2006 (10) TMI 140 - HC - Income Tax

Assessee claimed deduction of Rs. 31,433 paid as fine for belated payment of excise duty instalment though termed as fine, the payment was not in the nature of punishment - the payment was in effect intended to compensate the loss on account of delay in making the payment and was not by way of penalty for breach of law - where the amount paid is in the nature of compensation, the same will be allowable

Summary

Issues:
Question of law regarding deduction of fine paid to Excise Department for belated payment of excise duty instalment.

Analysis:
The Income-tax Appellate Tribunal referred a question of law to the High Court regarding the deletion of an addition made by the Income-tax Officer on account of a fine paid to the Excise Department. The Tribunal allowed the deduction claimed by the assessee for the fine paid for belated payment of excise duty instalment, contrary to the decisions of the Assessing Officer and the appellate authority. The Tribunal justified its decision by stating that the fine was incurred for making belated payments, indirectly benefiting the assessee, and could be considered a legitimate business expenditure. The Tribunal cited previous judgments to support its decision, emphasizing that the payment, though technically a penalty, was incidental to trade and allowable as a business expense.

The High Court, after hearing the counsel for the Revenue, upheld the Tribunal's decision. The Court relied on a judgment of the Supreme Court in Prakash Cotton Mills P. Ltd. v. CIT, which stated that where a payment is in the nature of compensation, it should be allowed as an expenditure regardless of its label. The Court noted that in the present case, the payment, though termed as a fine, was not a punishment but a form of compensation. The Court distinguished the case of Haji Aziz and Abdul Shakoor Bros. v. CIT, where penalties for breach of law were not considered allowable deductions. In this case, the payment was intended to compensate for the loss due to delayed payment rather than as a penalty for breach of law.

Ultimately, the High Court ruled in favor of the assessee, stating that the fine paid to the Excise Department was a legitimate business expense and should be allowed as a deduction. The Court concluded that the payment, despite being labeled as a fine, was not in the nature of a penalty for breach of law but rather a compensatory measure. As a result, the question referred by the Tribunal was answered against the Revenue and in favor of the assessee, and the reference was disposed of accordingly.