2014 (11) TMI 345 - AT - Income Tax

Payment made as redemption fine treated as deemed income u/s 69C - Import of almond Held that - In Commissioner of Income-Tax Versus Ahmedabad Cotton Manufacturing Co. Limited 1993 (10) TMI 1 - SUPREME Court it has been held that the statutory impost paid as damages, penalty or interest, if compensatory in nature, it is allowable as business expenditure - the nomenclature was not conclusive - It was concluded that payment, though referred as a penalty, but in fact made in exercise of option available under statutory scheme, in course of assessee s business, is allowable business expenditure - the payment was made to release the goods, therefore, it can be said to be compensatory as the Customs Authorities were recovering the difference between the market price and import cost - payment was in respect of commercial transaction between two unrelated parties - The assessee had applied for clearance of goods in India - Earlier similar goods have cleared by Customs Authorities under REP licence - The fault or defect in the REP licence was not attributable to the assessee - The assessee was not to be blamed who has not indulged in any offence or incurred any expenditure for the purpose which was prohibited by law. The order of the Tribunal was confirmed holding that the amount paid by the assessee to Customs Authorities was in the nature of redemption fine therefore allowable as business expenditure thus, the amount paid by the assessee to the Customs Authorities in terms of order dated 27-10-1986 was in the nature of redemption fine and not penalty and it was allowable as business expenditure which enhances the cost of goods - the payment was made by sister concern of the assessee namely M/s Mangla Brothers through Account Payee cheque/DD - The assessee has also furnished GIR No. AV-297-M(2) of M/s Mangla Brothers - there is no reason to doubt the source of payment - the assessee also submitted that after a lapse of 20 years, it is not possible for the assessee to produce the books of account for verifying the relevant entry made regarding payment of ₹ 75 lacs - The fact that the assessee is challenging the disallowance of payment made to Customs Authority clearly establishes that the same was recorded in the books of account and therefore claimed as business expenditure Decided in favour of assessee.

Summary

Issues Involved:

1. Confirmation of payment of redemption fine as deemed income under Section 69C.
2. Disallowance of expenses/business loss on account of redemption fine.
3. Validity of the order passed under Section 143(3) read with Section 147 and notice under Section 148.

Issue-wise Detailed Analysis:

1. Confirmation of Payment of Redemption Fine as Deemed Income Under Section 69C:

The Commissioner of Income Tax (Appeals) confirmed the payment of Rs. 75,00,000 as deemed income under Section 69C. The assessee argued that the source of expenditure was explained and thus could not be deemed income under Section 69C. The Tribunal reviewed the facts, noting that the assessee entered into an agreement with an Export House for importing goods, which were later confiscated by the Customs Authorities. The Customs Tribunal found a lack of clarity in the import policy, leading to the conclusion that the import was not in contravention of the law. The Tribunal held that the payment made to the Customs Authorities was in the nature of redemption fine and not a penalty, thus allowable as business expenditure. The source of payment was also verified and found legitimate, coming from the sister concern of the assessee.

2. Disallowance of Expenses/Business Loss on Account of Redemption Fine:

The Commissioner of Income Tax (Appeals) disallowed the expenses/business loss on account of the redemption fine, stating that the assessee was carrying on business in an unlawful manner and that the redemption fine was not laid out wholly and exclusively for business purposes. The Tribunal, however, found that the import of almonds was not in contravention of any law and that the redemption fine was compensatory in nature. Citing various judicial precedents, including decisions by the Supreme Court and High Courts, the Tribunal concluded that the redemption fine was an allowable business expenditure. The Tribunal emphasized that the payment was made to release the goods and was thus compensatory, enhancing the cost of goods.

3. Validity of the Order Passed Under Section 143(3) Read with Section 147 and Notice Under Section 148:

The Commissioner of Income Tax (Appeals) did not consider the validity of the order passed under Section 143(3) read with Section 147 and the notice under Section 148. The assessee contended that the order and notice were invalid and without jurisdiction. The Tribunal did not specifically address this issue in detail in the judgment, focusing instead on the substantive issues regarding the nature of the redemption fine and its allowability as business expenditure.

Conclusion:

The Tribunal allowed the appeal of the assessee, holding that the payment of Rs. 75,00,000 to the Customs Authorities was in the nature of redemption fine and not a penalty, thus allowable as business expenditure. The source of the payment was also found to be legitimate. The Tribunal's decision was pronounced in the open court on 31st October 2014.