IN THE HIGH COURT OF JUDICATURE AT BOMBAY
\nO.O.C.J.
\nINCOME TAX APPEAL NO. 51 OF 2016
\nWITH
\nNOTICE OF MOTION NO. 797 OF 2018
\nIN
\nNOTICE OF MOTION NO. 1975 OF 2016
\nIN
\nINCOME TAX APPEAL NO. 51 OF 2016
\nThe Principal Commissioner of
\nIncome Tax -17,
\nMumbai. .. Appellant
\nVersus
\nSushil Gupta
\nLegal Representative of Late
\nShri. Mahabir Prasad Gupta
\nA.Y. 1988-99
\nPAN : AALPG1065E
\n.. Respondent
\n……………….
\n\u2022\uf020Mr. Prakash Chandra Chhotaray for the Appellant
\n\u2022\uf020Mr. Vikram Nankani, Senior Counsel with Mr. S.L. Shah i\/by M\/s.
\nShah Legal for the Respondent
\n……………….
\nCORAM : AKIL KURESHI &
\nB.P. COLABAWALLA, JJ.
\nRESERVED ON : FEBRUARY 13, 2019.
\nPRONOUNCED ON : FEBRUARY 22, 2019 at
\n2.45 P.M. IN CHAMBER
\nORAL JUDGMENT (Per Akil Kureshi, J.)
\n1. This appeal was admitted for consideration of following
\nsubstantial question of law:-
\n” Whether on the facts and in the circumstances of the case
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\nand in law, the Tribunal was justified in holding that the
\nredemption fine of Rs. 75,00,000\/- is allowable as business
\nexpenditure under Section 37 of the Income Tax Act?”
\n2. The appeal arises in following background:-
\n2.1 Respondent assessee is an individual. For the
\nassessment year 1988-89, the assessee had filed return of
\nincome declaring total income of Rs. 1,47,020\/-. The return
\nwas accepted without scrutiny. Subsequently, information
\nwas received by the Assessing Officer that the assessee had
\nmade payment of Rs. 75 lacs in two separate installments
\ntowards penalty for import of almonds which import was not
\npermissible. On the basis of such information, the Assessing
\nOfficer reopened the assessment for the said assessment
\nyear 1988-89 by issuing the notice under Section 148 of the
\nIncome Tax Act, 1961 (“the Act” for short).
\n2.2 During the course of such assessment proceedings, the
\nassessee was called upon to provide various details by the
\nAssessing Officer. The representative of the assessee
\nremained present before the Assessing Officer and conveyed
\nthat the assessee was using import license of M\/s. Rajnikant
\nBros. which is an export house. For using the license, the
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\nassessee would pay service charges equivalent to 25% of CIF
\nvalue of the goods. It was further pointed that the
\nconsignment of almond was imported by M\/s. Rajnikant Bros.
\nThe assessee had merely acted as an agent in the
\ntransaction. It was pointed out that upon confiscation of the
\ngoods, redemption fine and penalty were imposed by the
\nCollector of Customs, Madras on M\/s. Rajnikant Bros.
\nTribunal in the appeal reduced the redemption fine to Rs. 75
\nLacs and deleted personal penalty. It was contended that in
\nany case, the imports were made by M\/s. Rajnikant Bros. and
\nthe order was passed against M\/s. Rajnikant Bros. and not
\nagainst the assessee. It was also contended that the penalty
\nwas paid by M\/s. Rajnikant Bros. and not by the assessee.
\nThe assessee, however, could not produce the books of
\naccounts to establish this averment. The Assessing Officer,
\ntherefore, issued summons to M\/s. Rajnikant Bros. asking for
\na copy of the agreement dated 14.10.1985 entered between
\nthe assessee and M\/s. Rajnikant Bros. for the use of import
\nlicence and other details. In response to the summons, the
\naccountant of M\/s. Rajnikant Bros. appeared before the
\nAssessing Officer. A copy of the said agreement dated
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\n14.10.1985 was produced. The procedure attached to the
\nagreement was also produced. The statement of the
\naccountant of M\/s. Rajnikant Bros. was recorded. Relevant
\nportion of which reads as under:-
\n“Q. No. 4 : What is the modus operandi of the transaction
\nmade by Shri. M.P. Gupta regarding the use of
\nlicence?
\nAns. : Mr. M.P. Gupta has imported almonds in Madras
\nPort on 20.12.195 by using the above said licence.
\nThe said material imported in the name of M\/s.
\nRajnikant Bros. Total consideration of import material
\nalong with duty, fine, foreign payment and clearing
\ncharges etc. are as under:-
\nPurchases Rs.
\ni. Foreign payment 55,65,487.23
\nii. Duty 56,00,000.00
\niii. Redemption Fine (Penalty) 75,00,000.00
\n(As per Madras Customs Order dt.
\n27.10.86)
\niv. Clearing Charges & Expenses 15,72,487.10
\nv. Service Charges of M\/s. Rajnikant Bros. 12,50,000.00
\n(As per Agreement dt. 14.10.85) ————————-
\nTotal Rs. 2,14,87,974.33
\n==============
\nQ. No. 5 : As stated by you redemption fine of Rs. 75,00,000\/-
\npaid to Madras Customs House. Please state who
\nhas paid the sum:
\nAnswer : Rs. 75,00,000\/- paid as custom fine by Mr. M.P.
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\nGupta through Rajnikant Bros. from Banoue
\nIndosuez P. Box 685 A\/c No. 11124 201 5301. All
\ntransactions were made by Shri. M.P. Gupta hence, he
\nis responsible for the above fine. As per agreement,
\nwe are only related for our service charges.”
\n2.3 The Assessing Officer confronted the assessee
\nwith the factum of payment of penalty of Rs. 75 Lacs. The
\nassessee in a written response dated 28.2.1997 contended
\nthat he had only made advances to M\/s. Rajnikant Bros from
\ntime to time as per the requirements but had not paid
\npenalty of Rs. 75 Lacs.
\n2.4 The Assessing Officer did not accept the said
\nexplanation particularly in view of the failure of the assessee
\nto produce books of accounts. He was also of the opinion
\nthat the stand of the assessee was in conflict with the
\nagreement dated 14.10.1985. He did not accept the
\nassessee\/s version of mere advances being made to M\/s.
