2022 (6) TMI 122 - AT - Income Tax

Allowability of fine and penalty as per section 37 - whether the Assessee as per Explanation 1 to section 37(1) of the Act, is entitled to claim expenditure incurred in respect of fine and penalty as imposed u/s 125(1) and 112(a) of the Customs Act 1962 respectively? - HELD THAT - The goods i.e. used digital multifunction printer and copying machines were imported by the Assessee without getting license from the DGFT and therefore, the same were confiscated by the Custom Authorities we are referring only one order in original passed by the Ld. Joint Commissioner of Custom, Group-V, Nhava, Sheva-I, Maharashtra u/s 111(d) of the Custom Act, 1962 and consequently, determined the value of the goods imported at Rs. 13,48,479/- and gave an option to the Assessee to redeem the goods on payment of fine of Rs. 2,15,000/- u/s 125(1) of the Custom Act, 1962 on the condition that option to redeem the goods shall be exercised within 15 days on receipt of the order and on payment of appropriate duty as other dues as applicable. Section 125 of the Custom Act, 1962 prescribes the imposition of fine and option to pay fine in lieu of confiscation - The provisions speaks clearly that whenever confiscation of the goods is authorized by the Customs Act, the Custom Authority/Officer Adjudgingis empowered to give an option to the owner of the goods or, where such owner is not known, the person from whose possession or custody such goods have been seized to pay in lieu of confiscation such fine as the said officer thinks fit. From the order passed by the Custom Authority it is clear that the said authority while exercising powers entrusted u/s 125 of the Act, imposed the FINE under challenge to redeem the goods and therefore, the said fine amounts to compensatory in nature and is an allowable expenditure u/s 37(1) of the Act, as also held by the Hon ble Delhi High Court in the case of Usha Micro Process Control Ltd (supra) and Hon ble Madras high Court in the case of CIT Vs. Parthasmarathy (supra) in the identical facts. Consequently the FINE paid by the Assessee is allowed as expenditure u/s 37(1) of the Act and resultantly the addition made and sustained on account of fine paid by the Assessee to the Custom Authorities, stands deleted. Penalty imposed by the Ld. JCIT (Customs)and paid by the Assessee, can be claimed as admissible expenditure under section 37(1) - In the instant case, the imposition for penalty u/s 112(a) of the Custom Act is prescribed in order to avoid doing or omit to do and abetting the doing or omission of such an act which causes violation of prohibited acts under the Custom Act and therefore in our considered opinion, imposition of Penality is penal in nature and the payment made for discharge of punishment for violation of prohibited acts and/or restriction(s) imposed under the provisions of law, cannot be considered as compensatory in nature. Hence on the the facts and circumstances of this case, conclusions drawn by the authorities below and analyzations made above, the amount paid as penalty is an inadmissible expenditure and not allowable under the provisions of section 37(1) of the Act. Consequently the addition made and affirmed on account of Penalty is sustained. - Decided partly in favour of assessee.

Summary

Issues Involved:
1. Whether the fine and penalty paid by the Assessee under sections 125(1) and 112(a) of the Customs Act, 1962, respectively, are allowable as business expenditure under section 37(1) of the Income-tax Act, 1961.

Detailed Analysis:

1. Background and Facts:
The Assessee, engaged in importing "used digital multifunctional printer and copying machines," filed its return of income for the assessment year 2015-16. The case was selected for limited scrutiny due to discrepancies in custom duty and invoice values. The Assessing Officer (AO) added Rs. 65,61,700/- to the Assessee's income, which included fines and penalties paid to Customs Authorities for importing goods without the necessary licenses and undervaluation.

2. Assessee's Arguments:
The Assessee argued that the expenses were compensatory and allowable under section 37(1) of the Act, and relied on various judgments to support their claim. They contended that the fines and penalties were necessary to get the goods released and were not for any illegal activities.

3. Assessment and Commissioner’s Findings:
The AO and the Commissioner observed that the Assessee imported goods without the required licenses under the Foreign Trade Policy and the Environment Protection Act. The Commissioner upheld the AO’s decision, stating that the fines and penalties were penal in nature and not allowable as business expenditure under section 37(1) of the Act.

4. Tribunal’s Examination:
The Tribunal examined the nature of the fines and penalties. It referred to various judgments, including those from the Delhi High Court and the Supreme Court, to determine whether the fines were compensatory or penal.

Fine under Section 125(1) of the Customs Act:
- Legal Provision: Section 125(1) allows an option to pay a fine in lieu of confiscation.
- Tribunal’s View: The Tribunal observed that the fine imposed for redeeming the goods is compensatory in nature and thus allowable as business expenditure under section 37(1) of the Act. This view was supported by the Delhi High Court's judgment in Usha Micro Process Control Ltd. and the Madras High Court in CIT Vs. Parthasmarathy.

Penalty under Section 112(a) of the Customs Act:
- Legal Provision: Section 112(a) imposes penalties for acts leading to confiscation under section 111.
- Tribunal’s View: The Tribunal held that the penalty is penal in nature, meant to punish for violations of law, and thus not allowable as business expenditure under section 37(1) of the Act. This aligns with the statutory fiction under Explanation 1 to section 37(1), which prohibits deductions for expenditures incurred for any purpose that is an offence or prohibited by law.

5. Conclusion:
The Tribunal allowed the fine paid under section 125(1) as a deductible expenditure but disallowed the penalty under section 112(a). The appeal was partly allowed, affirming the addition related to the penalty and deleting the addition related to the fine.

Key Judgments Referenced:
1. Usha Micro Process Control Ltd. vs. CIT: Redemption fine under section 125(1) is compensatory and allowable.
2. CIT vs. Parthasmarathy: Redemption fine is compensatory and allowable.
3. Prakash Cotton Mills Pvt. Ltd. vs. CIT: Distinction between compensatory and penal payments for determining allowable expenditure.
4. CIT vs. Pannalal Narottamdas & Co.: Penalty under Sea Customs Act not allowable if for the fault of the Assessee.

Order:
The appeal was partly allowed, with the fine under section 125(1) being deductible and the penalty under section 112(a) being non-deductible. The order was pronounced on 31/05/2022.