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2019 (2) TMI 1472 - HC - Income TaxRedemption fine - allowablity as business expenditure u/s 37 - irregularities or illegalities committed in the process of importing the goods - HELD THAT - AO had summoned the import licence holder M/s. Rajnikant Brothers whose representative had stated before the Assessing Officer that M.P. Gupta, the present assessee had imported almond by using the licence and that redemption fine of ₹ 75 lacs paid to the Madras Custom House was done by M.P. Gupta. All transactions were made by him and he was responsible for the fine. He stated clearly that as per the agreement, M/s. Rajnikant Brothers were only entitled to the service charges. There was ample evidence on record suggesting that the assessee had made imports through his direct involvement by using the import licence of M/s. Rajnikant Brothers and that M/s. Rajnikant Brothers merely received an agreed commission. The assessee cannot disassociate or divest himself from the irregularities or illegalities committed in the process of importing the goods. Thus, the penalty was for the infraction of law committed by the assessee. -Decision HAJI AZIZ AND ABDUL SHAKOOR BROTHERS VERSUS 1960 (11) TMI 15 - SUPREME COURT folloed- Decided in favour of the Revenue and against the assessee.
Issues Involved:
1. Whether the Tribunal was justified in holding that the redemption fine of ?75,00,000/- is allowable as business expenditure under Section 37 of the Income Tax Act. Issue-wise Detailed Analysis: 1. Background and Reopening of Assessment: The respondent assessee, an individual, filed a return of income for the assessment year 1988-89 declaring a total income of ?1,47,020/-. The return was initially accepted without scrutiny. Subsequently, the Assessing Officer (AO) received information that the assessee paid ?75 lakhs as a penalty for importing almonds, which was not permissible. Based on this, the AO reopened the assessment for the said year by issuing a notice under Section 148 of the Income Tax Act, 1961. 2. Proceedings Before the Assessing Officer: During the reassessment proceedings, the assessee's representative stated that the assessee used the import license of M/s. Rajnikant Bros., an export house, and paid service charges for using the license. It was contended that the consignment was imported by M/s. Rajnikant Bros., and the assessee acted as an agent. The AO issued summons to M/s. Rajnikant Bros., whose accountant confirmed that the assessee imported almonds using their license and paid the ?75 lakhs fine. 3. Assessing Officer's Conclusion: The AO concluded that the assessee made the customs penalty payment of ?75 lakhs and treated this expenditure under Section 69C of the Act as unexplained expenditure from an unexplained source. The AO initiated penalty proceedings under Section 271(1)(c). 4. Appeal Before Commissioner of Income Tax (Appeals): The assessee appealed, reiterating that the payment was made through funds arranged by M/s. Mangla Bros. However, the CIT(A) rejected this claim due to the absence of books of accounts and valid confirmation. The CIT(A) also rejected the contention that the expenditure should be considered as business expenditure under Section 37, stating that the penalty was due to the assessee's fault in carrying on business unlawfully. 5. Tribunal's Decision: The Tribunal allowed the assessee's appeal, recognizing the expenditure as business expenditure. The Tribunal concluded that the assessee and the export house believed the import was permissible, and the Customs Tribunal had reduced the redemption fine due to vagueness in the import policy. The Tribunal referenced the Supreme Court's decision in CIT V/s. Ahmedabad Cotton Mfg. Co Ltd., noting that the fault in the REP license was not attributable to the assessee. 6. Revenue's Appeal: The Revenue argued that the ?75 lakhs paid as redemption fine was not allowable as a deduction under Explanation 1 to Section 37(1) of the Act. The Revenue contended that the Tribunal erred in allowing the deduction and misapplied the Supreme Court's decision in Ahmedabad Cotton Mfg. Co Ltd. 7. High Court's Analysis: The High Court noted that the Tribunal did not adequately consider the relevant facts and materials. The AO and CIT(A) had concluded that the assessee imported the goods and paid the fine. The Tribunal ignored the statement of M/s. Rajnikant Bros.' representative, who attributed the entire transaction to the assessee. The High Court emphasized that the Tribunal's consideration was vitiated by this error. 8. Legal Precedents: The High Court referred to several precedents, including Haji Aziz & Abdul Shakoor Bros. Vs. CIT, which held that penalties for infraction of law are not deductible as business expenditure. The Court distinguished the case from Pannalal Narottamdas & Co., where the penalty was not due to the assessee's fault but was considered an additional cost of goods. 9. Conclusion: The High Court concluded that the facts of the case aligned with the decision in Haji Aziz & Abdul Shakoor Bros., where the penalty was for the infraction of law committed by the assessee. Therefore, the expenditure was not allowable as a deduction. The Tribunal's judgment was set aside, and the appeal was disposed of in favor of the Revenue. 10. Consequential Orders: The High Court noted that the question of releasing ?1,90,50,000/- in favor of the respondent assessee would not arise due to the appeal's outcome. The Revenue was allowed to take appropriate actions regarding the pending suit related to the source of this amount. This comprehensive analysis covers all relevant issues and preserves the legal terminology and significant phrases from the original judgment.
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