2014 (8) TMI 424 - HC - Income Tax

Claim of deduction against redemption fine paid to custom authorities - Whether the Tribunal was justified in holding that the sum paid to the Customs authorities on account of redemption fine, was an allowable expenditure Held that - Payment in form of expenditure should not be made for the purpose, which is prohibited by law - The fault or defect in the REP licence was not attributable to the assessee as the licenses were issued to India Craft - assessee was not to be blamed and had not indulged in any offence or incurred any expenditure for the purpose, which was prohibited by law - assessee had to pay redemption fine in order to save and protect themselves and they had received the balance consideration from the auction proceeds - the goods had been sold in auction pursuant to the direction of the Supreme Court - the conduct and action of the assessee was not blameworthy or commanding censure - assessee wanted to set-off the redemption fine from the consideration received by them - assessee had only received the net amount after adjustment of the redemption fine Decided against Revenue.

Summary

Issues:
- Whether the sum paid as redemption fine by the assessee to the Customs authorities is an allowable expenditure under Section 37 of the Income Tax Act, 1961?

Analysis:
1. The case involved an appeal by the Revenue regarding the assessment year 1992-93. The substantial question of law admitted for hearing was whether the sum of Rs. 45 lacs paid by the assessee to the Customs authorities as redemption fine was an allowable expenditure under the Income Tax Act.

2. The respondent-assessee, a partnership firm engaged in the manufacture of organic chemicals, purchased Isobutanol from M/s India Craft. The goods were detained upon import, leading to litigation with the Customs authorities. Subsequently, a redemption fine of Rs. 45,00,000 and a penalty of Rs. 2,00,000 were imposed on the respondent-assessee, which were later reduced on appeal.

3. The main issue was whether the redemption fine could be claimed as an expenditure under Section 37 of the Income Tax Act or if it was prohibited by law. The Revenue argued that the expenditure was barred under the Explanation to Section 37 as it was paid as a penalty for prohibited goods.

4. The respondent-assessee relied on a previous court decision related to payment of redemption fine and cited judgments from the Madras High Court and the Supreme Court. The Revenue contended that the Explanation to Section 37 should be strictly applied, deeming any expenditure for a prohibited purpose as not incurred for business.

5. The Revenue sought reconsideration of the previous court decision based on judgments from other high courts. They argued that the Explanation to Section 37 should be given full effect, considering any expenditure for a prohibited purpose as not for business. However, the Tribunal's findings indicated that the respondent-assessee was not at fault and had not incurred any expenditure for a prohibited purpose.

6. The Tribunal found that the respondent-assessee's actions were not blameworthy, as they had purchased goods in a commercial transaction and had to pay the redemption fine to protect themselves. The Tribunal concluded that the respondent-assessee had not incurred any expenditure for a prohibited purpose and had acted in good faith, leading to the dismissal of the Revenue's appeal.

7. Ultimately, the High Court ruled in favor of the respondent-assessee, stating that the substantial question of law had to be answered in their favor. The Court found that the respondent-assessee's payment of the redemption fine was justified in the circumstances, and the Revenue's appeal was dismissed with no costs awarded.