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Govind Choudhury and Sons Vs. Commissioner of Income-tax - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtOrissa High Court
Decided On
Case NumberS.J.C. No. 62 of 1966
Judge
Reported in[1971]79ITR493(Orissa)
ActsIncome Tax Act, 1922 - Sections 10(1) and 10(2); Income Tax Act, 1961 - Sections 256(1)
AppellantGovind Choudhury and Sons
RespondentCommissioner of Income-tax
Appellant AdvocateG. Rath, Adv.
Respondent AdvocateStanding Counsel
Cases ReferredPrafulla Kumar Mallik v. Commissioner of Income
Excerpt:
.....co. ltd. v md. makubur rahman, 1993 (2) glr 430 and new india assurance co. ltd. v smt rita devi, 1997(2) glt 406, approved. new india assurance co. ltd. v birendra mohan de, 1995 (2) gau lt 218 (db) and union of india v smt gita banik, 1996 (2) glt 246, are not good law]. - the word 'deduction 'appears to have been used by the appellant as well as by the tribunal only because the dispute related to a sum which had been deducted by the government of orissa as a penalty from the amount due to the appellant for the supplies made by him in pursuance of the agreement......out of the imposition of penalty was integrally connected with the carrying on of the business of paddy supply. the action of the assessee is not one contrary to law but was in violation of the terms of agreement under which the business was carried on. the assessing authorities in support of their conclusion relied on a bench decision of this court in commissioner of income-tax v. prafulla kumar, [1964] 51 i.t.r. 65 (orissa)., which was reversed by the supreme court in prafulla kumar mallik v. commissioner of income-tax, [1967] 63 i.t.r. 62, 64 (s.c.). their lordships observed thus:' the word ' deduction ' appears to have been used by the appellant as well as by the tribunal only because the dispute related to a sum which had been deducted by the government of orissa as a penalty from.....
Judgment:

G.K. Misra, C.J.

1. This reference has been made under Section 256(1) of the Income-tax Act, 1961. Two questions have been framed by the assessee asking for reference. They are !

' 1. Whether, on the facts and circumstances of the case, the Tribunal was justified in holding that the amount recovered by the Government as penalty for non-supply of paddy according to specification was not deductible as expenditure under the Indian Income-tax Act, 1922 ?

2. Whether, on the facts and circumstances of the case, the Tribunal was justified in upholding the estimate of profit at 121/2 per cent. on the gross value of the works executed by the applicant which includes the cost of the materials supplied by the contractee, Public Works Department '

2. The second question was not referred to this court and so the assessee filed S. J. C. No. 61/1966, asking for reference and the same was dismissed on December 12, 1966.

3. The facts relevant to question No. 1 may be stated in a narrow compass. The assessee is a registered firm. It carried on business in iron, cement, paddy, petroleum products, etc. The assessment year is 1955-56 and the accounting year is the year ending March 31, 1955. The assessee claimed deduction of a sum of Rs. 1,233, paid as penalty to the Government of Orissa for supply of inferior quality of paddy and rice. All the assessing authorities rejected the claim of the assessee to deduct the penalty from the income, and accordingly the aforesaid question was framed.

4. The assessing authorities were of opinion that the penalty paid by the assessee was wholly dissociated from the income accrued to him and cannot, therefore, be deducted under Section 10(2)(xv) of the Income-tax Act, 1922, which runs thus:

' (2) Such profits or gains shall be computed after making the following allowances, namely': . . .

(xv) any expenditure (not being an allowance of the nature described inany of the Clauses (i) to (xiv) inclusive and not being in the nature of capitalexpenditure or personal expenses of the assessee) laid out or expendedwholly and exclusively for the purpose of such business, profession orvocation. '

5. It is not necessary to enumerate the provisions of Clauses (i) to (xiv) of Sub-section (2) of Section 10 of the Indian Income-tax Act. A bare perusal of these clauses would show that the penalty would not come within theambit of any one of those clauses so as to entitle the assessee to claim deduction under Section 10(2)(xv).

6. The assessee by advancing a wrong argument did not place the real point before the assessing authorities. The real point to be answered is whether the penalty, while assessing the income, should be deducted therefrom as coming within the ambit of Section 10(1) which lays down that:

' The tax shall be payable by an assessee under the head ' profits and gains of business, profession or vocation ' in respect of the profits or gains of any business/profession or vocation carried on by him. '

7. The question is whether the penalty was so integrally connected with the carrying on of the business of supplying paddy, that the loss arising out of its payment would be deductible from the income itself. In our view the answer must be in the affirmative. It was a condition of the contract that the assessee would supply paddy of a particular specification. In the course of such supply of paddy slightly inferior quality was supplied. The supply authorities were of the view that the paddy was not according to specification and accordingly penalty was charged. This loss arising out of the imposition of penalty was integrally connected with the carrying on of the business of paddy supply. The action of the assessee is not one contrary to law but was in violation of the terms of agreement under which the business was carried on. The assessing authorities in support of their conclusion relied on a Bench decision of this court in Commissioner of Income-tax v. Prafulla Kumar, [1964] 51 I.T.R. 65 (Orissa)., which was reversed by the Supreme Court in Prafulla Kumar Mallik v. Commissioner of Income-tax, [1967] 63 I.T.R. 62, 64 (S.C.). Their Lordships observed thus:

' The word ' deduction ' appears to have been used by the appellant as well as by the Tribunal only because the dispute related to a sum which had been deducted by the Government of Orissa as a penalty from the amount due to the appellant for the supplies made by him in pursuance of the agreement. The High Court, therefore, in answering the question referred to it, should not have gone into the question of the applicability of Section 10(2)(xv) of the Act at all, and should have confined itself to deciding whether this amount deducted from the claims of the assessee by the Government of Orissa was liable to be excluded when computing the income under Section 10(1) of the Act. '

8. The Supreme Court remanded that case and ultimately in Commissioner of Income-tax v. Prafulla Kumar, [1969] 73 I.T.R. 119 (Orissa)., this court answered the question in favour of the assessee.

9. The real question which requires to be answered is whether the deduction claimed could come under Section 10(1) of the Income-taxAct, 1922. We would answer the question by saying that the assessee is entitled to relief under Section 10(1) of the Act and not by way of deduction under Section 10(2)(xv).

10. In the result, the reference is accepted but, in the circumstances, there will be no order is to costs. The reference fee deposited by the petitioner be refunded.

S. Acharya, J.

11. I agree.


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