Hardayal Hardy, C.J.
(1) The question raised in this reference under S. 256(1) of the Income-tax Act, 1961 relates to imposition of penalty amounting to Rs. 97028/04 for delayed payment of cess and purchase tax levied under the U.P. Sugarcane Cess Act, 1956.
(2) The Tribunal had held that the amount was an allowable expenditure under Section 10(2) (xv) of the Income-tax Act, 1922. The assessment related to the assessment year 1962-63, the year of account being the year ended on 30th September, 1961. As the assessment order was made by the Income-tax Officer after the coming into force of the Income-tax Act, 1961 in response to a notice issued under that Act, the Commissioner's application for reference was made under Section 256(1) of the said Act and the following question of law was referred to this Court :-
'WHETHERon the facts and in the circumstances of the case, the Tribunal was justified in holding that the sum of Rs. 97,021 was an allowable deduction.?'
(3) There is no dispute as to facts which lie in a short compass. The company which will hereafter be referred to as the assessed is the Upper Duab Sugar Mills Ltd Sharli. It derives income from manufacture and sale of sugar, distillery products, power and alcohol and spirit. During the previous year, the company had besides one sugar mill, two distilleries, one at Shamli and the other at Pilkhani. During that year the assessed paid cane cess to the tune of Rs. 12,53,059.00 and cane purchase tax amounting to Rs. 16,66,890.00. Over and above this payments a penalty of Rs. 97,028/04 was paid on delaying payments of the cess and purchase tax. It was claimed that the payments were made in accordance with the instructions contained in a letter dated 7th October 1959 from the Deputy Secretary to the Government of Uttar Pradesh.
(4) During the course of assessment proceedings the assessed claimed deduction of the amount of penalty but both the Income-tax Officer and the Appellate Assistant Commissioner held against it and the amount was disallowed. The reason given was that the penalty was levied for the failure to make the payment on the prescribed date and as such it could not be said that the amount was wholly and exclusively laid for the purpose of the business and that a penalty imposed on an assessed for breach of law during the course of the trade is not an allowable deduction for computing the statutory income under the Income-tax Act.
(5) On further appeal to the Tribunal the relief claimed by the assessed was allowed on the basis that the U.P. Sugarcane Cess Act, 1956 which,will hereafter be referred to as the State Act, under which the said amount was paid as penalty, was declared invalid by the Supreme Court in the case of Diamond Sugar Mills Ltd. and another v. The State of U.P. State on 13-12-1960.
(6) 'IN view of this decision the amount collected became refundable to the assessed among other persons. The U.P. Legislature thereforee passed the U.P. Sugarcane Cess (Validation) Act 4 of 1961, which will hereafter be referred to as the Validating Act, replacing the Ordinance issued earlier on 2-12-1961. Section 2(a) of the Validating Act runs as follows:-
''cess' means the cess payable under any State Act and includes any sums recoverable under any such Act by way of interest or penalty.'
(7) The Commissioner of Income-tax sought reference of the question of law mentioned above and obtained an order to that effect.
(8) Mr. Sharma on behalf of the Commissioner referred to two decisions, one by the Supreme Court and the other by the High Court of Orissa reported in : 1983ECR1942D(SC) and : 51ITR65(Orissa) respectively. The first is the case of Haji Aziz And Abdul Shakoor Bros. v. Commissioner of Income-tax, Bombay City II(1). There the assessed which carried on the business of importing dates from abroad and selling them in India, imported dates from Iraq partly by steamer and partly by country crafts at a time when the import of dates by steamer was prohibited. The dates which were imported by steamer were confiscated by the Customs authorities under Section 167 of the Sea Customs Act and the assessed was given an option to pay a fine and have the dates released. The assessed paid the fine and while computing its profits sought to deduct the amount paid as fine as an allowable expenditure under S. 10(2) (xv) of the Income-tax Act, 1922. It was held by their Lordships of the Supreme Court that no expense which was incurred by way of penalty for a breach of the law could be considered as an amount wholly and exlusively laid out for the purposes of business of the assessed within the meaning of S. 10(2) (xv) of the Act and hence the fine paid by the assessed was not an allowable deduction. It was also observed that the expenses which are permitted as deductions are only those as are made for the purposes of carrying on the business i.e. that which enable the person concerned to carry on and earn profit in that business.
