1997 (12) TMI 3 - SC - Income Tax

Transactions in violation of the provisions of FERA - expenditure incurred for evading the provisions of the Act and also the penalty levied for such evasion cannot be allowed as deduction u/s 37

Summary

Issues Involved:

1. Whether the sum of Rs. 2,95,000 is to be taken into account in computing the income of the assessee from business under section 28 of the Income-tax Act, 1961.
2. Whether the claim of Rs. 2,95,000 is covered by sub-rule (j) of rule 6DD, framed under section 40A(3) of the Income-tax Act, 1961.
3. Whether the sum of Rs. 19,659 incurred as guest expenses is allowable as a deduction.

Issue-wise Detailed Analysis:

1. Computation of Income under Section 28:

The Tribunal referred the question of whether Rs. 2,95,000 should be included in the assessee's business income under section 28 of the Income-tax Act, 1961. The assessee claimed this amount as business expenditure/loss, arguing that it was necessary to dispose of sub-standard tobacco stock at a discount, which involved remitting 20% of the sale price back to a Singapore party through an intermediary, Shamsuddin. The Income-tax Officer disallowed this claim, deeming the payment non-genuine and in contravention of section 40A(3) of FERA. The Tribunal, however, found that the amount should reduce the assessee's income from the export transaction, effectively recognizing the transaction's reality but not its legality.

2. Applicability of Rule 6DD(j) under Section 40A(3):

The Tribunal also considered whether the payment to Shamsuddin fell under the exceptions of rule 6DD(j), which allows cash payments in exceptional and unavoidable circumstances. The Tribunal concluded that the payment did not attract section 40A(3) because it was made under exceptional and unavoidable circumstances. However, the High Court disagreed, asserting that expenses tainted with illegality could not be allowed as business expenditure under section 37 or as business loss. The High Court emphasized that the transaction was illegal and not a normal incidence of carrying on business.

3. Deduction of Guest Expenses:

The issue of whether Rs. 19,659 incurred as guest expenses is allowable as a deduction was also raised. However, the judgment primarily focused on the legality of the Rs. 2,95,000 payment and did not provide a detailed analysis of the guest expenses claim.

High Court's Findings:

The High Court held that the Tribunal erred in its conclusions, stating that payments tainted with illegality could not be claimed as deductions. The High Court emphasized that the agreement to remit 20% of the sale price back to the Singapore party was illegal and could not be recognized by the court. The High Court further stated that the real income from the export transaction was the full invoice price, not the amount minus the illegal payment. The High Court cited various precedents, including English and Indian cases, to support its view that penalties or fines for legal infractions cannot be deducted as business expenses.

Supreme Court's Conclusion:

The Supreme Court agreed with the High Court's view, dismissing the appeal and holding that the expenditure incurred for evading the provisions of FERA and the penalty levied for such evasion could not be allowed as deductions. The Court emphasized that allowing such deductions would undermine the penal provisions of FERA and be against public policy. The appeal was dismissed with no order as to costs.