Bombay H.C : Whether, on the facts and in the circumstances of the case, the penalty of Rs. 18,775 imposed under s. 36(3) of the Sales Tax Act is an allowable deduction ?

High Court Of Bombay

Jairamdas Bhagchand vs. CIT

Section 37(1)

Asst. Year 1972-73

S.P. Bharucha & V.A. Mohta, JJ.

IT Ref. No. 227 of 1976

27th January, 1987

Counsel Appeared

C.J. Thakar, N.S. Thakar, S.S. Dwivedi & R.A. Shah, for the Assessee : G.S. Jetly, A. Shelat, S.G. Aney & Miss S.G. Shan, for the Revenue

V.A. MOHTA, J.:

The following question has been referred for our answer under s. 256 of the IT Act, 1961, at the instance of the assessee : ” Whether, on the facts and in the circumstances of the case, the penalty of Rs. 18,775 imposed under s. 36(3) of the Sales Tax Act is an allowable deduction ? “

3. This reference is concerned with the asst. yr. 1972-73. The assessee is a registered firm deriving income from trading in cotton. It has its head office at Dhamangaon, Maharashtra and branches in Maharashtra as well as outside. The assessee is obliged to file under the Sales Tax Act every quarter a return and to pay tax accordingly. For the year under consideration, the assessee did not make payment of sales tax in the 3rd and 4th quarters as a result of which penalty was imposed under s. 36(3) of the Sales Tax Act. It is apparent that s. 36(3) of the Sales Tax Act means the Bombay Sales Tax Act, 1959.

4. On noticing the debit entry of Rs. 18,775 under the head ” Penal interest”, the ITO refused to grant the deduction of the said payment as, according to him, the penalty was not deductible from the income of the assessee. Against the said order, an appeal was carried to the AAC who was pleased to agree with the view taken by the ITO. The Tribunal, in second appeal, also took the same view. Sec. 36(3) of the Sales Tax Act has been quoted in the order of the Tribunal as under : ” If a dealer does not, without reasonable cause, pay tax within the time he is required by or under the provisions of this Act to pay it, he shall, subject to the provisions of sub-s. (5) of s. 55, pay by way of penalty, in addition to the amount of tax, a sum equal to …… “

5. Sec. 36(3), as applicable at the material time read in full, thus : If a dealer does not, without reasonable cause pay tax within the time he is required by or under the provisions of this Act to pay it, the CIT may, after giving the dealer an opportunity of being heard, by an order in writing, impose upon the dealer by way of penalty, in addition to the amount of tax, a sum equal to— (a) One per cent. of the amount of tax for each month for the first three months …… (b) One and half per cent. of the amount of tax for each month thereafter during the time the dealer continues to make default in the payment of tax : Provided that the CIT or any appellate or revisional authority may remit the whole or any part of the penalty payable in respect of any period.”

6. Sub-s. (5) of s. 36 reads thus :

7. No prosecution for an offence under this Act shall be instituted in respect of the same facts on which a penalty has been imposed under this section.”

8. An examination of the scheme of the Sales Tax Act leaves no manner of doubt that s. 36 in terms deals with penalty. The marginal note which provides a clue reads thus: ” Imposition of penalty in certain cases and bar to prosecution.”

9. Shri Thakar, learned counsel for the assessee, contended that the use of the word ” penalty ” either in the marginal note or in the substantive provision is not conclusive of the matter and that the provisions of s. 38(2) of the Act merely permit charging of interest for not paying the tax in time and, therefore, is the tax itself and is, therefore, an allowable deduction. Our attention was invited to the decision of the Supreme Court in Mahalakshmi Sugar Mills Co. vs. CIT (1980) 16 CTR (SC) 198 : (1980) 123 ITR 429 in which the Supreme Court had occasion to construe s. 3(3) of the Uttar Pradesh Sugarcane Cess Act. In order to appreciate what the Supreme Court has laid down in that decision, it would be worthwhile to reproduce the provisions of s. 3 of the Uttar Pradesh Sugarcane Cess Act : ” 3. (3) Any arrear of cess not paid on the date prescribed under sub-s. (2) shall carry interest at 6 per cent. per annum from such date to date of payment …… (5) 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 per cent. thereof shall by way of penalty be recovered from the person liable to pay the cess. “

