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Issues involved:
The judgment involves the issue of whether a penalty paid by an assessee for non-conforming imported goods can be considered as a deductible expense in computing income u/s 28 of the Income-tax Act, 1961. Summary: The High Court of Bombay, in a reference u/s 256(1) of the Income-tax Act, 1961, addressed the question of whether a penalty of Rs. 4,400 paid by an assessee for non-conforming imported goods should be added to the income. The assessee, a registered firm dealing in cloth, had secured a license for importing automobile spare parts and entered into a contract to sell capacitors to a buyer. When the imported goods did not meet specifications, customs authorities imposed a penalty which the assessee paid. The Income-tax Officer disallowed the penalty as a deduction, a decision upheld by the Appellate Assistant Commissioner and the Income-tax Appellate Tribunal. The Court held that the penalty was rightfully levied on the assessee for its own default, not on the buyer, and thus could not be considered a deductible expense. The Court distinguished this case from a previous judgment where penalty costs were considered part of the goods' actual cost. The Court emphasized that penalties incurred due to the assessee's own fault cannot be fully considered as business expenses. Therefore, the penalty amount was not deductible under section 28 of the Income-tax Act, 1961. In conclusion, the Court answered the question in the affirmative, in favor of the Revenue, and directed the assessee to bear the costs of the reference.
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