Per A. Kalyanasundharam, A.M. - The appeal is filed by the assessed, a registered firm, aggrieved by the order of the CIT (A) dt. 25-11-1986. In this appeal, the grievance of the assessed is on the disallowance of claim of deduction in respect of penalty of Rs. 14,20,201 levied under section 10A of the Central Sales Tax Act and on the levy of interest under section 217 of the I. T. Act.
2. The assessed provided in its accounts for the previous year ended on 31-3-1982, the demand of penalty under section 10A, amounting to Rs. 14,20,201 raised by the Assessing Officer, Excise & Taxation Office, Faridabad by his orders for the various years 1974-75 to 1977-78 and 1979-80, passed on 15-3-1982. The assessed had claimed that, it carries on two activities, one was manufacturing of gas cylinders and the other was job-work of manufacture of gas cylinders for the three petroleum companies, viz., Indian Oil Corporation, Baharat Petroleum Corporation and Hindustan Petroleum Corporation. Both these activities were recognised by the concerned licencing authorities, as well as, the sales tax authorities and the required certificates were granted by them. In the various financial years, it had purchased the raw materials at a concessional rate of sales tax, from another registered dealer, for being used in its manufacturing activity, but had to use them in connection with the job-work for the three petroleum corporations. This utilisation of the raw materials, for purposes other than for which it was purchased, have been held to be contravention of the provisions contained in section 8(3) of the Central Sales Tax Act. The concerned authorities had invoked the sections 10(d) and 10A of that Act, and had levied penalty on the assessed firm. The imposition of the penalty has been challenged before the appellate authorities under that act. The deduction of these amounts had been claimed on the reasoning that, the authorities are aggrieved with the fact of the assessed having had the benefit of concessional rate of sales tax and not using the raw material for the purpose for which it was bought, the concessional tax should not have been allowed but, tax should have been levied as if, the assessed was not a registered dealer and thereby with the intention of recovering the difference in tax between the normal rate and the concessional rate, have raised the demand of tax. It was pleaded that though the words used are penalty, but in reality, it involves only the differential tax element and since it is regularization of a wrong committed, it needs to be allowed. The assessed had placed reliance on the ruling of Madhya Pradesh High Court in Simplex Structural Works v. ITO  140 ITR 782, which supported the claim of the assessed.
3. The ITO after considering the pleadings of the assessed and also the orders of the sales tax authorities, observed that, the authorities had levied penalties for breach of law and cannot be described as a business loss. He placing reliance on the ruling of Allahabad High Court in CIT v. Swadeshi Cotton Mills Co. Ltd.  121 ITR 747, held that, the penalties so claimed are not permissible deduction and disallowed the claim.
4. The assessed carried the matter to the CIT (A), aggrieved by this disallowance. Referring to the section 10A of the Central Sales Tax Act, it pleaded that the penalty imposed on the assessed is nothing more than compensation with regard to the deficiency in the sales tax paid by it. It was also pleaded that the section 10A allows the levy and the collection of tax as well. Reliance was also placed on the ruling of the Madhya Pradesh High Court in Simplex Structural Works case (supra). Referring to the Supreme Court ruling in Mahalakshmi Sugar Mills Co. v. CIT  123 ITR 429, which had considered the ruling of the Allahabad High Court in Saraya Sugar Mills (P.) Ltd. v. CIT  116 ITR 387 (FB), it was pleaded that, the nature of liability under section 3(3) of the Sugar Cane Cess Act and the Central Sales Tax Act were identical in nature and when Courts have held that the imposition under section 3(3) of the Sugar Cane Cess Act is in the nature of interest only, the same treatment should be given for the penalty under the Sales Tax Act. The CIT (A) in para 4.2 of his order considered the provisions of sections 10(d) and 10A of the Central Sales Tax Act and observed that the offences under section 10(d) were criminal in nature for it was punishable with simple imprisonment and the offences under section 10A were also criminal in nature for it provided imposition of penalty in lieu of prosecution. He was further of the view that, section 10A provided the imposition of penalty not exceeding a maximum of one and half times the tax as would have been levied under section 8(2) of that Act, i.e., the penalty being related to the normal tax payable and not to the concessional tax, the imposition had no connection to the additional sales tax. He also observed that, the quantum of penalty may be more or less the same as the amount of the additional tax for the improper utilization of the raw materials but since the imposition was in lieu of prosecution, the nature of imposition remained to be penalty. He was further of the view, that, the imposition being for the violation of the statutory provisions, it was only a penalty, and thus upheld the disallowance. The assessed, thus has come up in appeal before us.
