Commissioner of Income Tax-II vs Hero Cycles Ltd.

Adarsh Kumar Goel, J.—This appeal has been preferred by the revenue u/s 260A of the Income Tax Act, 1961 (in short, ''the Act'') against the order of the Income Tax Appellate Tribunal, Chandigarh Bench ''B'', Chandigarh passed in ITA No. 751/Chandi./2004, dated 31-10-2007 in respect of assessment year 1999-2000, proposing to raise following substantial question of law:

Whether on the facts and in the circumstances of the case, the ITAT was right in law in deleting the payment made to PSEB on account of extra charges being penalty paid, as capital expenditure under the Income Tax Act?

The assessee is manufacturer of cycle parts and during assessment, made claim for amount paid to Electricity Board as penalty for violating power regulations. The said claim was disallowed by the Assessing Officer but was allowed by the CIT (Appeals). This view has been upheld by the Tribunal. After considering the nature of amount paid, the Tribunal held that the payment was identical to the one considered by this Court in CIT v. Industrial Cables (India) Ltd. [2007] 162 Taxman 423. The finding of the Tribunal is as under:

We have given our careful consideration to the rival contentions. In our considered view, there is no distinction between the nature of the payment made by the assessee to the PSEB in the case of Industrial Cables (India) Ltd. (supra) and in the case of the assessee. Since the claim of the assessee in the case of Industrial Cables (India) Ltd. (supra) has been held not to be in the nature of penalty, we respectfully following the order of the Hon''ble Punjab and Haryana High Court in the case of Industrial Cables (India) Ltd. (supra) hold that the assessee is entitled to deduction on account of extra charges paid to the PSEB for drawing extra load in peak hours. The addition of Rs. 11,83,050 is accordingly deleted.

There is no doubt that payments made in the nature of penalty or fine for any wrongful act cannot be allowed as permissible deductions but mere label of the payment is not conclusive. Certain payments may be incidental to the business and have to be allowed on the test of ''commercial expediency'', if no violation of law or public policy is involved. Where penalty is not for deliberate violation of law, the amount may be allowed as deduction. There may be cases involving illegality or moral turpitude on the one hand and innocent violation on the other. Law is well-settled. Reference may be made to judgments of the Hon''ble Supreme Court in Haji Aziz and Abdul Shakoor Bros. Vs. The Commissioner of Income Tax, Bombay City II, , Malwa Vanaspati and Chemical Co. Vs. Commissioner of Income Tax, , M/s. Prakash Cotton Mills Pvt. ltd. Vs. Commissioner of Income Tax (Central), Bombay, . The test has to be applied from case to case.

Since the Tribunal has followed an order of this Court, which is not shown to be different, we are unable to hold that any substantial question of law arises.

Accordingly, the appeal is dismissed.