JUDGMENT H.N. Seth, J.
1. In connection with the assessment of M/s. Sir Shadi Lal Sugar and General Mills Ltd., Mansurpur District, Muzaffarnagar, for the years 1960-61, 1961-62, 1962-63 and 1963-64, the Income-tax Appellate Tribunal, Delhi Bench, has stated the case and referred the following questions for the opinion of this court:
"(1) Whether, on the facts and in the circumstances of the case, the sum of Rs. 86,230 and Rs. 47,898 being penalties for belated payment of sugarcane cess imposed under the U.P. Sugarcane Cess Act, 1956, for assessment years 1960-61 and 1961-62 respectively, and the sums of Rs, 4,000 and Rs. 135 being fines levied under the Factories Act, for the years 1962-63 and 1963-64, respectively, are allowable deductions for computing the real business profits of the assessee under Section 10(1) of the Indian Income-tax Act, 1922/section 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 profits chargeable to tax under Section 4 read with Section 28 of the Income-tax Act, 1961 ?"
2. Question No. 3(a) and (b) relate to the assessment year 1963-64.
3. The assessee-company carries on business of manufacture and sale of sugar and confectionery at Mansurpur in the District of Muzaffarnagar. In connection with its business it brought sugarcane into its factory premises and thus became liable to pay cess under the provision of Section 3 of the U.P. Sugarcane Cess Act. It appears that during the years relevant to the assessment years 1960-61 and 1961-62 it did not pay the cess payable by it within the time prescribed, with the result it was directed to pay a sum of Rs. 86,230 for the assessment year 1960-61 and Rs. 47,898 for the assessment year 1961-62 over and above the amount of cess and interest thereon by way of penalty imposed under Sub-section (5) of Section 2 of the Act. Similarly, the assessee committed certain breaches of the provisions of the Factories Act and during the accounting years relevant to the assessment years 1962-63 and 1963-64 it had to pay Rs. 4,000 and Rs. 135 as fine. The assessee claimed the aforementioned expenditure incurred by it in the relevant accounting years, as expenses which had to be deducted in computing its taxable profits and gains of the business. The Income-tax Officer disallowed the aforesaid claim of the assessee and on this score his order was upheld both by the Appellate Assistant Commissioner and the Appellate Tribunal. Learned counsel for the assessee urged that the sum of Rs. 86,230 and Rs. 47,898 representing the penalties for belated payment of sugar cane cess imposed under the U. P. Sugarcane Cess Act, 1956, partook the nature of cess payable by it in connection with its business. Accordingly, it was an expenditure which had been laid out or expended wholly and exclusively for purposes of the assessee's business. It was neither a personal expense of the assessee nor a capital, expenditure. Similarly, the amount of fine paid by it for breach of the provisions of the Factories Act was also expended or laid out and incurred wholly and exclusively for purposes of the assessee's business which could neither be described as personal expense of the assessee nor as a capital expenditure. The taxable profits and gains of the assessee had, therefore, to be computed after making an allowance in respect of all 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.
4. 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 not the gross receipts of an assessee. Such profits and gains of business are to be ascertained on ordinary principles of commercial trading and commercial accounting. In the case of Badridas Daga v. Commissioner of Income-tax, [1958] 34 ITR 10, 15 (SC). the Supreme Court after considering various authorities on the subject observed thus:
"The result is that when a claim is made for a deduction for which there is no specific provision in Section 10(2), whether it is admissible or not will depend on whether, having regard to accepted commercial practice and trading principles, it can be said to arise out of the carrying on of the business and to be incidental to it. If that is established, then the deduction must be allowed, provided of course there is no prohibition against it, express or implied, in the Act."
5. Main question, therefore, that arises for consideration is whether having regard to accepted commercial practice and trading principles, the expenditure incurred by the assessee towards payment of penalties imposed under Section 3(5) of the U.P. Sugarcane Cess Act and for the breach of provisions of the Factories Act, is an expenditure which arises out of the carrying on of the assessee's business and is incidental thereto.
6. In Strong and Co. of Romsey Ltd, v. Woodifield, [1906] AC 448. 453 (HL) while considering what expenses are allowable in computing profits of business, Lord Davey observed at page 453 thus:
"But it seems to me that a penal liability of this kind cannot be regarded as a loss connected with or arising out of a trade. I think that a loss connected with or arising out of a trade must, at any rate, amount to something in the nature of a loss which is contemplable and in the nature of a commercial loss. I do not intend that to be an exhaustive definition but I do not think it possible to say that when a fine, which is what the penalty in the present case amounted to, has been inflicted upon a trading body, it can be said that that is a ' loss connected with or arising out of ' the trade within the meaning of this rule ?"
