Commissioner of Income Tax vs Rane Brake Linings Ltd.

R. Jayasimha Babu, J.—The question referred to us is as to whether the Tribunal was right in holding that the penalty paid under Rule 173Q

of the Central Excise Rules, 1944, and the amount paid in lieu of confiscation of goods, could be allowed as a deduction in computing the income

of the asses-see.

The assessee is a manufacturer of excisable goods and is required to comply with the Central Excise Act and the Rules framed thereunder. The

infraction of the provision of that Act and the Rules exposes the assessee to penalty provided for under the Act and the Rules. As a consequence

of violation of Rule 173Q of the Central Excise Rules, such infraction having resulted from the removal of the goods without making entries in the

register, the assessee was called upon to pay and paid a sum of Rs. 18,500 as penalty. In lieu of the confiscation of the goods to which assessee

had become subject by reason of the violation of certain other provisions of the Rules, the assessee was levied a fine of Rs. 3,500 in lieu of the

confiscation.

The argument that was advanced for the assessee that these are minor irregularities and are the result of the want of care on the part of the

employees and not the result of any deliberate violation of law was accepted by the Tribunal, as affording sufficient basis to hold that these

penalties should be treated as business expenditure.

The expenditure which can be deducted in connection with the business carried on by the assessee is the expenditure which can properly be

regarded as such. Penalties paid for violating the law in the course of the conduct of the business cannot be regarded as deductible expenditure as

the assessee is expected to carry on business in accordance with law and not in violation of the law. Penalty incurred by the assessee for the

violation of the applicable statute, unless the true nature of that penalty is compensatory, is not to be regarded as a deductible item of expenditure.

The amount paid by the assessee here as penalty cannot be regarded as compensatory as the penalty was not an amount which was otherwise

payable as excise duty. The penalty was in addition to the duty payable on the manufacture of goods for the violation of the excise rules, while the

goods remained under the custody of the manufacturer. The fine levied in lieu of the confiscation only enabled the assessee to retain the goods

which otherwise would have had to be surrendered to the authorities. The fine was paid in order to avoid confiscation. The fine so paid cannot be

regarded as compensatory as the fine levied was not for recovery of duty which ought to have been, but had not been paid.

This court in the case of Commissioner of Income Tax Vs. Chemical Constructions, , has held that it is only compensatory element in a levy

termed penalty, that is eligible for being regarded as business expenditure, and that it is only that part which is purely penal that has to be excluded

from such expenditure.

On the facts of the case before us, it must be held that the amounts paid as penalty were in fact penalties and were not amounts which were

compensatory in character. The assessee was therefore not entitled to treat the same as part of his deductible business expenditure. The Tribunal

was in error in holding otherwise.

The question referred to us is therefore answered in favour of the Revenue and against the assessee.