5. The learned counsel Sh. Ganesan, appearing for the assessed, filed a paper book consisting of 103 pages, which comprised of the submissions in relation to the issue under appeal before the lower authorities, the orders of the Assessing Officer dated 15-3-1982, passed under the Central Sales Tax Act, the calculation of the element of tax included in the penalty, the Balance Sheet and Profit & Loss account of the assessed firm. He advanced his arguments on the same lines as were done before the lower authorities and placed reliance on the Bombay High Court ruling in CIT v. Pannalal Narottamdas & Co.  67 ITR 667. He pleaded that, the Bombay High Court (supra) considered the situation of unauthorised import of materials and the imposition of penalty to avoid confiscation and it was held that the payment of penalty paid to avoid confiscation, which would result in the loss of goods to the assessed resulted in the addition to the cost of the goods and hence allowable. He accordingly pleaded, that, in the instant case too, the situation is similar to wrongful confinement of the raw materials and thus, the penalty is in the nature of additional tax. He pleaded that, it is not the case of the assessed, that, the whole of the penalty relates to the additional tax, but, that, it includes the element of tax to the extent of the difference in rate of tax as leviable as if the assessed is not a registered dealer and the concessional tax already enjoyed by it. He submitted that, he had worked out the additional tax amount and the penalty amount and on this basis, his claim was limited to Rs. 9,60,494. He then drew our attention to the M. P. High Court ruling in Simplex Structural Works (supra) and submitted that, in that case, the penalty as was imposed under the M. P. Gen. Sales Tax Act as well as section 10A of the Central Sales Tax Act were examined and it was held that the penalty imposed was not for any infraction of law and therefore, was held as allowable under section 37(1) of the Income-tax Act. He then placed reliance on another Madhya Pradesh High Court ruling in CIT v. S. S. Ratanchand Bholanath  160 ITR 500. He also drew our attention to the Supreme Court ruling in the State of Madras v. Radio & Electricals Ltd.  18 STC 222, for the proposition that the dealer who sells the goods under a mistaken impression about the genuineness or the correctness of the certificate, could not be penalised at all. He submitted that the penalty came to be imposed for the reason that the three corporations had made the assessed to manufacture the gas cylinders as if the cylinders were to be sold by them, but in fact, they were using the cylinders for packaging the liquid gas and it was only the gas that was sold and not the cylinder itself. He also placed reliance on the Supreme Court ruling in Kedarnath Jute Mfg. Co. Ltd. v. CIT  82 ITR 363, for the proposition that, the liability came to be fastened on the assessed, by means of the demand made vide order dt. 15-3-82 and therefore, the liability was rightly claimed in the year. He therefore pleaded, that, the claim to the extent of Rs. 9,60,494 should be allowed the deduction.
6. The learned DR Sh. Puneet Gangal pleaded, that, the Central Sales Tax Act only talks of penalty and not penalty in lieu of the tax and therefore, the plea as advanced by the assessed needs to be rejected. He also placed reliance on the orders of the lower authorities.
7. We have given our very careful consideration to the rival submissions, the various materials that have been placed on record and also to the case laws relied upon by either side. The crux of the appeal before us lies on the interpretation of sections 10(d) and 10A of the Central Sales Tax Act.
Before we proceed with the analysis of these two sections, we would have to briefly recapitulate the basis of imposition of the penalties on the assessed firm by the sales tax authorities. Identical orders have been for the various financial years 1974-75 to 1977-78 and 1979-80 and the circumstances calling for the application of these two sections are also identical.
