1. By this reference under Section 256(1) of the I.T. Act, 1961, the Income-tax Appellate Tribunal has referred the following question of law to this court for its opinion :
'Whether, on the facts and in the circumstances of the case, the penalty levied under Sections 8(2) and 17(3) of the Madhya Pradesh General Sales Tax Act paid by the assessee is allowable expenditure in the computation of total income?'
2. The material facts giving rise to this reference briefly are as follows: The assessee is a company deriving income from the manufacture and sale of vegetable ghee and de-oiled cakes. The assessment year in question is 1971-72. During this year, the assessee had to pay the amount of Rs. 1,91,660 on account of penalty imposed on the assessee under the provisions of Section 17(3) of the Madhya Pradesh General Sales Tax Act, 1958, hereinafter referred to as the 'Sales Tax Act'. The assessee was also required to pay Rs. 1,28,000 on account of penalty imposed on the assessee under Section 8(2) of the Sales Tax Act. The assessee contended before the ITO that the amount of penalty paid by the assessee as aforesaid was allowable expenditure. The ITO rejected that claim. On appeal, the AAC upheld the order passed by the ITO. On further appeal, the Tribunal, however, held that the amount of penalty paid by the assessee was an allowable deduction in computing its total income. The Tribunal was of the viewthat the penalty imposed on the assessee under Section 8(2) of the Sales Tax Act was in the nature of an extra payment of sales tax. The Tribunal further held that the penalty imposed under Section 17(3) of the Sales Tax Act on the assessee could not be equated to a penalty imposed for an economic offence or for an offence involving moral turpitude. According to the Tribunal, the assessee had committed merely technical violations, for the breach of which the assessee was required to pay a compensation. In this view of the matter, the Tribunal upheld the claim of the assessee for a deduction of the amount of penalty paid as aforesaid in computing its total income. Aggrieved by the order passed by the Tribunal, the department submitted an application for making a reference, and it is at the instance of the department that the aforesaid question of law has been referred to this court for its opinion.
3. Shri Bagadia, learned counsel for the department, relying on the decision of the Supreme Court in Haji Aziz and Abdul Shakoor Bros. v. CIT : 1983ECR1942D(SC) , contended that if a sum was paid by the assessee because in conducting its business the assessee had acted in a manner which rendered it liable to pay a penalty for an infraction of the law, the assessee was not entitled to claim it as an allowable expenditure. In reply, Shri Chaphekar, learned counsel for the assessee, relying on the decision of the Supreme Court in Mahalakshmi Sugar Mills Co. v. CIT : 123ITR429(SC) , contended that though the amount which the assessee had paid was termed as penalty, it was really by way of compensation or interest levied on account of failure to pay sales tax in accordance with the provisions of law. Learned counsel for the assessee, therefore, contended that the Tribunal was justified in holding that, on the facts and in the circumstances of the case, the amount of penalty paid by the assessee was an allowable expenditure in the computation of its total income.
4. The real question for consideration is whether the amount of penalty paid by the assessee could be held to be an allowable expenditure as provided by Section 37(1) of the I.T. Act, 1961. That section reads as follows :
'37. General.--(1) Any expenditure (not being expenditure of the nature described in Sections 30 to 36 and Section 80VV and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head ' Profits and gains of business or profession '.'
5. From a perusal of the aforesaid provision, it is clear that the expenditure allowable under Section 37(1) of the I.T. Act should not be in the nature of a capital expenditure or the personal expenses of the assessee and that it should be laid out or expended wholly and exclusively for the purpose of the business of the assessee.
6. It is well settled that the amount of sales tax or cess which an assessee is required to pay is allowable under Section 37(1) of the Act. It is in the nature of a revenue expenditure laid out wholly and exclusively for the purpose of the business of the assessee. Similarly, in view of the decision of the Supreme Court in Mahalakshmi Sugar Mills Co. v. CIT : 123ITR429(SC) , the interest payable on arrears of sales tax or cess would also be allowable under Section 37(1) of the Act as it is in reality part and parcel of the liability to pay the tax or cess. It is not a penalty. The following observations of the Supreme Court in Mahalakshmi Sugar Mills Co. v. CIT, while considering the provisions of Section 3(3) of the U.P. Sugarcane Cess Act, 1956, dealing with a liability to pay interest on arrears of cess, are pertinent (p. 433):
' Now the interest payable on an arrear of cess under Section 3(3) is in reality part and parcel of the liability to pay cess. It is an accretion to the cess. The arrear of cess 'carries' interest; if the cess is not paid within the prescribed period a larger sum will become payable as cess. The enlargement of the cess liability is automatic under Section 3(3). No specific order is necessary in order that the obligation to pay interest should accrue. The liability to pay interest is as certain as the liability to pay cess. As soon as the prescribed date is crossed without payment of the cess, interest begins to accrue. It is not a penalty, for which provision has been separately made by Section 3(5). '
7. It is thus clear that the liability to pay tax or cess or interest on arrears of tax or cess, which is automatic if the tax or cess is not paid within the prescribed period, is an allowable expenditure.
