1998 (2) TMI 593 - AT - Income Tax

Summary

Issues Involved:
1. Deduction of redemption fine imposed by customs authorities.
2. Disallowance of incentive paid to workers.
3. Disallowance of telephone expenses at the residence of partners.
4. Disallowance of car expenses for personal use by partners.

Detailed Analysis:

1. Deduction of Redemption Fine Imposed by Customs Authorities:
The primary issue revolves around whether the redemption fine paid by the assessee for the clearance of imported goods can be deducted as a business expense. The assessee, a diamond exporter, had imported goods under an additional import license granted following a Supreme Court order. However, the legality of importing certain items was challenged, leading to the confiscation of goods and imposition of a redemption fine under Section 125 of the Customs Act.

The Assessing Officer (AO) added the redemption fine to the assessee's income, treating it as a penalty for infraction of the law, relying on the Bombay High Court decision in T. Khemchand Tejomal vs. CIT. Conversely, the CIT(A) held that the assessee acted in good faith, based on the legal understanding at the time, and thus the fine should be treated as an additional cost of goods, citing CIT vs. Pannalal Narottamdas & Co.

The Tribunal reconciled the conflicting decisions of the Bombay High Court (Rohit Pulp & Paper Mills Ltd. vs. CIT and Pannalal Narottamdas & Co.), concluding that since the assessee acted in good faith without intent to contravene the law, the redemption fine qualifies as a deductible business expense. The Tribunal upheld the CIT(A)'s decision, allowing the deduction.

2. Disallowance of Incentive Paid to Workers:
For the assessment year 1988-89, the Revenue contested the deletion of a disallowance of Rs. 1,03,512 on account of incentives paid to workers. The CIT(A) found that the incentives were linked to extra production and treated as part of the salary for PF and ESIS contributions. The Tribunal, noting the absence of contrary evidence, upheld the CIT(A)'s decision, affirming that the incentives were justifiable business expenses.

3. Disallowance of Telephone Expenses at the Residence of Partners:
The assessee challenged the disallowance of 50% of telephone expenses at the partners' residences as excessive. The Tribunal considered the nature of the expenses and reduced the disallowance to one-third, deeming it a reasonable allocation between personal and business use.

4. Disallowance of Car Expenses for Personal Use by Partners:
Similarly, the assessee contested the disallowance of one-fourth of car expenses for personal use by partners. The Tribunal found that a disallowance of one-fifth would be more appropriate and directed accordingly.

Conclusion:
The Tribunal's decision comprehensively addressed the issues, providing relief to the assessee on the redemption fine and incentives while partially allowing the disallowance of telephone and car expenses. The appeals of the Revenue were dismissed, and the cross-objections of the assessee were partly allowed.