1992 (4) TMI 27 - HC - Income Tax

Summary

Issues:
1. Deductibility of penalty paid to customs authorities under Income-tax Act.
2. Allowability of penalty as business expenditure or cost of goods.

Analysis:

Issue 1: The primary issue in this case revolves around the deductibility of a penalty paid by the assessee to the customs authorities under the Income-tax Act. The penalty in question amounted to Rs. 46,500 and was imposed for the illegal import of plastic sponges, which violated the terms of the import licenses held by the assessee. The Appellate Tribunal found that the penalty was levied for the infraction of law due to the unauthorized import of plastic sponges. The Tribunal held that such a penalty, incurred due to the fault of the assessee, cannot be considered a permissible deduction under the Income-tax Act. The Tribunal's decision was based on the principle that expenses incurred as a result of the assessee's unlawful conduct do not qualify as business expenditure.

Issue 2: The second aspect of this case pertains to the alternative argument raised by the assessee regarding the treatment of the penalty amount if not considered as business expenditure. The assessee contended that the penalty should be allowed to be added towards the cost of the goods. However, the Appellate Tribunal rejected this submission, emphasizing that expenses incurred for penalties due to violations of law cannot be attributed to the acquisition of goods and hence cannot be added to the cost of goods. The Tribunal's decision was further supported by a precedent where a penalty paid by an assessee for saving goods from confiscation was allowed as a deduction, but the key distinction was the absence of any violation of law on the part of the assessee.

In conclusion, the High Court held that the penalty paid by the assessee to the customs authorities for the illegal import of plastic sponges was not a permissible deduction under the Income-tax Act. The court rejected the assessee's argument to add the penalty amount to the cost of goods, emphasizing that such expenses incurred due to violations of law cannot be considered as part of the cost of goods. The judgment was delivered in favor of the Revenue, and the case was remitted back to the Appellate Tribunal for further proceedings in accordance with the court's decision.