(9) In Moore v. Stewarts & Lloyds 6 Tax Cas 501, Lord Pearson observed at page 507 that the statute did not require the party claiming deduction to show that any profit was in fact earned by the expenditure in question. In Hughes v. Bank of New Zealand 1938 I.T.R. 636 (3) Lord Thankerton observed at page 644 that 'expenditure in course of the trade which is un-remunerative is non-the-less a proper deduction if wholly and exclusively made for the purposes of the trade, it does not require the presence of a receipt on the credit side to justify the deduction of an expense.'' The real test as was observed by Viscount Cave L. C. in Atherton v. British Insultated & Helsby Cables Ltd. (10 Tax Cas 155 is that a sum of money expended, not of necessity and with a view to direct and immediate benefit to the trade, but voluntarily and on the ground of commercial expediency and in order indirectly to facilitate the carrying on of the business, may yet be expended wholly and exclusively for the purposes of the trade.
(10) In Eastern Investments Ltd. v. Commissioner of Income Tax . : 20ITR1(SC) the Supreme Court was concerned with deduction of interest under Section 12(2) of the Income-tax Act, 1922 and, it was urged that it was not expenditure incurred for the purpose of earning the income, profits and gains of the assessed and secondly that even if it was so it was at any rate not expenditure incurred solely for that purpose. It was held that the only question that should be considered was whether the-transaction was voluntarily entered in order indirectly to facilitate the carrying on of the business of the assessed and was made on the ground of commercial expediency. If that was so, it would fall within the purview of Section 12(2) and the interest paid would be a permissible deduction under that sub-section. The case of course did not relate to Section 10(2) (xv) but the principle laid down is of help in the decision of such cases.
(11) In Commissioner of Income-tax, Bombay North v. Chandulal Keshavlal & Co. : 38ITR601(SC) , the Supreme Court observed that in deciding whether a payment of money is a deductible expenditure one has to take into consideration questions of commercial expediency and the principles of ordinary commercial trading. If the payment of expenditure is incurred for the purpose of the trade it does not matter that the payment may ensure to the benefit of third party. Another test is whether the transaction is properly entered into as a part of the assessed's legitimate commercial undertaking in order to facilitate the carrying on of its business; and it is immaterial that a third party also benefits thereby.
(12) In Commissioner of Income-tax, Kerala v. Malayalam Plantations Ltd. : 53ITR140(SC) certain amounts were paid by way of estate duty under Section 84 of the Estate Duty Act, 1953 (before amendment in 1958) by a resident company incorporated outside India on the death of share-holders not domiciled in India. The question before the Supreme Court was whether the amounts paid were expenditure under Section 10(2) (xv) of the Income-tax Act, 1922. Their Lordships held that the expression 'for the purpose of the business' is wider in scope than the expression 'for the purpose of earning profits'. Its range is wide; it may take in not only the day to day running of a business but also the rationalisation of its administration and modernisation of its machinery; it may include measures for the preservation of the business and for the protection of its assets and property from expropriation, coercive process or assertion of hostile title; it may also comprehend payment of statutory dues and taxes imposed as a pre-condition to commence or for the carrying on of a business; it may comprehend among others acts incidental to the carrying on of the business. However wide the meaning of the expression may be, its limits are implicit in it. The purpose shall be purpose of the business, that is to say, the expenditure incurred shall be for the carrying on of the business and the assessed shall incur it in his capacity as a person carrying on the business.