The Assessing Officer under the Sales Tax Act, had observed that the assessed firm had diverted the raw materials purchased from outside the State for manufacture of gas cylinders to the job-work carried out for the three government owned petroleum corporations. Two of the dealers, who were distributors of the liquid gas produced by these three corporations to the various consumers in Faridabad, viz., M/s Allied Agencies and M/s K. D. Enterprises were examined, who categorically stated that, they were selling the gas and not the cylinder, as it always remained the property of these corporations. The Assessing Officer also called for the information in this regard from the corporations and these corporations stated that, "certified that L. P. G. (liquid petroleum gas) cylinders fabricated and supplied by M/s. Indian Gas Cylinders, Faridabad are used by us in processing, distribution and sale of liquid petroleum gas."
The Assessing Officer on the strength of the statements the employees of the dealers, as well as, the certificates from the corporations, held, that,
"the materials purchased on the strength of R. C. under CST, has been used by the firm in the fabrication of gas cylinders on job contract basis are actually neither sold by the firm itself nor by the dealer for whom they were manufactured. Thus it can be safely said to have committed a breach of conditions of R. C. or the violation of the provision of section 8(3) (b) of C. S. T. Act. Hence penalty under section 10A of CST Act is imposed in the light of decision of the Division Bench of the Honorable High Court of Punjab & Haryana in the case of M/s. East India Cotton Co. (P.) Ltd. v. Assessing Authority, which decision is further affirmed by the latest decision of the Supreme Court reported in  48 STC 240, this decision has full application on this case, where it is held that if it is proved in any proceeding initiated under section 10(d) or 10A that the goods manufactured by the assessed for a third party on job contract basis were not intended for sale by that third party, as would be evident if such goods were in fact not sold by the third party, but were used for its own purposes, the assessed would incur the penalty prescribed in those sections."
He then proceeded to estimate the proportional purchase of the materials used in the job-work and then levied the penalty for the various years. The quantum of purchases made by use of R. C. but used for the job-work and the quantum of penalty as levied for the various years is given below in a table :-
Quantum of purchases Year used in job-work
7.1 We would have to reproduce the sections 10(d) & 10A of the Central Sales Tax Act and the section, the contravention of which, penalties are provided, viz., section 8(3) (b) of that Act.
7.2 Section 10(d)
If any person after purchasing any goods for any purposes specified in clause (b), or clause (c), or clause (d) of sub-section (3) of section 8 falls, without reasonable excuse, to make use of the goods for any such purpose;
he shall be punishable with simple imprisonment which may extent to six months, or with fine, or with both; and when the offence is a continuing offence, with a daily fine which may extend to fifty rupees for every day during which the offence continues.
Section 10A (1)
If any person purchasing goods is guilty of an offence under clause (b), or clause (c), or clause (d) of section 10, the authority who granted to him or, as the case may be, is competent to grant to him a certificate of registration under this Act may, after giving him a reasonable opportunity of being heard, by order in writing, impose upon him by way of penalty a sum not exceeding one and a half times the tax, which would have been levied under sub-section (2) of section 8 in respect of the sale to him of the goods, if the sale had been a sale falling within that sub-section :
Provided that no prosecution for an offence under section 10 shall be instituted in respect of the same facts on which a penalty has been imposed under this section.
(1) Every dealer, who in the course of inter-State trade or commerce
(a) sells to the Government any goods, or
(b) sells to a registered dealer other than the Government goods of the description to in sub-section (3);
shall be liable to pay tax under this Act, which shall be four per cent of his turnover.
(2) The tax payable by any dealer on his turnover in so far as the turnover or any part thereof relates to the sale of goods in the course of inter-State trade or commerce not falling within sub-section (1) -
(a) in the case of declared goods, shall be calculated at twice the rate applicable to the sale or purchase of such goods inside the appropriate State; and
(b) in the case of goods other than declared goods, shall be calculated at the rate of ten per cent, or at the rate applicable to the sale or purchase of such goods inside the appropriate State, whichever is higher,
and for the purpose of making any such calculation any such dealer shall be deemed to be a dealer liable to pay tax under the sales tax law of the appropriate State, notwithstanding that he, in fact, may not be liable under that law.
(3) The goods referred to in clause (b) of sub-section (1) -
(b) are goods of the class or classes specified in the certification of registration of the registered dealer purchasing the goods as being intended for resale by him or subject to any rules made by the Central Government in this behalf, for use by him in the manufacture or processing of goods for sale or in mining in generation or distribution of electricity or any other form of power.
