Honble V.K. SINGHAL, J. — The Income Tax Appellate Tribunal Jaipur Bench, Jaipur has referred the following question arising out of its judgment under Section 256(1) of the Income Tax Act, 1961 :- "Whether in the facts and circumstances of the case the Tribunal was correct in law in holding that the entire amount paid by the assessee to the Sales Tax Department could not be allowed as a deduction in computing its total income for the relevant accounting years ?" 2. Brief facts of the case are that the assessee is a dealer in Tata Motor Parts. Certain motor parts were purchased by the assessee firm within the State of Rajasthan, on which Rajasthan Sales Tax was paid. While supplying such parts to the Government Departments, the assessee has charged sales tax in addition to the value of the goods. The amount of sales tax so collected was not deposited in the Government Treasury and the entire amount of sales tax was credited in Malkhata along with the Sales price of the goods. Sales Tax Department levied penalties of Rs 50, 000/- and 75,075/- in respect of the assessment years 1978-79 and 1979-80 under Section 16 (1) (j) of the Rajasthan Sales Tax Act, 1954. The assessee claimed these amounts as deduction from its income before the Income Tax Officer and its claim was rejected. The CIT (Appeals) held that the penalty levied in this case had a dual character. One was sales tax which the assessee had collected and credited in the Mal Khata and, therefore, in his opinion to the extent of the sales tax collected it should be allowed as a deduction on the basis of trade outgoings and only the remaining penalty portion should be disallowed. The matter was taken up before the Income Tax Appellate Tribunal and the Tribunal has held that the CIT (Appeals) has erred in bifurcating the figure of penalties. Accordingly, it was held that the penalty cannot be allowed as deduction. The appeal of the Revenue was allowed. 3. The submission of the learned counsel for the assessee before us is that the said penalties have ultimately been quashed by the Sales Tax Tribunal and the part which was refunded by the Department to the assessee has already been declared in the income when the refunds were received. The appeal of the Revenue was allowed. 3. The submission of the learned counsel for the assessee before us is that the said penalties have ultimately been quashed by the Sales Tax Tribunal and the part which was refunded by the Department to the assessee has already been declared in the income when the refunds were received. It has further been submitted that the penalty which is levied under sec. 16 (1) (j) of the Rajasthan Sales Tax Act is not penal in nature. 4. We have considered over the arguments of both the learned counsel. The provisions of Section 16(1) (j) RST Act at the relevant time in respect of the year to which the dispute relates provides that if any person demands or charges from any purchaser tax on the sale of any goods in respect of which no tax is payable by him or tax at a rate higher than that payable under this Act or having charged such tax retains such tax knowing it to be not due or higher than he is liable for penalty for a sum not exceeding double the amount of the authorised tax so demmded, charged or retained. The provisions of Sec 16 (I) (j) have subsequently been amended which are not relevant for the purpose of determination of this dispute. A distinction has been made by subsequent amendment between the tax amount and the quantum of penalty to be levied, but in so far as the present case is concerned, the assessee is liable for payment of penalty in respect of the unauthorised tax demanded, charged or retained. The question for determination is whether the payment of such penalty is the allowable deduction or not The penalty is levied for infraction of a law and cannot be considered a normal incidence of business. The assessee has to conduct his business in a manner which is prescribed by law. Inaction or acting contrary to the specific requirement of the law will be the contravention of the specific provisions of law and if it has been provided under the said law that for such inaction or breach the assessee is liable for penalty then it would be considered to be infraction of law. 5. Inaction or acting contrary to the specific requirement of the law will be the contravention of the specific provisions of law and if it has been provided under the said law that for such inaction or breach the assessee is liable for penalty then it would be considered to be infraction of law. 5. In C.I.T. V/s Ramdev Kirana Stores (1), the Madhya Pradesh High Court has held that : "Whether breach of law involves moral turpitude or only a violation of some technical provision is not decisive of the question as to whether expenditure incurred would be allowable u/s 37(1) of the IT Act. The expenditure incurred on account of penalty levied under the sales tax law of the State was held not allowable deduction." 6. The Bombay High Court in C.I.T. V. Bharat Barrel & Drum Manfg. Company Ltd. (2) has held that the penalty payable for non-payment of sales tax within the prescribed time is not the interest for late payment of tax and is not deductable as business expenditure under sec. 37 of the Act, 1961. 7. It has been held by the Honble Supreme Court in Haji Ajij Abdul Sakoor & Bros v. Commissioner of Income tax (3) that infraction of law is not a normal incidence of business and therefore, only such disbursement can be deducted as are real incidental to the business assets. They cannot be deducted if they fall in the assessee in some character other than that of the trader. Therefore, when penalty is incurred in contravention of any specific provision, it cannot be said to be a commercial loss falling on the assessee as a trader the test being that the expenses which are for the purpose of enabling a person to carry on trade for making profits in the business are permitted but not if they are merely connected with the business. 8. The Allahabad High Court in Kanpur Sugar Works Ltd.Vs. C.I.T. (4) has also taken the view that expenditure incurred by the assessee representing the amount of penalty in carrying on business in contravention of rules and regulations cannot be regarded as commercial loss or as the expenditure expanded wholly or exclusively for the purpose of business. 9. The Honble Supreme Court in Mahalaxmi Sugar Mills Co. C.I.T. (4) has also taken the view that expenditure incurred by the assessee representing the amount of penalty in carrying on business in contravention of rules and regulations cannot be regarded as commercial loss or as the expenditure expanded wholly or exclusively for the purpose of business. 9. The Honble Supreme Court in Mahalaxmi Sugar Mills Co. vs. Commissioner of Income Tax (5), made distinction between the interest and penalty and observed that no specific order is necessary in order that the obligation to pay interest should accrue. The liability to pay interest is as certain as the liability to pay cess. As soon as the prescribed rate is crossed without payment of cess, interest begun to accrue. It is not a penalty for which a provision has been separately made. Nor is it a penalty within the meaning of Sec. 4 which provides for criminal liability and criminal prosecution. The penalty payable under Sec. 3 (5) lies in the discretion of the collecting officer or authority. So, the basic distinction which has been drawn by the Apex Court was that if liability is automatic under the statute, the same can be considered as allowable deduction, but where the liability is in respect of the penalty for which the authority has the discretion to levy or not to levy, then the same cannot be allowed as deduction. The penalty is no doubt, a civil sanction, but is leviable when there is infraction of law. Infraction of law is not a normal incident of business. Nor it can be considered to be a commercial loss, which a trader has to bear. The law does not expect the infringment thereof and infringments are not incidental or ancilliary to the business, which is carried by a businessman. The requirement of Section 37 of the Income Tax Act is that the expenditure laid down or expanded wholly and exclusively for the purposes of business can be allowed as deduction. The expenditure in respect of penalty cannot be considered to be made out or expanded wholly and exclusively for the purposes of business. 10. The requirement of Section 37 of the Income Tax Act is that the expenditure laid down or expanded wholly and exclusively for the purposes of business can be allowed as deduction. The expenditure in respect of penalty cannot be considered to be made out or expanded wholly and exclusively for the purposes of business. 10. In these circumstances, we are of the view that the Tribunal was correct in law in holding that the entire amount paid by the assessee to the Sales Tax Department cannot be allowed as deduction in respect of penalty under Sec. 16 (1) (j) of the Rajasthan Sales Tax Act while computing its total income for the relevant accounting year. 11. Accordingly, the reference is answered in favour of the Revenue and against the Assessee. The revenue would be entitled for costs of Rs. 300/-.