\nRajnikant Bros. He, therefore, held as under:-
\n” All the above facts clearly established that the assessee viz.
\nShri. M.P. Gupta, user of the licence standing in the name of M\/s.
\nRajnikant Bros., has made the custom penalty of Rs. 75,00,000\/-. I,
\ntherefore, treat that this expenditure is covered u\/S. 69C of the Act
\nand has been incurred by the assessee from unexplained source of
\nwhich the assessee has no explanation about the source nor the
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\nassessee offered any satisfactory explanation. The penalty
\nproceedings u\/S. 271(1)(c) is being initiated separately.”
\n2.5 The assessee carried the matter in appeal and
\nreiterated his stand. In the context of the addition under
\nSection 69C of the Act, the Commissioner rejected the
\nassessee’s plea by making following observations:-
\n” As regards addition u\/S. 69C, the appellant has claimed that
\npayment was made through funds arranged by the assessee through
\nM\/s. Mangla Bros and debited to M\/s. Rajnikant & Bros accounts.
\nThe copy of the confirmation filed by M\/s. Mangla Bros. as a
\nCertificate dated 24.11.1997 it states that payments have been made
\nto Collector of Customs, M.P. Gupta account, M\/s. Rajnikant & Bros.
\nwhich gives DD No., date, amount and name of the party to whom
\npayment was arranged. The Certificate does not carry any PAN\/GIR
\nNo. of M\/s. Mangla Bros. and thus, itself of limited validity. In the
\nabsence of books of account and a valid confirmation the source of
\nexpenditure is not satisfactorily explained and the payment is liable to
\nbe treated as unexplained expenditure u\/s 69C of the Act.”
\n2.6 The assessee had raised additional contention
\nthat when the expenditure was attributed to the assessee,
\nthe same should be considered as business expenditure. In
\nthis context, the question of such expenditure incurred for
\nany purpose which is an offence or which is prohibited by law
\ncame up for consideration. The assessee had raised
\nadditional contention, though grounds of appeal were
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\nconfined to questioning the additions made by the Assessing
\nOfficer under Section 69C of the Act. The Commissioner of
\nIncome Tax (Appeals) [“the CIT(A) for short], therefore,
\nconsidered whether the expenditure was in the nature of
\ncompensatory expenditure or towards fine in contravention
\nof law. The CIT(A) while rejecting this contention, observed as
\nunder:-
\n” The appellant’s plea is that the expense is allowable as a cost u\/S.
\n37 in accordance with case laws cited. It is found that after
\nconsidering the judgments of the Bombay High Court in (a) CIT Vs.
\nPannalal Narottamdas & Co (supra) which laid down that redemption
\nfine is additional cost for the goods purchased and (b) the judgment
\nin Rohit Pulp & Paper Mills Vs. CIT (1995) 215 ITR 919\/79 Taxman
\n168 (Bom), where also there was confiscation of goods u\/s. 111(d) of
\nthe Customs Act and a fine was paid u\/s. 125 of the Customs Act,
\nand the High Court held that payment was in the nature of penalty,
\nthe ITAT, Mumbai in Dimexon’s case (supra) has held that where the
\npenalty \/ fine has to be incurred because of the fault of the assessee
\nhimself, i.e, carrying on of business in an unlawful manner or in
\ncontravention of certain rules and regulations, the penalty \/ fine paid
\ncannot be regarded as wholly laid out for the purpose of business.
\nThus, in the face of the specific findings of the Custom Tribunal and
\nMadras High Court, the appellant’s contention is without force.”
\n2.7 The assessee carried the matter in further appeal
\nbefore the Tribunal. In such appeal, the assessee raised both
\nthe contentions. In addition to questioning the very addition
\nof Rs. 75 Lacs under Section 69C of the Act, he also
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\nchallenged the decision of the CIT(A) not accepting the
\ncontention that in any case, the expenditure was made
\nwholly and exclusively for the the purpose of business and
\ntherefore, allowable as business expenditure.
\n2.8 The Tribunal, in the impugned judgment, referred
\nto the documents under which the import of almond was
\nheld to be unlawful. The Tribunal noted that the Collector of
\nCustoms, Madras had confiscated the goods, imposed
\nredemption fine 1.20 crore and penalty of Rs. 20 lacs on M\/s.
\nRajnikant Bros. Ms\/. Rajnikant Bros. had filed appeal before
\nthe Customs Tribunal, Madras which had reduced redemption
\nfine to Rs. 75 Lacs and deleted the penalty. The Tribunal,
\nwhile allowing the appeal of the assessee and recognizing
\nthe expenditure as business expenditure came to following
\nconclusions:-
\n(i). The assessee and the Export House were under bonafide
\nbelief that the almond in shell was one of the items allowed for
\nimport against additional licence granted;
\n(ii). That the Customs Tribunal had held that there was no malafide
\non the part of the assessee as there was certain amount of
\nvagueness in the import policy and therefore, redemption fine
\nwas reduced and penalty was deleted;
\n(iii). The Tribunal noted the decision of the Supreme Court in the
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\ncase of CIT V\/s. Ahmedabad Cotton Mfg. Co Ltd.1 and was of
\nthe opinion that the facts of the present case were similar.
\nThe Tribunal noted that in the said case, it was found that the
\nfault or defect in the REP licence was not attributable to the
\nassessee. The assessee was not to be blamed,had not
\nindulged in any offence or incurred any expenditure for the
\npurpose which is prohibited by law and the assessee had to
\npay redemption fine in order to save and protect themselves.”
\n2.9 Against this judgment, the Revenue has filed this
\nappeal.
\n3. Mr. Chhotaray, learned counsel appearing for the
\nRevenue submitted that the amount of Rs. 75 Lacs paid by
\nthe assessee was towards redemption fine. In terms of
\nExplanation 1 to Section 37(1) of the Act, such expenditure
\nwas not an allowable deduction. The Tribunal, therefore,
\ncommitted serious error in allowing the assessee’s appeal.
\nHe took us extensively through the orders and statements on
\nrecord and submitted that the Assessing Officer and CIT(A)
\ncame to the specific conclusion that it was the assessee who
\nhad made the imports and had, therefore, paid the
\nredemption fine. The Tribunal without any basis came to the
\nconclusion that the assessee was not connected with the
\nimport of almond which led to imposition of redemption fine.
