1967 (9) TMI 6 - HC - Income Tax

Penalty paid by the assessee to the customs authorities for infringement of Import Control Regulations constitutes an allowable deduction u/s 10 of Indian Income Tax Act 1922

Summary

Issues:
- Whether penalties paid in breach of the Sea Customs Act for imports of stock-in-trade, but on bills of lading purchased in good faith, are a proper deduction under section 10(1) of the Income-tax Act?

Analysis:
The case involved the question of whether penalties totaling Rs. 31,302 paid by an assessee in breach of the Sea Customs Act for unauthorized imports of stock-in-trade, but on bills of lading purchased in good faith, could be considered a proper deduction under section 10(1) of the Income-tax Act. The assessee, a registered firm dealing in gum, purchased bills of lading from parties importing gum from Africa. Upon arrival in India, it was discovered that the imports were unauthorized, leading to penalties paid by the assessee to save the goods from confiscation. The Income-tax Officer initially disallowed the deduction, but the Tribunal held that the penalties should be considered part of the cost of the goods imported by the assessee.

The Appellate Assistant Commissioner rejected the assessee's contention that the penalties were part of the purchase price of the gum, as the assessee failed to prove that the penalties were levied due to faults of the importers. However, the Tribunal disagreed and allowed the deduction, stating that the penalties were incurred to save goods that had become the property of the assessee. The department sought a reference to the High Court, challenging the Tribunal's decision.

The High Court upheld the Tribunal's decision, emphasizing that the penalties paid by the assessee were necessary to save the goods from confiscation and could be considered part of the cost of the goods. The Court noted that the penalties were not incurred due to any fault of the assessee but were a result of the goods being held by customs authorities. Therefore, the expenses were deemed to be wholly and exclusively incurred for the purpose of the business, making them allowable deductions under section 10(1) of the Income-tax Act.

In conclusion, the High Court answered the question in the affirmative, ruling in favor of the assessee. The Court held that the penalties paid were a proper deduction under section 10(1) of the Income-tax Act, as they were necessary expenses incurred in the course of business. The department was directed to pay the costs of the assessee, and the notice of motion taken out by the department was dismissed with costs.