8. The aforesaid statement of law was approved in the case of Commissioners of Inland Revenue v. Alexander Von Glehn and Company Ltd., [1920] 2 KB 553 (CA). where the assessee. paid a penalty of £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 breach of the law, and for that breach of the law they were fined. That, as it seems to me, was not a loss connected with the business, but was a fine imposed upon the company personally, so far as a company can be considered to be a person, for a breach of the law which it had committed. It is perhaps a little difficult to put the distinction into very exact language, but there seems to me to be a difference between a commercial loss in trading and a penalty imposed upon a person or a company for a breach of the law which they have committed in that trading. For that reason I think that both the decision of Rowlatt J. in this case, and his former decision in Inland Revenue Commissioners v. E. C. Warnes & Co., which he followed, were right, and that this appeal should be dismissed with costs." Warring-
ton L.J. said at page 569 :
"It is a sum which the persons conducting the trade have had to pay because in conducting it they have so acted as to render themselves liable to this penalty. It is not a commercial loss, and I think when the Act speaks of a loss connected with or arising out of such trade it means a commercial loss connected with or arising out of the trade."
9. Aforementioned observations were approved by the Supreme Court in the case of Haji Aziz and Abdul Shakoor Bros. v. Commissioner of Income-tax, [1961] 41 ITR 350 (SC). Their Lordships of the Supreme Court, at page 359, observed thus:
"A review of these cases shows that expenses which are permitted as deductions are such as are made for the purpose of carrying on the business, i.e., to enable a person to carry on and earn profits in that business. It is not enough that the disbursements are made in the course of or arise out of or are connected with or made out of the profits of the business but they must also be for the purpose of earning the profits of the business. As was pointed out in von Glehn's case, 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 expense's 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."
10. 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 to be a commercial expenditure. It is an expenditure incurred by the assessee in a capacity other than in the capacity of a trader and cannot be deducted in computing his profits.
11. Learned counsel for the assessee urged that the observations in Haji Aziz's case were made while considering the question whether the expenditure claimed in that case were deductible under Section 10(2)(xv) of the Indian Income-tax Act, 1922, which provides for an allowance in respect of an expenditure laid out wholly and exclusively in connection with the assessee's business and will not be relevant for deciding the question whether such expenditure is to be deducted from the gross receipts of the assessee while computing its taxable profits under Section 10(1)of the 1922 Act/section 28 of the 1961 Act. It is true that the Supreme Court made the aforesaid observations while considering the question of deduction claimed by an assessee under Section 10(2)(xv) of the 1922 Act, but they, in our opinion, clearly indicate that in the opinion of the court an expenditure incurred by an assessee towards payment of penalty for infraction of law, though that infraction might have taken place during the course of the assessee's business, is not a normal commercial or trading expenditure. Not being a trading or commercial expenditure it can neither be taken into account while computing the assessee's profits and gains of business nor can it be allowed as a deduction under Section 10(2)(xv) of the Act (expenditure not exclusively laid out for purposes of assessee's business).
12. Section 2(1) of the U.P. Sugarcane Cess Act, 1956, provides that the State Government may by notification in the Official Gazette impose a cess not exceeding twenty-five paise per maund on the entry of cane into the premises of a factory or of a gur, rab or khandsari sugar manufacturing unit for use, consumption or sale therein. Sub-section (2) then provides that the cess imposed under Sub-section (1) shall be payable by the owner of the factory or of the gur, rab, khandsari sugar manufacturing unit and shall be paid on such date and at such place as may be prescribed. According to Sub-section (3) any arrear of cess not paid on the date prescribed under Sub-section (2) shall carry interest at 6% per annum from such date to the date of payment. Sub-section (5) then lays down :
"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% thereof shall by way of penalty be recovered from the person liable to pay the cess."
13. According to Sub-section (7) any sum imposed by way of penalty under subsection (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 that it was a normal commercial or trading expenditure. Viewed in this light, neither the additional amount paid by the assessee in the assessment years 1960-61 and 1961-62, by way of penalty under Sub-section (5) of Section 2 of the U.P. Sugarcane Cess Act, 1956, nor the penalty paid by it for infraction of the provisions of the Factories Act during the assessment years 1962-63 and 1963-64, can be treated as commercial or trading expenditure or loss, which could be accounted for while determining the assessee's real gains and profits of business for purposes of Section 10(1) of the Indian Income-tax Act, 1922/Section 28 of the Income-tax Act, 1961.
14. Learned counsel for the assessee relied upon a decision of the Orissa High Court in the case of Commissioner of Income-tax v. Prafulla Kumar Mallick, [1969] 73 ITR 119 (Orissa). In that case under an agreement with the Government of Orissa, the assessee, who worked as a paddy procuring agent, was required to supply paddy and rice of a standard known as "fair average quality". One of the clauses in the agreement empowered the Collector to levy a penalty for supplying foodgrains which was not of fair average quality. Such penalty could be deducted from amounts due under bills submitted by the assessee. During the calendar year 1954, relevant to the assessment year 1955-56, penalties amounting to Rs. 25,700 were imposed and realised from the assessee. The Orissa High Court held that the sum of Rs. 25,700 which was paid by the assessee by way of penalty to the Government of Orissa had to be taken into account while computing the assessee's profits under Section 10(1) of the Income-tax Act. Learned counsel for the assessee contends that just as in the Orissa case the penalty for not supplying paddy and rice of fair average quality was held to be an expenditure incidental to the carrying on of the assessee's business and as such allowable as a loss under Section 10(1) of the Income-tax Act, in the same manner the additional payments, over and above the cess and the interest paid by the assessee under Section 2(5) of the U.P. Sugarcane Cess Act were also incidental to and consequential to the carrying on of the assessee's business and should have been accounted for in computing the assessee's profits under Section 10(1) of the Indian Income-tax Act, 1922/Section 28 of the Income-tax Act, 1961.
