Contravention of Import and Export Trade Control Regulations on the ground of misclassification. - Income Tax - 163/CBDT

INSTRUCTION NO 163/CBDT, Dated: April 24, 1970 Section(s) Referred: 143 Statute: Income - Tax Act, 1961 A question has arisen whether penalty levied on an assessee by the Customs Authorities on account of wrong classification of the goods imported is allowable as deduction in the computation of income. 2. The problem arises whenever there is contravention of Import and Export Trade Control Regulations on the ground of misclassification. The penalty which an importer may have to pay in a case of this kind is capable of being divided into two categories. When a person imports goods and they are held by the Customs Authorities not to be covered by a valid licence due to a difference of opinion on the question of classification, it is open to the Customs Officer to order confiscation of the goods. In such cases he may u/s.125 of the Customs Act give the importer an option to pay a fine in lieu of confiscation. Further u/s.112 of the Customs Act a personal penalty may be imposed on the importer. However a genuine dispute as to whether a particular article would come under one head rather than another, would not result in an importer being asked to pay a personal penalty. If the penalty in respect of which a deduction is claimed is a personal penalty imposed u/s.112 of the Customs Act, there would be no question of allowing it as a deduction, because the imposition of such a penalty presupposes that there has been a deliberate violation of the law. As regards fines in lieu of confiscation imposed u/s.125 of the Customs Act, the Customs Authorities fix the quantum of fine after taking into account the relevant factors such as the bonafides of the importer, the margin of profit that an importer can expect to make and such other factors. In cases of bonafide mistakes on classification, the fine in lieu of confiscation would, generally, be intended only to wipe out any extra profit which the importer might be expected to make. But it cannot be disputed that there has been a contravention of the law though it might be unwilling contravention, otherwise there will be no question of levy of any penalty. In the case of Haji Aziz and Abdul Shakur Bros. Vs. CIT 41 ITR 350 it was laid down that infraction of law is not a normal incident of the business. Accordingly a penalty levied by the Customs Authorities even for misclassification of the imported articles would not be admissible as deduction in the hands of the assessee. 3. These instructions may please be brought to the notice of all the ITOs working in your charge.