1960 (11) TMI 15 - SC - Income Tax

Whether on the facts and in the circumstances of the case, the payment of ₹ 82,250 is an allowable expenditure under section 10(2)(xv) of the Indian Income-tax Act ? Held that - High Court rightly held that the amount claimed was not deductible and we, therefore, dismiss this appeal.

Summary

Issues Involved:
1. Admissibility of expenditure incurred due to infraction of law.
2. Nature of the expenditure as a penalty for illegal acts.
3. Allowability of expenditure under section 10(2)(xv) of the Indian Income-tax Act.

Detailed Analysis:

1. Admissibility of Expenditure Incurred Due to Infraction of Law:

The appellant-firm imported dates from Iraq, some of which were brought by steamer, contrary to notifications prohibiting such imports. The goods were confiscated by customs authorities but were released upon payment of fines totaling Rs. 82,250. The appellant sought to deduct this amount as an allowable expenditure under ordinary principles of commercial accounting. The Income-tax Officer and the Appellate Assistant Commissioner disallowed this claim. The Income-tax Appellate Tribunal allowed the deduction by a majority, but the High Court of Bombay held that the amount paid was a penalty for an illegal act and thus not allowable under section 10(2)(xv) of the Indian Income-tax Act.

2. Nature of the Expenditure as a Penalty for Illegal Acts:

The High Court concluded that the payment of Rs. 82,250 was a penalty incurred due to the infraction of the law. The appellant argued that the order of confiscation was an order in rem against the stock-in-trade and not against the person of the appellant firm, thus making it an allowable expenditure. However, the court noted that the action taken under section 167, item 8 of the Sea Customs Act, was indeed a penalty for the infraction of the law, as it involved the confiscation of goods imported contrary to prohibitions and restrictions.

3. Allowability of Expenditure Under Section 10(2)(xv) of the Indian Income-tax Act:

Section 10(2)(xv) of the Indian Income-tax Act allows deductions for any expenditure laid out or expended wholly and exclusively for the purpose of the business. The court referred to several precedents, including English cases such as Commissioners of Inland Revenue v. Warnes & Co. and Commissioners of Inland Revenue v. Alexander von Glehn & Co. Ltd., which established that penalties paid for infractions of the law are not allowable deductions as they are not commercial losses connected with the trade. The court emphasized that expenses must be for the purpose of earning profits in the business and not merely connected with the business. Penalties for legal infractions do not meet this criterion as they are not considered commercial losses but rather penalties imposed for breaches of the law.

The court dismissed the argument that penalties not involving personal liability should be deductible, stating that any infraction of the law visited with a penalty cannot be considered a commercial expense for the purpose of the business. Public policy dictates that such penalties cannot be allowed as deductions.

Conclusion:

The Supreme Court upheld the High Court's judgment, affirming that the amount paid as a penalty for the illegal importation of goods was not an allowable expenditure under section 10(2)(xv) of the Indian Income-tax Act. The appeal was dismissed with costs, reinforcing the principle that penalties for legal infractions cannot be deducted as business expenses.