\n1 [1994] 205 ITR 163 (SC)
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\nHe submitted that the judgment of the Supreme Court in
\ncase of Ahmedabad Cotton Mfg. Co. Ltd. (supra) was
\ntherefore, wrongly applied by the Tribunal. Learned counsel
\nheavily relied on the decision of the Supreme Court in the
\ncase of Haji Aziz & Abdul Shakoor Bros. Vs. CIT2.
\nLearned counsel for the Revenue has also relied on certain
\ndecisions reference to which would be made at proper stage.
\n4. On the other hand, Mr. Nankani opposed the appeal
\ncontending that the assessee was not an importer. The
\nimports were made by M\/s. Rajnikant Bros. The assessee
\nhad merely entered into an agreement with M\/s. Rajnikant
\nBros. for purchase of imported almond which in turn would
\nbe sold by the assessee to local consumers \/ manufacturers
\nfor commission. The sum of Rs. 75 Lacs was thus paid to
\nprevent the imported consignment being forfeited. The
\nexpenditure was thus made on business considerations.
\nSum of Rs. 75 Lacs thus, was an additional cost of purchase
\nin the hands of the assessee. In the hands of the assessee, it
\nwould not partake the character of penalty. He placed
\nreliance on the decision of this Court in the case of CIT,
\n2 41 ITR 350 (SC)
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\nBombay Vs. Pannalal Narottamdas & Co3. He also
\nreferred to several other judgments reference to which would
\nbe made at proper stage.
\n5. Before dealing with the rival contentions, we may
\nrecord the genesis of the present dispute. M\/s. Rajnikant
\nBros. and another who were diamond exporters had applied
\nfor grant of Export House Certificates under the Import Policy
\n1978-79 which was denied to them on the ground that they
\nhad not diversified their exports. They had, therefore, filed
\nwrit petition before the Bombay High Court claiming that
\nthey were entitled to Export House Certificates. Such
\ndeclaration was granted by the Bombay High Court. Special
\nLeave Petition filed by the Union of India against the
\njudgment of the Bombay High Court was dismissed directing
\nthe Government of India to issue necessary Export House
\nCertificates for the year 1978-79 and further providing that :
\n“Save and except items which are specifically banned under
\nthe prevalent Import Policy at the time of import, the
\nrespondents shall be entitled to import all other items
\nwhether canalized or otherwise in accordance with the
\n3 (1968) 67 ITR 667 (Bom)
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\nrelevant rules”. Pursuant to such directions, M\/s. Rajnikant
\nBros. were granted additional licence. It started importing
\ngoods. At that stage, Indo Afghan Chambers of Commerce
\nwho was the association of dealers engaged in the business
\nof selling dry fruits in North India filed a petition before the
\nSupreme Court under Article 32 of the Constitution
\ncontending that the goods sought to be imported on the
\nadditional licences included those which were prohibited by
\nthe prevalent import policy. The Supreme Court held that
\nunder the import policy of 1985-88 when the dry fruits were
\nsought to be imported, they were no longer open to import
\nunder the Open General Licence. Relevant observations of
\nthe Supreme Court read thus:-
\n“7. We may assume for the purpose of this case that a diamond
\nexporter is legitimately entitled to obtain an Additional Licence under
\nthe Import Policy 1978-79 for an item which is different from the item
\nhe may have intended to import had the Additional Licences been
\nrightly granted to him originally. In that event, the diamond exporter
\ncan succeed only if the item could have been imported under the
\nImport Policy 1978-79 and also under the Import Policy 1985-88 in
\naccordance with the terms of the order of this Court dated April 18,
\n1985 as construed by this Court by its judgment dated March 5,
\n1986.
\n12. In our opinion the respondents diamond exporters are not
\nentitled to import dry fruits under the Import Policy 1985-88 under the
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\nAdditional Licences possessed by them. They are also not entitled to
\nthe benefit extended by the judgment of this Court dated March 5,
\n1986 to those diamond exporters who had imported items under
\nirrevocable Letters of Credit opened and established before October
\n18, 1985. It appears from the record before us that the respondents
\ndiamond exporters opened and established the irrevocable Letters of
\nCredit after that date.
\n14. The writ petition is allowed and the respondents Nos. 10 and
\n11, M\/s. Rajnikant Brothers and M\/s. Everest Gems are restrained
\nfrom importing dry fruits during the period 1985-88 under the
\nAdditional Licences granted to them under the Import Policy 1978-79.
\nIn the circumstances there is no order as to costs.”
\nWith this background, we may refer to the facts on
\nhand. As noted, the Assessing Officer in the order of
\nassessment after giving ample opportunities to the assessee
\ncame to the conclusion that the assessee M.P. Gupta was the
\nuser of the licence in the name of M\/s. Rajnikant Bros. and all
\ntransactions including the payment of penalty had been
\ncarried out by him. He did not accept the version of the
\nassessee that the assessee had merely advanced the money
\nto M\/s. Rajnikant Bros. in time of its need. It was held that
\nthe assessee had paid the customs fine of Rs. 75 Lacs.
\nSince, it could not shown the legitimate source of this
\namount, the Assessing Officer treated the same as
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\nassessee’s unexplained expenditure. Before the CIT(A) also,
\nthe assessee failed to persuade the Appellate Authority that
\nthe addition under Section 69C of the Act was wrongly
\nmade by the Assessing Officer. At which time, the petitioner
\nraised additional contention claiming deduction of the same
\namount by way of business expenditure. In response to this,
\nthe CIT(A) held that the penalty or fine had to be incurred
\nbecause of the fault of the assessee himself of carrying on
\nbusiness in unlawful manner or in contravention of the rules
\nand regulations.
