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1. Admissibility of penalty paid to Pakistan Government as a deduction under section 10(2)(xv) of the Indian Income-tax Act. Analysis: The judgment involves a case referred by the Commissioner of Income-tax regarding the deduction of a penalty paid to the Pakistan Government by the assessees for exporting molasses to East Pakistan. The primary issue is whether the penalty of Rs. 3,110 is admissible as a deduction under section 10(2)(xv) of the Income-tax Act. The assessees exported molasses to Pakistan, which was prohibited by Pakistan, resulting in the seizure of the goods. After negotiations, the Pakistan Government allowed entry on payment of penalties. The assessing authority disallowed the deductions, stating that exporting molasses to Pakistan was not part of the trade agreement and the penalties were not necessary for business purposes. The Income-tax Appellate Tribunal initially allowed the deductions based on the penalties being obligatory, but the High Court disagreed. The High Court emphasized that the penalties were paid due to Pakistan's ban on importing molasses from India, making the act of exporting molasses not a business necessity. The court held that paying a penalty for a prohibited act cannot be considered an expenditure wholly or exclusively for the purpose of the business. The judgment cited precedents stating that penalties for breaches of law are not deductible commercial losses. Even if there was no explicit law cited, the burden was on the assessees to prove that the penalties were not for infringing Pakistani law. The court concluded that the penalties paid were not deductible under section 10(2)(xv) of the Income-tax Act. The court also addressed the jurisdiction of the Tribunal to introduce fresh materials after submitting the initial statements of the cases, emphasizing that only the original facts should be considered. The judgment referenced legal principles stating that expenses deductible for business purposes must be incurred to enable profit-making and cannot include penalties for legal violations. The court highlighted that penalties incurred for contraventions of statutory provisions do not qualify as commercial losses. The judgment concluded by answering the question of admissibility of the penalty as a deduction in the negative, directing the Commissioner of Income-tax to receive costs from the opposite party. Overall, the judgment clarifies the criteria for deducting expenses under section 10(2)(xv) of the Income-tax Act, emphasizing that penalties for legal violations are not considered allowable deductions for business expenditures. The decision provides a detailed analysis based on legal precedents and the specific circumstances of the case, ultimately ruling against the admissibility of the penalty paid to the Pakistan Government as a deduction.
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