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TMI Blog1961 (1) TMI 71X X X X Extracts X X X X X X X X Extracts X X X X ..... aph 5(2) of the said Order it was provided that it shall be deemed to be a condition of every licence that the licensee shall not transfer the licence except with a prior permission and that the goods for the export of which the licence is granted shall be the property of the licensee at the time of the export. The assessee was granted a licence, popularly called as Export quota to export wool to the extent of 22,000 Ibs. Similarly another trader, viz., Messrs. S. B. and Co. (abbreviation of Messrs. Sri Kant Banwari Lal and Co.), was also granted an export quota to export certain quantity of wool. It appears that over and above the quantity allowed to be exported by the assessee, the assessee wanted to export more wool and entered into a contract for sale of 37 bales of Indian wool at 534d. per lb. with Messrs. J. C. Gilbert Limited, London, sometimes in April, 1, 1954. In part fulfilment of this contract and in order to make use of the export quota held by Messrs. S. B. and Co., which firm evidently had no wool of their own the assessee purported to sell three bales lying in his account with Messrs. D. Abraham and Sons Ltd., Bombay, to the said company on June 1, 1954. On Ju ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) of the Indian Income-tax Act. Reliance was placed on the decision of the Bombay High Court in Commissioner of Income-lax v. Haji Aziz Abdul Sakoor Bros [1955] 28 I. T. R. 266 (Bom.). The alternative claim of the assessee that this amount should be taken into consideration in computing the profits of the assessee on the accepted principles of commercial accountancy under section 10(1) of the Indian Income-tax Act was again rejected as it was held that any payment which is a payment of an unlawful nature cannot be taken into consideration under any of the provisions of section 10 of the Indian Income-tax Act. The order of the Tribunal is made a part of this statement of case and is r marked as annexure A . 3. On the above facts and circumstances of this case, the following question of law arises : Whether on the facts and in the circumstances of this case the sum of ₹ 6,800 is an admissible expense either under the provisions of Section 10(2)(xv) of the Indian Income-tax Act or otherwise on accepted principles of commercial accountancy under section 10(1) of the Indian Income-tax Act ? 4. Draft statement of the case was drawn up in the presence of the parties. Furth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndian Income-tax Act, 1922. The Income-tax Officer regarded the transactions of sale and purchase entered into between the assessee and S.B. and Co., as pseudo transactions , i.e., transactions which were not genuine. According to him, the ownership in the goods never passed from the assessee to S. B. and Co., and the difference between the aforesaid two figures merely represented the cost of acquisition of shipping rights which is not an expense for carrying on the business and which is not admissible under section 10(2)(xv). He further considered that it was of no consequence in so far as the computation of income under section 10 of the Incometax Act was concerned as to what shape was given by the assessee to it in his book. Before the Appellate Assistant Commissioner, the position adopted by the assessee was somewhat different and it was sought to deduct a sum of ₹ 6,800 under section 10(1) of the Act. The Appellate Assistant Commissioner agreed with the Income-tax Officer that there were no genuine sale and repurchase transaction and he further came to the conclusion that the real nature of the transactions was merely to acquire the quota rights which belonged t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it for its business and by way of compensation D was to be paid certain sums in accordance with the prevailing conditions. The firm paid two amounts of ₹ 13,500 and ₹ 10,000 during the accounting years in question and claimed those amounts as deduction from the taxable profits of the firm. The High Court held that the payments made were not of a capital nature and what the assessee agreed to pay to D was for the use of the quota with which the assessee could acquire its stock-in-trade for export till D was allotted his separate quota. Then certain observations were made which were more in the nature of obiter but on which a great deal of emphasis was laid by the learned counsel for the assessee in the present case. It was observed by the Madras Bench that a certain practice had been referred to by the Appellate Assistant Commissioner with reference to what he called the usual procedure adopted by exporters who were purchasing export quota from others. It was considered that the aforesaid practice had legal sanction behind it and the Madras Bench proceeded to make the following observations ([1957] 32 I. T. R. 313, 319 (Mad.).) : The quota itself, it sho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t, observed that under section 10(2)(xv) a permissible deduction was an expenditure which was laid out or expended wholly and exclusively for the purpose of the assessee' business, profession or vocation. Although the Legislature has not stated it in express terms, it must be read into section 10(2)(xv) by necessary intendment that the expenditure contemplated by that sub-section was an expenditure which was laid out or expended for the purpose of carrying out business of the assessee lawfully. The learned Chief Justice was quite emphatic about repelling the suggestion that if an assessee spent money in order to carry out the business unlawfully, he would be entitled to deduction under section 10(2)(xv). The following observations at pages 272 are noteworthy ([1955] 21 I. T. R. 266, 272 (Bom.) : In our opinion no distinction can be drawn between a case where an assessee makes an unlawful expenditure and claims it as a deduction under section 10(2)(xv) and a case where an assessee commits a breach of the law, incurs an expenditure as a result of that breach of the law, and then claims that expenditure under section 10(2)(xv). The two cases are identical and no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of the law, The Master of the Rolls observed ((1920) 12 Tax Cas. 232, 238 (C. A.)) : This business could perfectly well be carried on without any infraction of the law at all. This penalty was imposed because of an infraction of the law and that does not seem to me to be any more than the expense which had to be paid in the case of Strong v. Woodifield (1906) 5 Tax Cas. 219 (H. L.)) appeared to Lord Davey to be, a disbursement or expense which was laid out or expended for the purpose of such trade, manufacture, adventure or concern; nor does it seem to me, though this is rather more questionable to be a sum paid on account of a loss connected with or arising out of such trade, manufacture, adventure or concern. Indeed, the case was decided largely on the basis that a breach of law committed and for that breach the company was fined and that did not seem to be a loss connected with a business nor could it be regarded to be money wholly and exclusively laid out or expended for the purposes of the trade. Scrutton L. J. was inclined to think, though he did not wish to finally decide it, that the Income-tax Act should be confined to lawful businesses and to bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the purpose of the business. The true position appears to be that where the expenses which are claimed as deductions have a direct and proximate connection with an act which is an infringement of law or is a contravention of it, they have not been allowed or regarded as deductions which can be granted under the income-tax law. With respect, the opinion expressed by Chagla C.J. in Commissioner of Income-tax v. Haji Aziz and Abdul Sakoor Bros. (1), that if an assessee spends money in order to carry out the business unlawfully, he cannot be held entitled to deduction under section 10(2)(xv), represents the correct statement of law on the point. There is force in the contention of the learned counsel for the Commissioner that the amount of ₹ 6,800 which is claimed as a deduction under section 10(2)(xv) was paid clearly to achieve what was prohibited by law, namely, to export wool without having the requisite quota in contravention of paragraph 3 of the Exports (Control) Order. The learned counsel for the assessee has sought to reopen the question whether the sales to S.B. and Co., in India and the transactions of re-purchase from that company were genuine or not. That cannot ..... X X X X Extracts X X X X X X X X Extracts X X X X
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