10. The Supreme Court examined the entire scheme of the Act and the difference in language used in sub-ss. (3) and (5) of s. 3 and made the following observations (p. 433): ” If the cess is not paid by the specified date, then by virtue of s. 3(3) the arrear of cess will carry interest at the rate of six per cent. per annum from the specified date to the date of payment. Sec. 3(5) is a very different provision. It does not deal with the interest paid on the arrear of cess but provides for an additional sum recoverable by way of penalty from a person who defaults in making payment of cess. It is a thing apart from an arrear of cess and the interest due thereon.”

11. A comparison of the provisions of s. 3(3) of the Uttar Pradesh Sugarcane Cess Act and s. 36(3) of the Sales Tax Act leaves no manner of doubt that these two provisions are in pari materia though the language used is slightly different. In our judgment, far from supporting the case of the assessee, the very ratio of this decision goes against him.

12. Our attention was also invited to s. 38(2) of the Sales Tax Act which provides for payment of tax and deferred payment of tax, etc. According to s. 38(2), every registered dealer furnishing returns as required by sub-s. (1) of s. 32, shall first pay into a Government treasury, in the manner prescribed, the whole of the amount of tax due from him according to such return along with the amount of any penalty payable by him under s. 36. The substance of the submission is that inasmuch as the amount of penalty payable under s. 36 has to be deposited in the first instance in the Government treasury, the payment is in the nature of interest, there being no question of (i) any hearing, or (ii) absence or presence of any reasonable cause for delay, or (iii) remission either by the CIT or by the appellate or revisional authority. This submission cannot be accepted, for s. 38(2) cannot be read in isolation. A combined reading of sections, 36 and 38 indicates that there is an obligation to deposit the maximum penalty in the first instance which, on reasonable cause being shown, may be reduced or totally waived. This power of imposing penalty is given not only to the Sales Tax Officer but also to the CIT, the appellate or revisional authority, each in their respective jurisdiction. Under the circumstances, the mere obligation to pay the maximum penalty in the first instance cannot change its character from penalty into interest.

13. Our attention was also invited to the case of Sakthi Sugars Ltd. vs. Asstt. CIT of Commercial Taxes (1985) 59 STC 52 (Mad), in which s. 24(3) of the Tamil Nadu General Sales Tax Act, 1959, fell for consideration. Sec. 24(3) of the said Act provides that (at p. 58) : ” If the tax assessed under this Act or any instalment thereof is not paid by any dealer or person within the time specified therefor in the notice of assessment or in the order permitting payment in instalments, the dealer or person shall pay by way of penalty, in addition to the amount due, a sum equal to a sum calculated at the rate of one rupee for every hundred rupees or part thereof of such amount for each month or part thereof after the date specified for its payment.”

14. The Madras High Court considered the whole scheme of the Act in general and s. 45(2) in particular. Sec. 45(2) is a provision for imposition of penalty and while examining the scheme, it has been held that the said provision and not the provisions of s. 24(3) is penal in nature. The use of the word ” penalty ” under s. 24(3) was not in the whole context held to be conclusive of the matter.

15. In the present case, the Revenue is not relying only on the use of the word ” penalty “, but it is relying on the scheme of the Act as well as the specific provision. Under the circumstances, we are unable to see any ratio in the said decision which supports the case of the assessee.

16. In the matter of imposition of penalty, the element of wilfulness is relevant. Sec. 36(3) speaks of this element and only because the rate is computed on interest basis, it cannot be said that the penalty imposed is in effect interest an allowable deduction.

17. Hence, we answer the question referred in the negative and against the assessee. The assessee to bear the costs of the Revenue.

[Citation : 171 ITR 545]

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