7.3 In para 7 and 7.1 above, we have observed that the penalties were imposed on the assessed, for the various years for the contravention of the provision contained in section 8(3) (b) of the Central Sales Tax Act. As per this sub-section, a dealer is issued a certificate of registration, specifying the class of goods, which goods, he is allowed to purchase under concessional rate of tax either for resale of such class/classes of goods, or for being used in the manufacture or processing of goods for resale. In the instant case, the assessed is alleged to have bought the goods for manufacturing cylinders for resale but had used the goods for the manufacture of cylinders for the three corporations, who use it for packing of liquid petroleum gas and it is only the gas that is sold. Since it was not intended for resale by the three corporations, the assessed had been held to have contravened the provisions of section 8(3) (b) of that Act.
The penal provisions are quasi-criminal in nature and recognising this factor, the section 10(d) has used the words "without reasonable excuse". This clearly implies that the principle of means read are attracted and when the excuse of using of goods for any other purpose other than for which the goods was purchased, has been established by the revenue to be unreasonable, the penalty is imposable. Now the question that remains to be answered is, whether, the element of penalty is strictly penal in nature or procedural in nature. In case it is the former, then it is for infringement of law, and in case it is the latter, then it is only in the nature of additional tax or interest. The section 8(3) (b) of the Central Sales Tax Act, does not allow any option to the assessed to purchase the goods for one purpose and to utilise it for any other purpose and therefore, it is not a procedural regulation but a mandatory provision. Infringement of any mandatory provision is obviously an infraction of law, for which infraction penalty provisions are prescribed in the Act.
7.4 Section 9(1) & (2) of that Act spells out the procedure for levy and collection of tax and penalty. This section provides that the authorities under the General Sales Tax Laws of the appropriate State are empowered to make assessments, reassessments, revisions, collected and enforce payment of tax, including any penalty payable under this Act, as they are to carry out under the General Sales Tax Laws of that State. It further states that, for these purposes the authorities may exercise of all or any of the powers they have under the General Sales Tax Law of that State, and the provisions of such State law, which includes, the manner of making of assessments, payment of tax, transfer of registration, appeals, reviews, revisions, references, refunds, penalties, charging of interest, compounding of offences, etc. It also states that, in case the State law is inapplicable to any State or part thereof, then, the Central Government may provide for the necessary rules in this behalf.
Sub-section (2A) of section 9 states that, in respect of penalties under section 10(d) and 10A of the Central Act, the State law would be inapplicable.
7.5 It is obvious from the above that, in regard to offences of the nature as in the instant case, it is only the Central Act that would have application and the nature of penalty imposed would have to be examined in the light of the provisions contained under that Act alone. We have observed in para 7.3 above that, section 8(3) (b) of the Central Act does not allow any option to a dealer, to purchase the goods as specified in the registration certificate for one purpose, and to use it for a different purpose. It is for such change or modification of purpose or intention with which the goods are purchased, the penalty provisions are spelt out in section 10(d) and section 10A of that Act. The certificate of registration entitles the dealer to purchase the goods at a concessional rate of tax for the specified purposes only and therefore, when a dealer uses that certificate, purchases the goods but utilises them for a different purpose, then it could be said to be misrepresentation of the facts to the dealer from whom he had purchased the goods. Providing of a certificate of registration for purchase of goods to the selling dealer is a procedure evolved under the Act but strict compliance of the contents of that certificate is not merely a procedure but a mandatory one, i.e., the dealer had no choice in the manner of following or adopting it to his convenience. However, section 10(d) provides that, using of the goods for a purpose different from the one for which it was intended, with reasonable excuse, is pardonable. In case of absence of any reasonable excuse, the act of using of goods for a purpose other than for what it was intended to, would be clearly mala fide, i.e., with motive to not to follow the law, which would be an act of infringement or infraction of law.