15. We are unable to accept this submission. In the 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.
16. Learned counsel for the assessee also cited the case of Commissioner of Income-tax v. Birla Cotton Spinning and Weaving Mills Ltd., [1971] 82 ITR 166 (SC). 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 to year and during the whole period for which the business continues. If the assessee takes any steps for reducing its liability to tax which results in more funds being left for the purpose of carrying on the business there is always the possibility of higher profits. In this view the expenses incurred by the assessee for protecting its business from any such proceedings which might result in the reduction of its income and profits are allowable under Section 10(2)(xv). The question whether an amount paid by the assessee by way of penalty for infraction of law can be treated as a normal commercial or trading expenses for purposes of Section 10(1) was neither gone into nor decided in that case. Accordingly, neither of the two cases cited by the learned counsel help the assessee and the first question referred to this court has to be answered in the negative and in favour of the department.
17. So far as the second question is concerned, we find that during the years, relevant to assessment years 1960-61 to 1963-64, the assessee's factory being a seasonal factory worked for less than 300 days. It claimed an extra shift allowance under the head depreciation at the full rate of 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 normally as well as double shift throughout the relevant previous years. In the case of Ganesh Sugar Mills Ltd. v. Commissioner of Income-tax, [1969] 73 ITR 395 (Cal). it was held that in a case where the assessee's seasonal sugar factory had worked its normal and extra shift only during that part of the year when the sugarcane is available, the departmental authorities and the Tribunal were right in disallowing the assessee's claim for the full amount of 50% of the normal depreciation as extra depreciation under the note appended to item III of Appendix of Rule 8 of the Income-tax Rules, 1922. Similarly, in the case of Raza Sugar Co. v. Commissioner of Income-
tax, [1970] 76 ITR 541 (All) the assessee, a seasonal sugar factory, claimed that being a seasonal factory it was entitled to full 50% depreciation over the normal depreciation for the first and the second 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.
18. 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 with a view to see that the Congress party was returned to power. In other words, the amount was used for purposes of general election. In the case of J.K. Cotton Spg. & Wvg. Mills Ltd. v. Commissioner of Income-tax, [1966] 62 ITR 813 (All) a Division Bench of this court held that in a case where an assessee paid a sum of Rs. 56,000 to the Congress Parliamentary Board for purposes of general elections and claimed it as a business expenditure on the ground that with the changing pattern of economic structure of society, it was in the interest of the company to keep the ruling party in power, there was no direct nexus between the business of the company and the contribution made by it and the same was not an admissible deduction. Following this decision we hold that the assessee was not entitled to claim an allowance in respect of the amount paid by it to the Congress Parliamentary party to prevent the sugar industry being nationalized.
19. Learned counsel for the assessee tried to argue that in this case the assessee incurred the expenditure not only for protecting itself from evil forces of lawlessness and political chaos which were expected to gain strength if the Congress party was not returned to power but also to prevent the sugar industry being nationalized and taken over in the public sector. Any expenditure incurred for the protection of the industry as such should be treated as business expenditure which is allowable as deduction in computing the assessee's taxable profits. We are not prepared to entertain . and consider this argument as we find that there is no reference to it in any of the orders passed by any of the income-tax authorities. The fact whether the money in question was contributed to the Congress Parliamentary Board with a view to protect the sugar industry from being nationalized and taken over in the public sector cannot be investigated by the High Court in a reference made under the Income-tax Act. Accordingly, it is unnecessary for us to express any opinion on the question whether in a case where one of the considerations for contributing the money to the Congress party was the hope that if that party came into power, the sugar industry would not be nationalized, it could be said that the contribution was directly connected with the running of the assessee's business and as such was an allowable deduction in computing its taxable profits. Question No. 3(a) is, accordingly, answered in the affirmative and in favour of the department. In view of our answer to question No. 3{a), question No. 3(b) does not arise for discussion.
20. In the result, we answer the three questions referred to us as follows:
Question No. 1 in the negative and in favour of the department;
Question No. 2 in the negative and in favour of the department; and Question No. 3(a) is answered in the affirmative and (b) returned as unanswered.
21. The assessee shall pay the sum of Rs. 200 to the Commissioner of Income-tax as costs of this reference.