(13) In Roman and Roman Ltd. v 'Commissioner of Income-tax, Madras : 46ITR400(Mad) . The learned Judges of Madras High Court held that the test to find out whether a particular expenditure is wholly or partly justified is not to see whether it was necessary, nor to see whether the officer, if he were to do the business himself would incur it to the extent to which it was incurred but to find out whether the businessman when he expended the money was acting reasonably in the interest of his own business un-influenced by irrelevant or extraneous considerations.
(14) In Sree Meenakshi Mills Ltd. vs Commissioner of Income-tax, Madras : 63ITR207(SC) , the Supreme Court observed that in order that an expenditure may be admissible as a deduction under S. 10 (2) (xv) it is not necessary that the primary motive in incurring it must be directly to earn income thereby.
(15) The next case is the case of Commissioner of Income-tax, Bihar & Orissa v. Prafulla Kumar Malik. This case was a case of systematic breach of a contract which prevented the Government of Orissa from equitably distributing an essential commodity. The payment for the breach was not in the nature of damages for breach of contract but penalty for committing an act opposed to public policy. The amount could not thereforee be deducted under Section 10(2) (xv) for it was said that payments by way of penalty are not incidental to business and cannot be deducted.
(16) Mr. Sharma did not rest his case entirely on the two decisions reported in : 1983ECR1942D(SC) & : 51ITR65(Orissa) but he also cited three other decisions. The first case cited by him is a decision of Allahabad High Court in Mahabir Sugar Mills (P) Ltd. v. Commissioner of Income-tax. U.P. 7 ITR 87. This case related to payment of penalty under Section 3(5) of the State Act for non-payment of arrears of sugar-cane cess levied under that Act. The amount was held not to be deductible as business expenditure under Section 10(2) (xv) of the Indian Income-tax Act, 1922. What the Chief Justice V.G. Oak, who wrote the judgment of the Bench said was that no expense which was paid by way of penalty for breach of law even though it might not involve personal liability could be said to be an amount wholly and exlusively laid out for the purpose of the business of the assessed within the meaning of Section 10(2) (xv) of the Act.
(17) The second case relied upon by the counsel for the Revenue is a decision of Calcutta High Court in Deoria Sugar Mills Ltd v. Commissioner of Income tax West Bengal : 77ITR834(Cal) . The case of Mahabir Sugar Mills(10) was relied upon, in this decision and what was said was that an infraction of law is not a normal incident of trade.
(18) The third case is a decision of this Court in The Commissioner of Income-tax v. M/s. Mahalaxmi Sugar Mills Lid. (Income-tax Reference No. 40 of 1971) decided on 25.10 1971 (12). Prithvi Raj J. who wrote the Judgment (Hardy C.J. concurring) observed :-
'BUTin the case before us what is to be seen is whether the assessed by infringing the provisions of the statute and not depositing the cess in time whereby penal interest was imposed on him could claim that the amount deposited by way of penal interest was in any manner closely related to the assessed's business as a result whereof the expenditure incurred by way of penal interest could be said to be laid out or expended wholly or exclusively for the purpose of assessed's business. We are unable to answer the question in favor of the assessed as the origin of the liability flows from a statute and in meeting his liability of depositing the penal interest it cannot be said that the assessed was laying out or expending the amount wholly and exclusively for the purpose of his business.'
(19) It is no doubt true that in the case decided by the Court, the Bench was concerned with payment of penal interest but it appears to us that the same consideration would also apply to payment of penalty which was imposed on the assessed because he delayed the payment of cess and purchase tax.