7.6 In the instant case, the penalty has been imposed on the assessed and this would mean that, the assessed had infringed the provisions of that Act and the imposition, is clearly one arising as a consequence of an act not permitted under the Act and therefore, is obviously penal in nature. We had observed above that the Central Act recognises only two kinds of levies, the tax and the penalty and the plain reading of the provisions indicates that, nowhere it suggests the treating of penalty an additional tax. Further, the Central Act does not even permit the application of the State laws for levy of additional tax or the charging of interest, especially in respect of the penalties imposed under sections 10(d) and 10A of that Act. Therefore, it is essential that, the nature of imposition of penalty under sections 10(d) and 10A under the Central Act has to be examined only in the light of the provisions contained in that Act. Thus it needs to be concluded that, the penalty that has been imposed on the assessed in lieu of prosecution under section 10A of the Central Act for the contravention as spelt out in section 10(d) of that Act, has the only nature of penalty and no other.
7.7 The assessed had claimed before us that the imposition contains two elements, (a) difference in tax at rate of ten per cent and six per cent and (b) penalty. Its claim is that, the portion relatable to tax is deductible business expenditure and the portion relatable to penalty is not so allowable as a deduction. In para 7.6 above, we have observed that, the Act does not provide for giving a different treatment to either of the levies under the Act and that the penalty so imposed under the Act could, under no circumstance be said to include part amount of difference in tax between the normal rate and the concessional rate. This is further fortified by the fact of the State laws being specifically made inapplicable to the provisions relating to the penalties under section 10(d) and 10A of the Central Act. Therefore, the claim of the assessed that the penalty imposed has two elements, one of which is additional tax is clearly bereft of any substance and is rejected.
7.8 In support of its contention that, the penalty included the element of additional tax, and to that extent it should be allowed as business expenditure, it had placed reliance on the Madhya Pradesh High Court ruling in Simplex Structural Works case (supra) and also in the ruling of the same High Court in S. S. Ratanchand Bholanaths case (supra).
7.9 We have to observe that, the first ruling in Simplex Structural Works case (supra) the assessment year involved was 1976-77, and relates to a period prior to the introduction of section 9(2A) of the Central Act and therefore, would not be applicable to the instant case before us. In this ruling the nature of penalty as was levied under sections 10(d) and 10A of the Central Act was examined and since the penalty came to be imposed equal to the difference in normal rate and the concessional rate, it had been concluded that, the penalty was in the nature of additional tax. While coming to this conclusions, reference was made to the earlier ruling of the same High Court in CIT v. Malwa Vanaspati & Chemical Co. Ltd.  135 ITR 221 (MP) and it was observed that, in that case, since the penalty imposed was not merely the difference in the tax at the full rate and the tax at the concessional rate and that the assessed could not provide material to the effect that, the penalty was the minimum imposable and therefore, was not allowed as a deduction. In the ruling in S. S. Ratanchand Bholanath (supra), the same High Court had held that the penalty for delay in filing of the return, was not an allowable expenditure. In this ruling, it had also been held that, the additional sales tax levied under that States General law is an allowable expenditure.
The assessed also had stressed its arguments on the basis of the ruling of the Bombay High Court in CIT v. Pannalal Narottamdas & Co.  67 ITR 667, which ruling was concerned with the levy of penalty under the Customs Act, to avoid confiscation of goods imported. The said ruling would have no application to the instant case before us, for the provisions contained in Customs Act and the Central Sales Tax Act are not identical in nature and their purpose of enactment are also very different.
As observed earlier, after the amendment to the Central Act by the Amendment Act of 1976, section 9(2A) having been introduced, the State laws being made inapplicable to the imposition of penalties under section 10(d) and section 10A of the Central Act, the question of levy of any additional tax by the State does not arise and also giving a different treatment to the nature of penalty is not permissible. Therefore, the above ruling, in no way is of any assistance to the assesseds case.
7.10 We are therefore, of the view that, the penalties imposed under section 10A of the Central Act are not allowable as business expenditure.
8. The second issue in this appeal relates to the levy of interest under section 217 of the Act and the pleading was limited to the effect that, it was only consequential. On this issue, we have to observe that, the CIT (A) had noted in para 7 of his order, that, no arguments in regard to levy of interest under section 217 were advanced before him and has accordingly been rejected by him. Since, it is not the case of the assessed, that, arguments were in fact, advanced before the CIT (A), therefore, the ground cannot be said to arise out of the order of the CIT (A) and hence rejected.
9. The appeal of the assessed is accordingly dismissed.