1981 (7) TMI 4 - HC - Income Tax

Summary

Issues Involved:
1. Deduction of customs penalty in the computation of total income.
2. Set-off of unabsorbed depreciation and business loss of earlier years against the income of the assessment year 1968-69.

Summary:

Issue 1: Deduction of Customs Penalty

The first question addressed was whether the assessee is entitled to a deduction of Rs. 4,18,000 paid by way of penalty to the customs authorities for contravention of the provisions of the Customs Act in the computation of its total income for the assessment year 1968-69. This issue is covered by the Supreme Court decision in Haji Aziz and Abdul Shakoor Bros. v. CIT [1961] 41 ITR 350, which held that penalties paid for breach of law cannot be claimed as deductible expenses. The court observed that "infraction of the law is not a normal incident of business" and thus, the penalty amount does not represent a commercial loss. The court also considered CIT v. Piara Singh [1980] 124 ITR 40, distinguishing it by noting that the penalty in the present case was for a breach of law in a lawful business, unlike Piara Singh, which involved an inherently unlawful business. Therefore, the court concluded that the assessee is not entitled to claim a deduction of the penalty amount.

Issue 2: Set-off of Unabsorbed Depreciation and Business Loss

The second question was whether the assessee-firm was entitled to set off unabsorbed depreciation and business loss of earlier years against the income of the assessment year 1968-69. This issue is directly covered by the decision of the court in CIT v. Garden Silk Wvg. Factory [1975] 101 ITR 658, which held that the assessee is not entitled to carry forward business loss distributed among its partners but is entitled to set off unabsorbed depreciation of preceding years against the income of the year under reference. Following this precedent, the court answered the question in the affirmative and against the assessee.

Conclusion:

The court held that the Tribunal was justified in rejecting the assessee's claim for deduction of the customs penalty and in denying the set-off of unabsorbed depreciation and business loss of earlier years. The reference was answered accordingly with no order as to costs.