\n6. In our opinion, the Tribunal without adverting to the
\nrelevant facts and materials on record granted benefit to the
\nassessee on the lines followed by this Court in the case of
\nPannalal (supra). The Tribunal without discussing the
\nrelevant materials compared the case of the assessee with
\nthe facts arising in the judgment of the Supreme Court in the
\ncase of Ahmedabad Cotton Mfg Co Ltd (supra) in which it was
\nrecorded that the fault or defect in the REP licence was not
\nattributable to the assessee and therefore, the assessee was
\nnot to be blamed for indulging in any offence or having
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\nincurred any expenditure for the purpose which was
\nprohibited by the law. In the present case, the Assessing
\nOfficer had held that it was the assessee who had imported
\nthe goods. The CIT(A) also largely concurred with this
\nfinding. The Tribunal did not advert to the materials on
\nrecord to give a different conclusion. The Tribunal totally
\nignored the statement of the representative of M\/s. Rajnikant
\nBros., relevant portion of which is reproduced earlier in which
\nhe attributed the entire transaction of import and payment or
\nfine to the assessee. The Tribunal merely referred to the
\nterms of the agreement overlooking the ground realities.
\nThe entire consideration of the Tribunal, therefore, has been
\nvitiated on account of this vital error. Even otherwise, the
\nfacts on record would suggest that it was the assessee who
\nhad imported the goods by utilizing the advance licence of
\nsaid M\/s. Rajnikant Bros. M\/s. Rajnikant Bros. merely
\nreceived payment computed in terms of percentage of CIF
\nvalue of the imports. For the purpose of making declarations
\nand filing bill of entries, M\/s. Rajnikant Bros. may be the
\ncorrect entity and therefore, the Customs Authorities might
\nhave offered redemption fine and imposed penalty on M\/s.
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\nRajnikant Bros and the Tribunal in the appeal may have
\nreduced the redemption fine and deleted the penalty in the
\nhands of M\/s. Rajnikant Bros, but in the context of income tax
\nliability, we cannot ignore the hard facts that the imports
\nwere made by the assessee himself. M\/s. Rajnikant Bros. had
\nmerely allowed the licence to be used for such purpose. In
\nessence,therefore, whatever the fault, defect or error of law
\nin such import, would attach to the assessee. In the context
\nof considering whether the expenditure incurred in the
\nprocess of importing the goods could be claimed by way of
\nexpenditure regard being had to the first explanation to subsection
\n(1) of Section 37, would therefore have to be decided
\non the anvil of this conclusion.
\n7. Once this much is clear, everything else would fall in
\nline. There is a clear line of distinction between two lines of
\nauthorities, one led by the judgment of the Supreme Court in
\nthe case of Hazi Aziz (supra) and the other adopted by this
\nCourt in the case of Pannalal (supra) as pointed out by
\nlearned counsel for the assessee.
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\n8. In case of Hazi Aziz (supra), the facts were that the
\nassessee was a firm doing the business of importing dates
\nfrom abroad and selling them in India. During the accounting
\nyear under consideration, the assessee had imported dates
\nfrom Iraq. At the relevant time, import of dates by steamer
\nwas prohibited but permitted to be brought by country craft.
\nThe goods ordered by the assessee were received partly by
\nsteamer and partly by country craft. Consignments imported
\nby steamer were confiscated by the Customs Authorities and
\nthe assessee was given an option to pay fine for redemption
\nof goods, upon payment of which the dates were released.
\nThe assessee claimed the redemption fine amount by way of
\ndeduction while computing profit arising out of sale of the
\ngoods. In this background, the issue reached the Supreme
\nCourt. The Supreme Court held that the expenditure was in
\nthe nature of penalty for infraction of law and therefore, not
\na deductible expenditure. It was observed as under:-
\n” A review of these cases shows that expenses which are permitted
\nas deductions are such as are made for the purpose of carrying on
\nthe business, i.e., to enable a person to carry on and earn profit in
\nthat business. It is not enough that the disbursements are made in
\nthe course of or arise out of or are concerned with or made out of the
\nprofits of the business but they must also be for the purpose of
\nearning the profits of the business. As was pointed out in Von
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\nGlehn’s case [1920] 2 K.B. 553 an expenditure is not deductible
\nunless it is a commercial loss in trade and a penalty imposed for
\nbreach of the law during the course of trade cannot be described as
\nsuch. If a sum is paid by an assessee conducting his business,
\nbecause in conducting it he has acted in a manner, which has
\nrendered him liable to penalty, it cannot be claimed as a deductible
\nexpense. It must be a commercial loss and in its nature must be
\ncontemplable as such. Such penalties which are incurred by an
\nassessee in proceedings launched against him for an infraction of the
\nlaw cannot be called commercial losses incurred by an assessee in
\ncarrying on his business. Infraction of the law is not a normal incident
\nof business and, therefore, only such disbursements can be
\ndeducted as are really incidental to the business itself. They cannot
\nbe deducted if they fall on the assessee in some character other than
\nthat of a trader. Therefore where a penalty is incurred for the
\ncontravention of any specific statutory provision, it cannot be said to
\nbe a commercial loss falling on the assessee as a trader the test
\nbeing that the expenses which are for the purpose of enabling a
\nperson to carry on trade for making profits in the business are
\npermitted but not if they are merely connected with the business.
\nIt was argued that unless the penalty is of a nature which is
\npersonal to the assessee and if it is merely ordered against the
\ngoods imported it is an allowable deduction. That, in our opinion, is
\nan erroneous distinction because disbursement is deductible only if it
\nfalls within 10(2)(iv) of the Income-tax Act and no such deduction can
\nbe made unless it falls within the test laid down in the cases
\ndiscussed above and it can be said to be expenditure wholly and
\nexclusively laid for the purpose of the business. Can it be said that a
\npenalty paid for an infraction of the law, even though it may involve
\nno personal liability in the sense of a fine imposed for an offence
\ncommitted, is wholly and exclusively laid for the business in the
\nsense as those words are used in the cases that have been
\ndiscussed above. In our opinion, no expense which is paid by way of
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\npenalty for a breach of the law can be said to be an amount wholly
\nand exclusively laid for the purpose of the business. The distinction
\nsought to be drawn between a personal liability and a liability of the
\nkind now before us is not sustainable because anything done which
\nis an infraction of the law and is visited with a penalty cannot on
\ngrounds of public policy be said to be a commercial expense for the
\npurpose of a business or a disbursement made for the purposes of
\nearning the profits of such business.
\nIn our opinion the High Court rightly held that the amount
\nclaimed was not deductible and we therefore dismiss this appeal with
\ncosts.”
