,429, the analysis given by the Income-tax Officer shows that Rs. 13,985 represents advance received from the customers and Rs. 6,445 as expenses already charged to the Profit & Loss Account but not paid to the creditors. As far as the advances received in excess are concerned, it is quite clear that the assessed had collected advances towards the sale of his goods and the excess over the sale price has not been paid back to them. Apparently there is also no claim. Under these circumstances, following the decision of the Bombay High Court in the case of CIT v. Batliboi & Co. (P.) Ltd. [1984] 149 ITR 604/18 Taxman 299, we hold that the amounts were correctly brought to tax. With regard to Rs. 6,443, these were clearly liabilities and the mere fact that they were written back to Profit & Loss Account would not justify an inference that the liabilities had ceased. Therefore, this would be deleted.

22. In ground No. 4, the question is whether the assessed would be eligible for deduction u/s 35B in respect of the expenditure incurred on samples etc. Shri Harihar Lal at the time of hearing laid stress only on Rs. 28,029. These expenditure were incurred mainly in the preparation of brochures on the goods manufactured and exported. These are clearly in the nature of advertisement and covered by clause 1 of section 35B (2). So, we hold that the assessed would be eligible for deduction of Rs. 28,029. In respect of the rest of the items, we agree with the department.

23. In ground No. 5, the question is whether the assessed is eligible for investment allowance on computer. The Income-tax Officer has given a clear finding that the computers were installed in the factory of the assessed and is used for monitoring the input of raw materials. On these facts, following the decision of the Tribunal for the prior assessment year 1981-82, we hold that the assessed is entitled to this deduction.

24. With regard to air-conditioners and voltage stabilisers, we are of the opinion that the assessed would not be eligible. As Shri Aggarwal for the department had pointed out that there are machines which merely facilitate the proper functioning of the computers. They are not an integral part of the computers. We, therefore, accept the departments finding that the assessed would not be eligible for this deduction.

25. Ground No. 6 is merely consequential to the finding given in ground No. 5. The assessed would be entitled to higher depreciation rate on computers and data processing equipments.

26. Ground No. 7 is also consequential. It covers the additional depreciation on computers and data processing equipments.

27. In ground No. 8, the assessed is claiming depreciation on generators at a higher rate on the ground that comes into contact with corrosive materials. It support of their contention the reference is made to the assesseds own case for the year 1981-82 where the Tribunal has accepted the contention in paragraph 18 of their order. Shri Aggarwal for the department submitted that in order to be eligible for the higher rate of depreciation the machineries should be actively in continuous contact with corrosive Chemicals. He submitted that on the facts given by the assessed, it would appear that only exhaust fume containing certain quantity of sulphur is held to be a reason of higher rate of depreciation. On that basis, Shri Aggarwal submitted that it is possible for claiming higher depreciation even in respect of cars and vehicles plying in a crowded city like Delhi or Bombay. He submitted that it would not be sufficient.

28. We may state that here if the matter were to be decided for the first time, we may be inclined to accept the departments contention. However, in the assesseds own case in respect of these very machines the Tribunal has upheld the assesseds claim. Under these circumstances, judicial propriety requires to follow orders on this point. So, this is also decided in favor of the assessed.

29. Ground No. 9 and ground No. 10 are said to be consequential to the earlier findings. So, that will also be decided in favor of the assessed.

30. In the result, the appeal is partly allowed.