(20) Counsel for the assessed contended on the other hand that the State Act which required the assessed to pay the amount of cess was eventually declared invalid by a majority judgment of the Supreme Court on the ground that it was ultra virus and beyond the competence of the State legislature. Meanwhile Uttar Pradesh Government had assessed or collected under the State Act large sums of money and thereforee Parliament in exercise of its powers passed a Validating Act known as the U.P. Sugarcane Cess (Validation) Act, 1961 replacing the earlier Ordinance to validate the imposition and collection of cess on sugarcane under the State Act, namely,
(I)The United Provinces Sugar Factories Control Act, 1938;
(II)The U.P. Sugarcane (Regulation of Supply and Purchase) Act, 1953; and
(III)The U.P. Sugarcane Cess Act, 1956 (which we have previously described as the State Act). Section 3 of the Validating Act reads as under:-
'3. Validation of imposition and collection of cesses under State Acts during a certain period.
(1)Notwithstanding any judgment, decree or order of any court, all cesses imposed, assessed or collected or purporting to have been imposed, assessed or collected under any State Act before the 3rd day of February, 1961 shall be deemed to have been validly imposed, assessed or collected in accordance with law, as if the provisions of the State Acts and of all notifications, orders and rules issued or made there under, in so far as such provisions relate to the imposition, assessment and collection of such cess had been included in and formed part of this section and this section had been in force at all material times when such cess was imposed, assessed or collected; and accordingly :-
(A)no suit or other proceeding shall be maintained or continued in any court for the refund of any cess paid under any State Act;
(B)no court shall enforce a decree or order directing the refund of any cess paid under any State Act; and
(C)any cess imposed or assessed under any state Act before the 3rd day of February, 1961 but not collected before that date, may be recovered (after assessment of the cess, where necessary) in the manner provided under that Act.
(2)For the removal of doubts it is hereby declared that nothing in sub-section (1) shall be construed as preventing any person-
(A)from questioning in accordance with the provisions of any State Act and rules made there under the assessment of any cess for any period, or
(B)from claiming refund of any cess paid by him in excess of the amount due from him under any State Act and the rules made there under.'
(21) Counsel for the assessed referred to the definition of 'cess' as given in Section 2(a) of the Validating Act which has already been re-produced above and submitted that in the Validating Act 'cess' meant 'Cess' payable under any State Act and included any sums recoverable under any such Act by way of interest or penalty. According to the learned counsel, the words 'interest' or''penalty' thereforee formed part of the term 'cess' and when thereforee the assessed paid in addition to what was earlier described as 'cess', he also paid interest and penalty in addition to cess. In the State Act the word 'Cess' was not defined. All that Section 3 of the State Act said was that State Government may by notification in the official gazette impose cess not exceeding four annas per maund on the entry of the cane into the premises of a factory for use, consumption or sale therein. It was under sub-section (2) of that section that it was laid down that the cess imposed under that section shall be payable by the owner of the factory on such date and at such place as may be prescribed. Sub-section (3) of that section provided that any arrear of cess not paid on the date prescribed under sub-section (2) shall carry interest at 6 per cent per annum from such date to date of payment. Sub-section (5) provided that where any person was in default in making the payment of cess the officer or authority empowered to collect the cess may direct that in addition to the amount of 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. Section 4 provided for imprisonment up to six months or fine not exceeding Rs. 5,000.00 or both and in the case of continuing contravention to a further fine not exceeding Rs. 1,000.00 for each day during which the contravention continued in case any person defaulted in the payment of cess imposed under Section 3 or contravened any provision of any rule made under that Act. This liability for imprisonment was without prejudice to the liability of the defaulter under sub-s : 82ITR44(SC) ction (5) of Section 3 of the Act.
(22) The argument advanced by the learned counsel was that since the State Act had been declared invalid there was no liability on the part of the assessed to pay the cess or interest or penalty. It is only the Validating Act that gave the definition of the term 'cess' and included 'interest' or 'penalty' in the definition. Counsel referred to the meaning of the word 'Includes' in the case of Commissioner of Income-tax A. P. v. M/s. Taj Mahal Hotel, Secundrabad : 82ITR44(SC) . It was there said that the word 'includes' is often used in interpretation clauses in order to enlarge the meaning of the words or phrases occurring in the body of the statute. When it is so used, these words and phrases must be construed as comprehending not only such thing as they signify according to their nature and import but also those things which the interpretation clause declares that they shall include.'