\n9. In case of Maddi Venkataraman & Co P Ltd Vs. CIT4
\n, the facts were that the assessee company had remitted to a
\nparty in Singapore certain amounts in violation of law. The
\nproceedings were undertaken against the assessee for
\ninfringement of the relevant provisions of Foreign Exchange
\nRegulation Act which ultimately resulted into penalty being
\nimposed against the assessee. The Supreme Court held and
\nobserved as under:-
\n“20. The case of Haji Aziz Abdul Shakoor Bros. (supra) is important
\nfor another reason. It was categorically held in this case that no
\ndistinction can be made in this regard between a personal liability
\nand a liability of any other kind. So long as the payment has to made
\nfor infraction of law, it cannot be said that it was made in course of
\ncarrying out of the trade.
\n4 (1998) 2 SCC 95
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\n23. In the instant case, the assessee had indulged in transactions
\nin violation of the provision of Foreign Exchange (Regulation) Act. The
\nassessee’s plea is that unless it entered into such a transaction, it
\nwould have been unable to dispose of the unsold stock of inferior
\nquality of tobacco. Another words, the assessee would have incurred
\na loss. Spur of loss cannot be a justification for contravention of law.
\nThe assessee was engaged in tobacco business. The assessee was
\nexpected to carry on the business in accordance with law. If the
\nassessee contravenes the provision of FERA to cut down its losses
\nor to make larger profits while carrying on the business, it was only to
\nbe expected that proceedings will be taken against the assessee for
\nviolation of the Act. The expenditure incurred for evading the
\nprovisions of the Act and also the penalty levied for such evasion
\ncannot be allowed as deduction. As was laid down by Lord Sterndale
\nin the case of Alexander Von Glehn (supra) that it was not enough
\nthat the disbursement was made in the course of trade. It must be for
\nthe purpose of the trade. The purpose must be a lawful purpose.
\n24. Moreover, it will be against public policy to allow the benefit of
\ndeduction under one statute of any expenditure incurred in violation
\nof the provisions another stature or any penalty imposed under
\nanother statute. In the instant case, if the deductions claimed are
\nallowed, the penal provisions of FERA will become meaningless. It
\nhas also to be borne in mind that evasion of law cannot be a trade
\npursuit. The expenditure in this case cannot, in any way, be allowed
\nas wholly in this case cannot, in any, way be allowed as wholly and
\nexclusively laid out for the purpose of assessee’s business.”
\n10. In case of Rohit Pulp and Paper Mills Ltd Vs. C.I.T.5,
\nthe assessee had imported goods which were found by
\nCustoms Authorities not covered by a valid licence. The
\n5 [1995] 215 ITR 919 (Bom)
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\nDeputy Collector of Customs ordered confiscation of the
\ngoods and offered redemption on payment of fine. This
\namount was claimed by the assessee as a deduction.
\nRejecting such a claim, the High Court observed as under:-
\n” We do not find that the above amount paid by the
\nassessee is anything else than a penalty. It is, therefore, not
\nallowable as a deduction under the Income Tax Act. The
\nIncome Tax Officer and other authorities were justified in not
\nallowing any deduction under Section 37 of the Income Tax
\nAct on account of the same. The third question is, therefore,
\nanswered in the negative and in favour of the Revenue.”
\n11. In case of M.S.P. Senthikumara Nadar & Sons Vs
\nC.I.T. Madras6, Division Bench of Madras High Court
\nconsidered a case where the assessee firm which was
\ncarrying on the business in coffee had entered into contract
\nwith India Coffee Board and purchased coffee at a rate far
\nbelow the price of coffee to be sold within India with the
\ncontractual obligation to export the whole of the coffee so
\npurchased to the places outside India. The assessee,
\nhowever, exported part of it and sold the rest within India.
\nThe Coffee Board, in terms of the agreement levied damages
\nfrom the assessee for breach of the contract. This amount
\n6 [1957] 32 ITR 138 (Madras)
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\nwas paid by the assessee and and claimed by way of
\nexpenditure. The High Court referred to various judgments
\non the issue and observed as under:-
\n“From what we have said above it should be clear that it was not a
\ncase of a payment of damages for a mere breach of contract with
\nnothing more. It was not of course a case of penalty paid under the
\nterms of a statute for contravention of any specific statutory provision.
\nIn the circumstances of this case, the liquidated damages claimed
\nand paid was, however, more akin to a penalty than the damages
\nsuffered for breach of contract in the course of normal trading
\nactivities, whether or not that breach of a contract was also
\ndishonest. That is why we said that it may not be necessary to rest
\nour decision in this case on the rule laid down in Masks case [1943]
\n11 ITR 454. In our opinion it is the principle laid down in Von Glehns
\ncase [1920] 12 Tas Cas. 232 that should be extended and applied to
\nnegative the claim of the assessee in this case. To adopt the words
\nof Sterndale, M. R., in Von Glehns case (supra) the assessee’s
\nbusiness could perfectly well be carried on without any infraction of
\nthe obligations laid on the assessee by the India Coffee Board,
\nentrusted with the statutory duty of controlling and regulating sales of
\ncoffee. A penalty was imposed because of an infraction of these
\nobligations and the money was not expended or laid out for purposes
\nof the trade which the assessee carried on. Or in the words of
\nScrutton, L.J :
\n“Were these fines made or paid for the purpose of earning the
\nprofit ? The answer seems to me obvious, that they were not, they
\nwere unfortunate incidents which followed after the profits had been
\nearned.”
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\n12. In case of Agra Leatheries Ltd Vs. CIT7, the Division
\nBench of Allahabad High Court considered the case where
\nthe assessee had obtained licence for import under which
\nthe assessee had imported plastic sponges. The Customs
\nAuthorities held that under the licence, the assessee could
\nhave imported only natural sponges and not plastic sponges
\nand the import of plastic sponges was thus illegal. The
\nassessee claimed penalty for infraction of law by way of
\nexpenditure. The Allahabad High Court relied on the decision
\nof the Supreme Court in the case of Hazi Aziz (supra), ruled
\nagainst the assessee by making following observations:-
\n” The question whether penalty levied for infraction of law is a
\npermissible deduction is not res integra. In Haji Aziz and Abdul
\nShakoor Bros. v. CIT [1961] 41 ITR 350, the Supreme Court held that
\nin a case where the penalty has to be incurred because of the fault of
\nthe assessee himself, as for instance for the reason of his having
\ncarried on his business in an unlawful manner or in contravention of
\ncertain rules and regulations, the penalty paid by the assessee for
\nsuch conduct could not be regarded as wholly laid out for the
\npurpose of the business, because the incurring of the said expenses
\nhas not been necessitated by the business but by the conduct of the
\nassessee in trying to carry on the business in unlawful manner. We,
\ntherefore, do not see any legal infirmity in the view taken by the
\nTribunal.”
