2013 (6) TMI 274 - HC - Income Tax

Loss on account of confiscating of goods by customs authority - whether in the nature of Penalty - deduction u/s 37(1) - held that - the Apex Court in Maddi Venkataraman & Co. (P) Ltd s case (1997 (12) TMI 3 - SUPREME Court), delving into the issue whether the benefit of deduction under one statute where any expenditure is stated to have been incurred in violations of another statute was admissible had held that the expenditure could not be said to be wholly and exclusively laid out for the purpose of assessee s business and was inadmissible. The loss in the nature of penalty - evasion of law can not be a trade pursuit - Not allowed to be deducted - decided against the assessee.

Summary

Issues:
1. Interpretation of Section 37(1) of the Income Tax Act regarding deduction of expenditure incurred due to confiscation of goods.
2. Application of Explanation to Section 37(1) in determining the admissibility of claimed deduction.
3. Consideration of judicial precedents on deduction of expenditure incurred in violation of statutory provisions.

Analysis:

Issue 1:
The appeal before the High Court involved the interpretation of Section 37(1) of the Income Tax Act regarding the deduction of expenditure incurred due to the confiscation of goods. The revenue challenged the Tribunal's decision allowing the deduction claimed by the assessee for the loss of Rs. 8,00,760 in respect of non-released goods.

Issue 2:
The primary contention raised by the revenue was that the amount claimed as expenditure was on account of confiscation of goods due to misdeclaration under the Customs Act. The revenue argued that the Explanation to Section 37(1) of the Act rendered such expenditure inadmissible, as it pertained to an offense or was prohibited by law. The High Court noted that the Explanation explicitly states that any expenditure incurred for a purpose that is an offense or prohibited by law shall not be deemed to have been incurred for the purpose of business or profession.

Issue 3:
The High Court considered the judgment in Maddi Venkataraman & Co. (P) Ltd. v. Commissioner of Income Tax, which established that expenditure incurred in violation of statutory provisions cannot be considered as wholly and exclusively expended for the purpose of the business. The Court highlighted that the purpose of the expenditure must be lawful, and allowing deductions for expenses incurred in contravention of the law would undermine the statutory provisions.

In conclusion, the High Court upheld the revenue's appeal, ruling in favor of disallowing the claimed deduction by the assessee. The Court emphasized that the expenditure incurred for evading statutory provisions or penalties imposed for such evasion cannot be considered as wholly and exclusively laid out for the purpose of the business. The judgment reaffirmed the principle that expenditure incurred in violation of statutory provisions is not admissible for deduction, in line with the Explanation to Section 37(1) of the Income Tax Act.