(23) The argument does not seem to have any force. The original liability of the assessed was to pay cess and thereforee the State Government went on imposing, assessing and collecting cess from various sugarcane factory owners. Some of them did not pay the amount of cess and became defaulters. They thereforee become liable to payment of interest and in some cases also to pay penalty. The cess and also the interest and/or penalty were imposed, assessed or collected before the third day of February, 1961. On 13th December 1960 the Supreme Court delivered its majority judgment. The result was that the entire amount of cess, interest and/or penalty that had-been collected by the State Government had to be refunded. The President thereforee passed an Ordinance validating the recovery of the cess, interest and/or penalty and this Ordinance was replaced by Parliament by the Validating Act which mentioned the 3rd day of February 1961 as the dead line and provided that cess, interest and/or penalty that had been imposed, assessed or collected in accordance with law, as if the provisions of the State Act and of notifications, orders and rules issued or made there under, in so far as such provisions related to the imposition, assessment and collection of such cess had been included in and formed part of Section 3 of the Validating Act and that section should be deemed to have been in force at all material times when such cess was imposed, assessed or collected. The deeming provision in Section 3 of the Validating Act provided that all cesses imposed, assessed or collected before the 3rd day of February, 1961 shall be deemed to have been validly imposed, assessed or collected according to law. It also gave retrospective effect to the provision as if section 3 of the Validating Act was in force at all material times when the cess was imposed, assessed or collected.
(24) Clause (c) of sub-section (1) of Section 3 also provided that any cess imposed or assessed under any State Act before the 3rd day of February 1961 but not collected before that day, may be recovered (after assessment of the cess, where necessary) in the manner provided under the State Act. The result of this provision was that it is the cess that was imposed or assessed under any State Act before the 3rd day of February 1961 but which had not been collected before that day that was to be recovered in the manner provided under the State Act provided necessary assessment of the cess was made because it is only after the assessment of the cess under the State Act that the collection of the cess had to be made in such a case.
(25) In the present case, it was the amount of cess under the State Act that had to be collected and the counsel for the assessed conceded that under the State Act interest or penalty did not form part of the cess. It is only when cess was not paid on the prescribed date that the factory owner became liable to pay interest and when payment was not still made by the factory owner he also became liable to pay penalty.
(26) The assessed thereforee cannot take advantage of the definition of the term 'cess' in the Validating Act because since cess, interest and/ or penalty were all parts of the proceedings under the State Act a comprehensive definition of the term 'cess' was given in the Validating Act. The expressions 'penalty' and/or 'interest' did not under any circumstances become part of the term 'cess' and were at all material times separate and different from that expression. The liability of the factory owner to pay interest and or penalty arose only when payment of cess was not made on due date but neither penalty nor interest became part of the term 'cess'.
(27) Counsel for the assessed referred to a decision of Madhya Pradesh High Court in M/s. Joara Sugar Mills Private Ltd. v. State of Madhya Pradesh and others : AIR1964MP118 and submitted that the deeming provision in Section 3 of the Validating Act only creates an artificial imposition of cess for a period before the commencement of the Act and makes the imposition, assessment and collection thereof 'in accordance with law'. It does not give retrospective validity to any State Act imposing a cess. We do not see how this decision can be of any assistance to the argument of the learned counsel, more so, in view of clause (c) of sub-section (1) of Section 3 of the Validating Act which clearly refers to the State Act. The deeming provisions in the Validating Act is in our view retrospective to the extent mentioned therein.
(28) The imposition of penalty was on account of failure on the part of the assessed to comply with a statutory obligation and as such any payment made by the assessed was not incidental to its business nor was there any commercial expediency for its payment.
(29) The result is that the question is answered in favor of the Revenue and against the assessed. The assessed will also pay costs of these proceedings. Counsel's fee Rs. 300.00.