\n7 [1993] 200 ITR 792 (Allahabad)
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\nThe decision of this Court in the case of Pannalal
\n(supra) was cited before the Court which was distinguished.
\n13. This Court in a decision in the case of T. Khemchand
\nTejoomal Vs. CIT8 considered a case where the assessee
\nwas a registered firm doing business mainly in cloth. The
\nassessee had acquired a licence for importing automobile
\nspare parts. The assessee then entered into a contract for
\nimport and sale of capacitors to one Bipin Automobiles. The
\npurchaser would bear all expenses including customs duty.
\nPursuant to the agreement, the assessee placed an order of
\ncapacitors and the goods were imported. However, it was
\nfound that the goods did not conform to some of the
\nspecifications in the licence and the Customs Authorities
\nconfiscated the goods and offered the option to pay penalty
\nfor clearance of goods. The assessee paid the penalty and
\nclaimed it as business expenditure. Before the High Court, it
\nwas argued that the assessee was a mere nominal licence
\nholder and the penalty was really levied on Bipin
\nAutomobiles to whom the goods have been sold and
\ntherefore, the assessee should be allowed to claim the
\n8 161 ITR 492 (Bom)
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\nexpenditure as business expenditure. The Court held and
\nobserved as under:
\n” The submission of Mrs. Jagtiani, learned counsel for the
\nassessee, is that in this case, on the facts found, the assessee must
\nbe regarded as a mere nominal licence-holder and the penalty was
\nreally levied on M\/s. Bipin Automobiles to whom the goods had been
\nsold as aforesaid. It was argued by her that, in these circumstances,
\nthe assessee should be allowed to claim the amount of penalty paid
\nby the assessee as a deduction in the computation of profits under
\nsection 28 of the Income Tax Act, 1961. She placed strong reliance
\non the decision of a Division Bench of this court in CIT v. Pannalal
\nNarottamdas & Co. : [1968] 67 ITR 667(Bom) . We shall deal with this
\ncase after setting out our own views. In the present case, the facts
\nfound by the Tribunal clearly show that it was the assessee who had
\ngot the import licence. It was the assessee who imported the goods
\nin question, and it was the fault of the assessee if the goods in
\nquestion imported did not conform to the specifications of the licence.
\nIn these circumstances, there is no escaping the conclusion that the
\npenalty was levied on the assessee for the default of the assessee
\nitself and not on the ground of any other person’s default. Nor is this
\na case in which the assessee can be regarded in any sense as a
\nnominal licence-holder. It is not as if the assessee gave its licence to
\nM\/s. Bipin Automobiles for importing the goods in question and M\/s.
\nBipin Automobiles imported the goods. The licence was utilized by
\nthe assesses-firm itself and that fact cannot be altered by the
\ncircumstance that they had agreed to sell the goods to be imported
\nby them to M\/s. Bipin Automobiles. It is well settled that if an
\nassessee has to pay a penalty to the customs authorities in respect
\nof goods imported by the assessee on account of its own default, the
\namount of that penalty cannot be deducted in the computation of
\ntaxable profits of the assessee.
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\nComing to the case of Pannalal Narottamdas & Co. (supra)
\ncited by Mrs. Jagtiani, the facts in that case were altogether different.
\nIn that case, in the course of its business, the assessee had
\npurchased bills of lading and other shipping documents from certain
\nparties in respect of some consignments of goods imported by them
\nfrom a foreign country. When the goods arrived in India and were
\nsought to be cleared through the customs by the assessee on the
\nbasis of the documents purchased by it, it was found that the imports
\nwere unauthorized and the goods were liable to be confiscated and a
\npenalty was liable to be imposed under section 167(8) of the Sea
\nCustoms Act, 1878. The assessee paid the penalty for saving the
\ngoods from being confiscated. The Tribunal took the view that the
\nassessee was entitled to plead that it had purchased the documents
\nof title in good faith and had paid consideration thereon, and,
\nthereafter, it had to pay the penalties in order not to lose the goods
\nwhich had become its property and, in these circumstances, the
\npenalty could be legitimately regarded as part of the cost of the
\ngoods. It was held by the Division Bench that, on the facts and
\ncircumstances, the actual cost of the goods to the assessee was not
\nonly what it had paid to the importers but in addition thereto what it
\nhad to pay by way of penalty in order to save the goods from being
\nconfiscated and lost to it. It is significant that the observations of the
\nDivision Bench set out at page 672 of the aforesaid report show that
\nthe Division Bench clearly took the view that in cases where penalty
\nhad to be incurred because of the fault of the assessee himself, as
\nfor instance, by reason of his having carried on his business in an
\nunlawful manner or in contravention of certain rules and regulations,
\nthe penalty paid by the assessee for such conduct thereof could not
\nbe regarded as wholly laid out for the purpose of the business, and,
\nin support of this conclusion, the decision of the Supreme Court in
\nHaji Aziz & Abdul Shakoor Bros. v. CIT : [1961] 41 ITR 350 was cited.
\nThis decision, in our view, does not advance the argument of Mrs.
\nJagtiani, and, in fact, the aforesaid observations pointed out by us
\nlend considerable support to the view which we have taken.”
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\nIt can, thus, be seen that consistently various High
\nCourts following the decision of the Supreme Court in the
\ncase of Hazi Aziz (supra) have held that fine or penalty for
\nredemption of goods ordered to be confiscated for breach of
\nimport conditions is not an allowable deduction. The case of
\nthe assessee squarely falls in this category.
