1978 (11) TMI 32 - HC - Income Tax

Summary

Issues:
- Deductibility of penalty as a business expense under sections 28(i) and 37(1) of the Income-tax Act, 1961.

Analysis:
The judgment pertains to the deductibility of a penalty amount of Rs. 61,000 paid by the assessee for releasing goods from customs authorities as a business expense under sections 28(i) and 37(1) of the Income-tax Act, 1961. The Income Tax Officer (ITO) added this amount to the book profit of the assessee, contending that it was not an admissible expense as it was a penalty for an infringement of the law. The assessee, however, argued that the penalty amount should be allowed as a deduction in computing business income. The Appellate Assistant Commissioner (AAC) upheld the assessee's contention, allowing the penalty amount as a proper deduction. The revenue appealed to the Tribunal, which reversed the AAC's decision, relying on the Supreme Court's decision in Haji Aziz and Abdul Shakoor Bros. v. CIT. The Tribunal held that expenses paid as penalties for breaches of the law are not wholly and exclusively laid out for the purpose of the business. The Tribunal also rejected the claim for deduction under section 28(i) of the Income-tax Act, 1961, stating that such expenses do not qualify as incidental to the nature of the business or expended wholly and exclusively for business purposes.

The High Court considered the arguments presented by the assessee's counsel, who contended that the penalty amount should be deductible under section 37(1) of the Income-tax Act, 1961, as a commercial loss incurred in the course of business. However, the court, citing previous decisions, including Vishnu Sugar Mills Ltd. v. CIT and CIT v. Mihir Textiles Ltd., rejected this argument. The court emphasized that an infraction of the law is not a normal incident of business, and penalties paid for such infractions do not constitute business losses in the commercial sense. Therefore, the penalty amount paid by the assessee was not considered a deductible expenditure under section 28(i) of the Income-tax Act, 1961. The court answered the referred question in the negative and in favor of the revenue, affirming the Tribunal's decision. Judge Deb concurred with the judgment.