(Civil Appeal No. 1397 of 1982 is by Special Leave from the judgment and order, dated February 13, 1981, of the Madhya Pradesh High Court in M.C.C. No. 121 of 1978).

(Civil Appeals Nos. 1398 and 1399 of 1982 are by Special Leave from the judgment and order, dated,June 27, 1981 of the Madhya Pradesh High Court in M.C.C. No. 21 of 1979).

Income-tax---

----Business expenditure---Sales tax---Raw materials used for purpose other than specified---Penalty---Comprises both elements of compensation and penalty--Amount paid to be bifurcated---Element of compensation to be allowed---Failure to comply with requirements of notice or to file return-- Penalty---No element of compensation involved---Not allowable as deduction---Indian Income Tax Act, 1961, S.37(1)---Madhya Pradesh General Sales Tax Act, 1958, Ss.8(2), & 17(3)---[CIT v. Malwa Vanaspati and Chemical Co. Ltd. (1982) 135 ITR 221 reversed].

The amount that the assessee is required to pay under section 17(3) of the Madhya Pradesh General Sales Tax Act, 1958, is by reason of the fact that he has, without sufficient cause, failed to comply with the requirements of a notice or to furnish a return. The provision is intended to have penal consequences upon an assessee who fails to comply with the provisions of the statute without sufficient cause. There is no element of compensation involved in the payment under section 17(3) and the assessee is not titled to deduction thereof under section 37(1) of the Income Tax Act, 1961.

Commissioner of Income-tax v. Malwa Vanaspati and Chemical Co. Ltd. (1982) 135 ITR 221 affirmed on this point.

Where an assessee uses the raw material purchased at the lower rate of sales tax specified in section 8(1) of the Madhya Pradesh General Sales Tax Act, 1958, for a purpose other than that specified in that section, he has to pay an amount to be determined as stated in subsection (2) of that section. That amount cannot be less than the difference between the tax on the sale of such raw material at the full rate and the amount at the lower rate by reason of subsection (1). The amount to be paid by the assessee under section 8(2) comprises both the elements of compensation and penalty; compensation in so far as payment of tax at the full rate is obligatory; and something more up to 25 per cent. thereof as is determined by the Commissioner; to tile latter extent the amount would partake of the character of penalty. The amount payable under section 8(2) is allowable as business expenditure under section 37(1) of the Income Tax Act, 1961, to the extent that it is compensatory in nature.

CIT v, Malwa Vanaspati and Chemical Co. Ltd. ( 1982) 135 ITR221 reversed.

Vivek Gambhir and S. K. Gambhir for Appellant.

Dr. R. R. Misra, Senior Advocate, Ms. Luxmi Iyengar and S. N. Terdol, Advocates with him) for Respondent.

JUDGMENT

These appeals relate to the assessment years 1971-72, 1972-73 and 1973-74. In its Income-tax returns for these assessment years the assessee claimed as deduction of expenditure for the purpose of business under section 37(1) of the Income-tax Act, 1961, amounts that it had paid to the I4Iadhya Pradesh Sales Tax authorities under the provisions of sections 8(2) and 17(3) of the Madhya Pradesh General Sales Tax Act, 1958. The matter was carried by the assessee up to the Income-tax Appellate Tribunal, which held that it was entitled to the deduction. Arising from out of the order of the Tribunal, the following question was referred to the High Court of Aadhya Pradesh under the provisions of section 256 of the Income-tax Act (see page 222 of 135 ITR):

"Whether, on the facts and in the circumstances of the case, the penalty levied under sections 8(2) and 7(3) of the Madhiya Pradesh General Sales Tax Act paid by the assessee is allowable expenditure in the computation of total income?"

Section 17(3) of the State statute reads as follows:

"If a dealer fails without sufficient cause to comply with the requirements of a notice issued under subsection (1) or a registered dealer fails without sufficient cause to furnish under the said sub section 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-forth 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 "

The amount that the assessee is required to pay thereunder is by reason of the fact that he hat, without sufficient cause, failed to comply with the requirements of a notice or to furnish a return. Then, after giving the assessee a reasonable opportunity of being heard, the Commissioner may direct him to pay a sum that does not exceed 1/4th of the tax that is assessed or, if no tax is found payable, a sum not exceeding rupees one hundred. It is for the Commissioner to determine whether the assessee has so failed without sufficient cause and he must do after giving the assessee an opportunity of being heard. He is empowered to direct the assessee to pay and the upper limit of such payment is prescribed. Where no tax is found to be payable he can direct the assessee to pay a sum not exceeding Rs.100. The use of the word penalty in the provision is neither here nor there. Read as a whole, there can be no doubt that the provision is intended to have penal consequences upon an assessee who fails to comply with the provisions of the statute without sufficient cause. There is no element of compensation involved and, therefore, the High Court was right in the view that it took, namely, that the assessee was not entitled to a deduction under section 37(1) of the Income-tax Act in respect of the amounts that it had been required to pay under the provisions of section 17(3).

Section 8, so far as it is relevant, reads thus:

"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 the course of inter-State trade or commerce or in the course of export out of the territory of India, shall be two per cent, of the sale or purchase price of .such raw material:

Provided ....

(2) Where any raw material purchased by a registered dealer under subsection (1) is utilised by him for any purpose other than a purpose specified in the said subsection, 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) for Schedule 11 and the amount of tax payable under subsection (1), and not exceeding 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:

Provided..."

Here, the assessee, should he have used the raw material for a purpose other than that specified in subsection (1), must pay an amount to be determined as stated in subsection (2). That amount cannot be less than the difference between the amount of tax on the sale of such raw material at the full rate and the amount at the lesser rate by reason of subsection (1). That amount also cannot be more than one and one-quarter times the amount of the tax at the full rate. Whether it should be the aforesaid minimum amount or the aforesaid maximum amount or something in between is for the Commissioner to determine, having regard to the circumstances in which such use was made. Clearly, subsection (2) comprises both the elements of compensation and penalty, compensation in so far as payment of tax at the full rate is obligatory, and something more, up to 25 per cent. thereof, is payable should the Commissioner so deem fit, having regard to the circumstances in which the use of the raw material was made: to that extent the amount would partake of the character of a penalty.

Now, it does not appear from the record that there had at any stage been a bifurcation, if at all a bifurcation was required, of the amounts paid under the provisions of section 8(2) between the elements of compensation and penalty as aforesaid. This shall now have to be done and the assessee shall be entitled to the deduction under section 37(1) only in so far as the payments under section 8(2) partake of the element of compensation.

The question referred to the High Court must be answered thus: The amounts payable under the provisions of section 17(3) of the Madhya Pradesh General Sakes Tax Act are not allowable expenditure in the computation of total income. The amounts payable under the provisions of section 8(2) thereof are allowable expenditure in the computation of total income only in so far as they are compensatory in character.

No order as to costs.

The appeals are allowed to the extent aforesaid.

M.B.A./ 1463/FC Appeal partially allowed.