\n14. We may now refer to the decisions cited by Mr. Nankani,
\nthe learned counsel for the respondent. The decision in the
\ncase of Pannalal (supra) would require close examination. It
\nwas the case in which the assessee, a registered firm was
\ndealing inter alia in gum. In the course of its business, the
\nassessee purchased bills of lading and other shipping
\ndocuments from certain parties in respect of some
\nconsignments of gum imported by them from Africa. When
\nthe goods arrived in India, the assessee sought to clear them
\non the basis of the documents purchased by it. It was found
\nthat the imports were unauthorized and the goods were
\nliable to be confiscated and penalty liable to be imposed.
\nThe assessee paid an amount of Rs. 31,302\/- by way of
\npenalty for saving the goods being confiscated. This
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\namount the assessee claimed by way of allowable
\ndeduction. The assessee had argued that the amount must
\nbe regarded as a part of purchase price of the gum. It was
\nargued that the assessee had purchased the consignments
\nof gum in good faith and was not aware of any faults
\ncommitted by the importers in such importation. It was only
\nwhen the goods arrived in India that the assessee found that
\nthe imports were unauthorized. The parties from whom the
\nassessee had purchased the goods declined to pay the
\npenalties. It was further argued that in the circumstances,
\nthe penalty amount which the assessee had to bear was in
\nthe nature of additional cost of the goods in the hands of the
\nassessee. The Revenue Authorities rejected such contention.
\nThe Income Tax Appellate Tribunal, however, had taken a
\nview that the assessee was correct in contending that it had
\npurchased the documents of title in good faith and
\ntherefore, it had to pay the additional cost not to loose goods
\nwhich had become its property. In this context, a reference
\nwas made to the High Court on following substantial question
\nof law:-
\n“Whether the penalties totaling Rs. 31,302\/- paid in breach of
\nthe Sea Customs Act in respect of imports of stock-in-trade, but
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\non bills of lading, purchased in good faith, is a proper deduction
\nunder Section 10(1) of the Income Tax Act?”
\nThe Department objected to the framing of the
\nquestion and insisted that the following question be reframed
\nby the High Court:-
\n“Whether, on the facts and in the circumstance of the case, the
\npenalty of Rs. 31,302 paid by the assessee to the customs authorities
\nfor infringement of Import Control Regulations constitutes an
\nallowable deduction under Section 10 of the Income-tax Act?”
\nThe High Court first rejected any modification to the
\nquestion as desired by the Revenue observing that the
\nTribunal had concluded that what was paid as penalties by
\nthe assessee was to be regarded as cost of the goods, which
\nwas based on its acceptance of the contention of the
\nassessee. In other words, the conclusion of the Tribunal was
\nbased on its acceptance of the assessee’s case that its
\npurchase of bills of lading was in good faith. Having thus
\naccepted the Tribunal’s conclusion on facts, the Court
\nproceeded to answer the question referred in favour of the
\nassessee by making following observations:-
\n“7. Coming now to the question as framed, we think that it must
\nbe answered in the affirmative and in favour of the assessee. Under
\nsection 10(1) of the Indian Income Tax Act, tax is made payable in
\nrespect of the profits or gains of business. Profits or gains of
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\nbusiness would be the excess of the sale price over the cost price
\nand in determining the profits or gains, therefore, the cost has to be
\ndeducted from the proceeds realized on sale of the goods. On the
\nfacts and circumstances of the present case, the actual cost of the
\ngoods to the assessee was not only what it had paid to the importers,
\nbut in addition thereto what it had to pay by way of penalty, in order to
\nsave the goods from being confiscated and lost to it. The penalty paid
\nby it could, therefore, be regarded as part of the cost of the goods to
\nit. It can also be regarded as an amount expended by it wholly and
\nexclusively for the purposes of the business, because unless the said
\namount was expended, the goods could not have been saved from
\nconfiscation. It may be pointed out that, in cases where the penalty
\nhas to be incurred be incurred because of the fault of the assessee
\nhimself, as for instance, for the reason of his having carried on his
\nbusiness in an unlawful manner or in contravention of certain rules
\nand regulation, the penalty paid by the assessee for such conduct
\nthereof, could not be regarded as wholly laid out for the purpose of
\nthe business, because the incurring of the said expenses has not
\nbeen necessitated by the business,but but by the conduct of the
\nassessee in trying to carry out the business in an unlawful manner
\n(see Haji Aziz and Abdul Shakoor Bros. v. Commissioner of Incometax
\n[supra]). In the present case, however, on the finding of the
\nTribunal the penalty has been imposed not for the fault of the
\nassessee but he had to bear the same for the purpose of getting his
\ngoods released from the customs authorities. In the present case,
\ntherefore, the expenses incurred by the assessee could be regarded
\nas wholly and exclusively incurred for the purpose of his business. In
\nour opinion, therefore, the conclusion arrived at by the Tribunal that
\nthe sum of Rs. 31,302 was allowable to the assessee as proper
\ndeduction is correct and the deduction is capable of being allowed
\nunder section 10(1) of the Income Tax Act as held by the Tribunal or
\neven under section 10(2)(xv) of the Act.”
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\nThis case, thus, is clearly distinguishable. On facts, the
\nTribunal had held that the assessee was not responsible for
\nthe breach of law, a finding on the basis of which the High
\nCourt proceeded. It was in this background that the Court
\nupheld the Tribunal’s decision allowing deduction of the
\namount in question as an expenditure emphasizing that
\nsuch amount in the hands of the assessee was not penalty
\nbut an additional cost for purchase of goods.
\n15. In case of CIT, Gujarat V\/s. Ahmedabad Cotton
\nMfg. Co Ltd & Ors.9, the assessee company had to pay to
\nthe Textile Commissioner an amount in view of the non
\nproduction and non packing of the minimum quantity of
\nspecified types of cloth. It was, in this background, that the
\npayment was held to be allowable expenditure. The Court
\nheld that the decision in the case of Hazi Aziz (supra) would
\nnot apply.
\n16. The Supreme Court in the case of Prakash Cotton
\nMills Pvt Ltd. Vs. CIT10 had emphasized on the nature of
\n9 (1994) 1 SCC 632
\n10 (1993) 201 ITR 684
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\nstatutory imposts paid by the assessee, be it in the nature of
\ndamages or penalty or interest in the context of assessee’s
\nclaim of expenditure under Section 37(1) of the Act. The test
\nlaid down was whether such payment was compensatory or
\npenal in nature.
