2006 (7) TMI 135 - HC - Income Tax

Business Expenditure - (1) Whether the redemption fine paid by the assessee to the excise authorities for the infraction of law to release the seized goods can be treated as business expenditure? (2) Whether the Tribunal even before deciding the issue is correct in holding that in respect of penalty paid for the infraction of law two views are possible and therefore the one favourable to the assessee should be taken? (3) Whether the Tribunal was correct in affirming the deletion made by the Appellate Commissioner in respect of unexplained investment made by the assessee and estimated by the Assessing Officer? - we deem it proper to say that violation of a statute has to be curbed as otherwise violation would be a premium for violators for the purpose of tax benefits. - we accept this appeal. Questions of law raised in this appeal are answered in favour of the Revenue

Summary

Issues Involved:
1. Whether the redemption fine paid by the assessee can be treated as business expenditure.
2. Whether the Tribunal was correct in holding that two views are possible regarding penalty paid for infraction of law and favoring the assessee.
3. Whether the Tribunal was correct in affirming the deletion of unexplained investment made by the assessee.

Detailed Analysis:

1. Redemption Fine as Business Expenditure:
The primary issue is whether the redemption fine of Rs. 2,00,000 paid by the assessee to the excise authorities for the infraction of law can be treated as business expenditure. The court examined the nature of the expenditure and relevant case law. The Supreme Court in *Maddi Venkataraman and Co. P. Ltd. v. CIT* held that expenses incurred for violating the law cannot be considered business expenditure. Similarly, in *CIT v. Mamta Enterprises*, it was established that penalties for legal infractions cannot be considered commercial expenses. The court reiterated that any expenditure resulting from the violation of law cannot be treated as business expenditure under the Income-tax Act. This principle was further supported by the Supreme Court in *Haji Aziz and Abdul Shakoor Brothers v. CIT*, which emphasized that penalties for legal infractions are not deductible as business expenses. The court concluded that the redemption fine paid by the assessee was not deductible as business expenditure.

2. Tribunal's View on Penalty for Infraction of Law:
The second issue concerns whether the Tribunal was correct in holding that two views are possible regarding the penalty paid for the infraction of law and favoring the assessee. The Tribunal's reliance on a judgment from the Bombay High Court was criticized due to the lack of availability and clarity of the said judgment. The court expressed displeasure over the Tribunal's reliance on unverified judgments. The court emphasized that penalties for legal infractions cannot be considered business expenses, as established in prior judgments. The Tribunal's decision to favor the assessee was deemed incorrect and not in line with established legal principles.

3. Deletion of Unexplained Investment:
The third issue is whether the Tribunal was correct in affirming the deletion made by the Appellate Commissioner regarding unexplained investment by the assessee. The court reviewed the facts and found that the Department had added the value of suppressed production to the total income declared by the assessee. The Tribunal's decision to accept the deletion made by the Appellate Commissioner without proper appreciation of the facts was found to be erroneous. The court emphasized that unexplained investments must be properly accounted for and cannot be deleted without substantial evidence.

Conclusion:
The court concluded that the redemption fine paid by the assessee cannot be treated as business expenditure, the Tribunal erred in holding that two views are possible regarding the penalty for infraction of law, and the Tribunal incorrectly affirmed the deletion of unexplained investment. The appeal was accepted, and the questions of law were answered in favor of the Revenue. No costs were awarded.