8. However, in the case of a fine or a penalty imposed upon an assessee for a breach of the law, which the assessee has committed in carrying on any trade or business, the fine or penalty is imposed upon that assessee personally. We may usefully refer to the following observations of Lord Sterndale in IRC v. Alexander van Glehn  2 KB 553:
'During the course of 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.'
9. The amount of fine or penalty imposed upon an assessee in carrying on the business cannot also be said to be an expenditure laid out 'for the purpose of the business'. The expression 'for the purpose of the business' meant, as held by Lord Davey in Strong & Co. of Romsey Ltd. v. Woodifield  AC 448, 'for the purpose of enabling a person to carry on and earn profits in the trade '.
10. The aforesaid two decisions were referred to by the Supreme Court in Haji Aziz and Abdul Shakoor Bros, v. CIT : 1983ECR1942D(SC) , and it was observed as follows (p. 359):
'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 profit in that business.
It is not enough that the disbursements are made in the course of or arise' out of or are concerned with or made out of the profits of the business but they must also b3 for the purpose of earning the profits of the business. As was pointed out in von Glehn's case  2 KB 553, 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 au 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.'
11. The Supreme Court held that no expense which is paid by way of a penalty for a breach of the law can be said to be an expenditure wholly and exclusively laid out for the purpose of the business.
12. It is in the light of the aforesaid principles that we have to ascertain the nature of the expenditure incurred by the assessee on account of the penalty imposed on it under Sections 8(2) and 17(3) of the Sales Tax Act. Before we do that, it must be borne in mind, as held by the Supreme Court in CIT v. Calcutta Agency Ltd. : 19ITR191(SC) , that in a claim for the exemption of an amount contended to be an allowable expenditure, the burden of proving the necessary facts in that connection is on the assessee.
13. Now, Section 8(1) and (2) and Section 17(3) of the Sales Tax Act read as follows:
'8. Rate of tax for raw material.--(1) Notwithstanding anything contained in Section 6 or Section 7 but subject to such restrictions and conditions as may be prescribed, the rate of tax payable on the sale to or purchase by a registered dealer of any raw material other than tendu leaves for the manufacture of other goods for sale in the State of Madhya Pradesh or in course of inter-State trade or commerce or in course of export out of the territory of India shall be two per cent, of the sale or purchase price of such raw material:...
(2) Where any raw material purchased by a registered dealer under Sub-section (1) is utilised by him for any purpose other than a purpose specified in the said sub-section, such dealer shall be liable to pay as penalty an amount not less than the difference between the amount of tax on the sale of such raw material at the full rate mentioned in column (3) of Schedule II and the amount of tax payable under Sub-section (1), and not exceeding one and one-quarter times the amount of tax at such full rate as the Commissioner may determine having regard to the circumstances in which such use was made :...
17. Returns.--(3) If a dealer fails without sufficient cause to comply with the requirements of a notice issued under Sub-section (1) or a registered dealer fails without sufficient cause to furnish under the said subsection his return for any period, the Commissioner may, after giving such dealer a reasonable opportunity of being heard, direct him to pay, by way of penalty, a sum not exceeding one-fourth of the amount of the tax which may be assessed on him under Section 18 or where no tax is payable a sum not exceeding one-hundred rupees. '
14. A penalty is imposed under Section 8(2) of the Sales Tax Act where any raw material purchased under Section 8(1) is utilised for a purpose other than a purpose specified in Section 8(1). The amount of penalty to be imposed is in the discretion of the Commissioner, but the minimum and the maximum amounts are specified. The amount of penalty imposed in the instant case is Rs. 1,28,000. The assessee did not produce any material to show that the penalty imposed on it under Section 8(2) of the Sales Tax Act was the minimum and that it, therefore, comprised only the difference in tax between the amount of tax at the full rate and the amount of tax paid by the assessee under Section 8(1). The Tribunal upheld the contention of the assessee that it should be assumed that the nature of the entire amount of penalty imposed under Section 8(2) was akin to a payment of sales tax. This assumption is not justified. Inability to pay under Section 8(2) is not automatic. It arises as a result of the imposition of a penalty by the Commissioner when it is discovered that an assessee has committed a breach of the provisions of Section 8(1). Similarly, the liability to pay under Section 17(3) is also not automatic. It arises as a result of the imposition of a penalty by the assessing authority when an assessee is found to have committed a breach of the provisions of the law. As observed in Haji Aziz and Abdul Sfaakoor Bros. v. CIT : 1983ECR1942D(SC) , no expense which is paid by way of penalty for a breach of the law can be said to be 'for the business of the assessee'. The question as to whether the breach of law involves moral turpitude or only a violation of some technical provision, which according to the Tribunal is vital, is not, in our opinion, decisive of the question as to whether the amount is an allowable expenditure under Section 37(1) of the Act. In the caseof expenses incurred on account of the penalty levied for a breach of the law, the penalty is, as observed in IRC v, Alexander von Glehn & Co. Ltd.  2 KB 553, imposed on the assessee personally and the expenses incurred in that behalf cannot be held to be laid out wholly and exclusively for the purpose of the business of the assessee.
15. For all these reasons, our answer to the question referred to us is in the negative and against the assessee. In the circumstances of the case, parties shall bear their own costs of this reference.