\n17. In the case of CIT Vs. N.M. Parthasarathy11 , the
\nMadras High Court considered the case where the assessee,
\nan individual running a small scale industry was granted a
\nlicence for importing permissible spare parts for construction
\nmachinery and spare of machine tools. On the basis of such
\nlicence, the assessee imported 400 drums of sodium cyanide
\nfrom Hungary. When the goods arrived, the Customs
\nAuthorities noticed that there was no valid licence covering
\nthe consignment and that the provisions of Customs Act,
\n1962 were violated. This resulted into confiscation of the
\ngoods and imposition of redemption fine in lieu of
\nconfiscation. The assessee claimed the amount of
\nredemption fine of Rs. 1,84,000\/- by way of business
\nexpenditure which was disallowed by the Revenue
\nAuthorities. The High Court noticed the decision of the
\n11 (1995) 212 ITR 105 (Mad)
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\nSupreme Court in the case of Hazi Aziz (supra) and the ratio
\nlaid down therein but observed that in view of later
\ndecisions in the case of Prakash Cottom Mills (supra) and
\nAhmedabad Cotton Mfg Co Ltd (supra), the ratio laid down in
\nthe case of Hazi Aziz (supra) cannot be stated to have laid
\ndown an inflexible rule of law to be followed in all
\neventualities and situations.
\n18. In our opinion, the ratio laid down by the Supreme
\nCourt in the case of Hazi Aziz (supra) continues to hold the
\nfield even post decisions in the case of Prakah Cotton Mills
\n(supra) and Ahmedabad Cotton Mfg Co Ltd (supra). In
\nneither of these two decisions, the ratio laid down in the
\ndecision in case of Hazi Aziz (supra) which was a decision of
\nBench of three Judges can be seen to have been diluted. In
\nother words, what the facts of the case are materially similar
\nas the facts before the Supreme Court in the case of Hazi
\nAziz, the ratio laid down therein would squarely apply. The
\nlater decision cited by the learned counsel for the assessee
\nemphasizes that not the nomenclature of fine or penalty, but
\nthe true character of payment must be taken into
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\nconsideration. If the payment is compensatory in nature, it
\nwould be allowable deduction. Judgment of this Court in
\nPannalal (supra) proceeded on the basis that the infraction of
\nlaw for which penalty was imposed, was by the importer and
\nnot the assessee who had purchased the goods, though the
\nfine was borne by the assessee. It was in this background,
\nthe Court had held that the payment in question was in the
\nnature of additional cost of the goods for the assessee.
\n19. Reliance was also placed on the decision of Punjab &
\nHaryana High Court dated 9.12.2008 in the case of
\nCommissioner of Income Tax Vs. Hero Cycles Ltd.
\nHowever, this decision does not lay down any ratio which can
\nbe applied in the present case. The observations in the
\njudgment that: “there is no doubt that payments made in the
\nnature of penalty or fine for any wrongful act cannot be
\nallowed as permissible deductions but mere label of the
\npayment is not conclusive. Certain payments may be
\nincidental to the business and have to be allowed on the
\ntest of ‘commercial expediency’, if no violation of law or
\npublic policy is involved. Where penalty is not for deliberate
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\nviolation of law.” can at best be seen as passing remarks,
\nobiter dicta but not ratio.
\n20. In the present case, the Tribunal, without proper
\njustification or detailed examination of material on record,
\nfollowed the line of logic adopted by this Court in the case of
\nPannalal (supra) whereas the facts as we have noticed
\nsquarely fall within the parameters of the decision of the
\nSupreme Court in the case of Hazi Aziz (supra). The
\nAssessing Officer had summoned the import licence holder
\nM\/s. Rajnikant Brothers whose representative had stated
\nbefore the Assessing Officer that M.P. Gupta, the present
\nassessee had imported almond by using the licence and that
\nredemption fine of Rs. 75 lacs paid to the Madras Custom
\nHouse was done by M.P. Gupta. All transactions were made
\nby him and he was responsible for the fine. He stated clearly
\nthat as per the agreement, M\/s. Rajnikant Brothers were only
\nentitled to the service charges. Thus, there was ample
\nevidence on record suggesting that the assessee had made
\nimports through his direct involvement by using the import
\nlicence of M\/s. Rajnikant Brothers and that M\/s. Rajnikant
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\nBrothers merely received an agreed commission. The
\nassessee cannot disassociate or divest himself from the
\nirregularities or illegalities committed in the process of
\nimporting the goods. Thus, the penalty was for the infraction
\nof law committed by the assessee. Under these
\ncircumstances, the question is answered in the negative i.e
\nin favour of the Revenue and against the assessee. The
\nimpugned judgment of the Tribunal is set aside. Accordingly,
\nthe appeal is disposed of.
\n21. In view of the Revenue’s appeal being allowed, the
\nquestion of releasing a sum of Rs. 1,90,50,000\/- in favour of
\nthe respondent assessee would not arise. However, the very
\ndispute with respect to the source of this amount is pending
\nin Suit No. 445 of 2002 before the learned Single Judge. It
\nwill be open for the Revenue to file appropriate Motion before
\nappropriate forum as may be advised for withdrawal of the
\namount.
\n22. In view of disposal of appeal, nothing survives in the
\nNotice of Motion. The same is disposed of accordingly.
\n[ B.P. COLABAWALLA, J. ] [ AKIL KURESHI, J ]
\n36 of 36
\n::: Uploaded on – 22\/02\/2019 ::: Downloaded on – 25\/02\/2019 12:57:35 :::<\/p>\n","protected":false},"excerpt":{"rendered":"
The Tribunal without adverting to the relevant facts and materials on record granted benefit to the assessee on the lines followed by this Court in the case of Pannalal (supra). The Tribunal without discussing the relevant materials compared the case of the assessee with the facts arising in the judgment of the Supreme Court in the case of Ahmedabad Cotton Mfg Co Ltd (supra) in which it was recorded that the fault or defect in the REP licence was not attributable to the assessee and therefore, the assessee was not to be blamed for indulging in any offence or having incurred any expenditure for the purpose which was prohibited by the law.<\/p>\n