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TMI Blog2019 (2) TMI 1472X X X X Extracts X X X X X X X X Extracts X X X X ..... infraction of law committed by the assessee. -Decision HAJI AZIZ AND ABDUL SHAKOOR BROTHERS VERSUS[1960 (11) TMI 15 - SUPREME COURT]folloed- Decided in favour of the Revenue and against the assessee. - INCOME TAX APPEAL NO. 51 OF 2016 WITH NOTICE OF MOTION NO. 797 OF 2018 IN NOTICE OF MOTION NO. 1975 OF 2016 IN INCOME TAX APPEAL NO. 51 OF 2016 - - - Dated:- 22-2-2019 - AKIL KURESHI B.P. COLABAWALLA, JJ. Mr. Prakash Chandra Chhotaray for the Appellant Mr. Vikram Nankani, Senior Counsel with Mr. S.L. Shah i/by M/s. Shah Legal for the Respondent ORAL JUDGMENT (Per Akil Kureshi, J.) 1. This appeal was admitted for consideration of following substantial question of law:- Whether on the facts and in the circumstances of the case and in law, the Tribunal was justified in holding that the redemption fine of ₹ 75,00,000/- is allowable as business expenditure under Section 37 of the Income Tax Act? 2. The appeal arises in following background:- 2.1 Respondent assessee is an individual. For the assessment year 1988-89, the assessee had filed return of income declaring total income of ₹ 1,47,020/-. The return was accepted without scrutiny. Subs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id licence. The said material imported in the name of M/s. Rajnikant Bros. Total consideration of import material along with duty, fine, foreign payment and clearing charges etc. are as under:- Purchases Rs. i. Foreign payment 55,65,487.23 ii. Duty 56,00,000.00 iii. Redemption Fine (Penalty) (As per Madras Customs Order dt. 27.10.86) 75,00,000.00 iv. Clearing Charges Expenses 15,72,487.10 v. Service Charges of M/s. Rajnikant Bros. (As per Agreement dt. 14.10.85) 12,50,000.00 ------------------------ Total ₹ 2,14,87,974.33 ============== Q. No. 5 : As stated by you redemption fine of ₹ 75,00,000/paid to Madras Customs House. Please state who has paid the sum: Answer: ₹ 75,00,000/- paid as custom fine by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e payment is liable to be treated as unexplained expenditure u/s 69C of the Act. 2.6 The assessee had raised additional contention that when the expenditure was attributed to the assessee, the same should be considered as business expenditure. In this context, the question of such expenditure incurred for any purpose which is an offence or which is prohibited by law came up for consideration. The assessee had raised additional contention, though grounds of appeal were confined to questioning the additions made by the Assessing Officer under Section 69C of the Act. The Commissioner of Income Tax (Appeals) [ the CIT(A) for short], therefore, considered whether the expenditure was in the nature of compensatory expenditure or towards fine in contravention of law. The CIT(A) while rejecting this contention, observed as under:- The appellant's plea is that the expense is allowable as a cost u/S. 37 in accordance with case laws cited. It is found that after considering the judgments of the Bombay High Court in (a) CIT Vs. Pannalal Narottamdas Co (supra) which laid down that redemption fine is additional cost for the goods purchased and (b) the judgment in Rohit Pulp P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent case were similar. The Tribunal noted that in the said case, it was found that the fault or defect in the REP licence was not attributable to the assessee. The assessee was not to be blamed,had not indulged in any offence or incurred any expenditure for the purpose which is prohibited by law and the assessee had to pay redemption fine in order to save and protect themselves. 2.9 Against this judgment, the Revenue has filed this appeal. 3. Mr. Chhotaray, learned counsel appearing for the Revenue submitted that the amount of ₹ 75 Lacs paid by the assessee was towards redemption fine. In terms of Explanation 1 to Section 37(1) of the Act, such expenditure was not an allowable deduction. The Tribunal, therefore, committed serious error in allowing the assessee's appeal. He took us extensively through the orders and statements on record and submitted that the Assessing Officer and CIT(A) came to the specific conclusion that it was the assessee who had made the imports and had, therefore, paid the redemption fine. The Tribunal without any basis came to the conclusion that the assessee was not connected with the import of almond which led to imposition of redemption ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l licence. It started importing goods. At that stage, Indo Afghan Chambers of Commerce who was the association of dealers engaged in the business of selling dry fruits in North India filed a petition before the Supreme Court under Article 32 of the Constitution contending that the goods sought to be imported on the additional licences included those which were prohibited by the prevalent import policy. The Supreme Court held that under the import policy of 1985-88 when the dry fruits were sought to be imported, they were no longer open to import under the Open General Licence. Relevant observations of the Supreme Court read thus:- 7. We may assume for the purpose of this case that a diamond exporter is legitimately entitled to obtain an Additional Licence under the Import Policy 1978-79 for an item which is different from the item he may have intended to import had the Additional Licences been rightly granted to him originally. In that event, the diamond exporter can succeed only if the item could have been imported under the Import Policy 1978-79 and also under the Import Policy 1985-88 in accordance with the terms of the order of this Court dated April 18, 1985 as construed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out discussing the relevant materials compared the case of the assessee with the facts arising in the judgment of the Supreme Court in the case of Ahmedabad Cotton Mfg Co Ltd (supra) in which it was recorded that the fault or defect in the REP licence was not attributable to the assessee and therefore, the assessee was not to be blamed for indulging in any offence or having incurred any expenditure for the purpose which was prohibited by the law. In the present case, the Assessing Officer had held that it was the assessee who had imported the goods. The CIT(A) also largely concurred with this finding. The Tribunal did not advert to the materials on record to give a different conclusion. The Tribunal totally ignored the statement of the representative of M/s. Rajnikant Bros., relevant portion of which is reproduced earlier in which he attributed the entire transaction of import and payment or fine to the assessee. The Tribunal merely referred to the terms of the agreement overlooking the ground realities. The entire consideration of the Tribunal, therefore, has been vitiated on account of this vital error. Even otherwise, the facts on record would suggest that it was the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f penalty for infraction of law and therefore, not a deductible expenditure. It was observed as under:- A review of these cases shows that expenses which are permitted as deductions are such as are made for the purpose of carrying on the business, i.e., to enable a person to carry on and earn profit in that business. It is not enough that the disbursements are made in the course of or arise out of or are concerned with or made out of the profits of the business but they must also be for the purpose of earning the profits of the business. As was pointed out in Von Glehn's case [1920] 2 K.B. 553 an expenditure is not deductible unless it is a commercial loss in trade and a penalty imposed for breach of the law during the course of trade cannot be described as such. If a sum is paid by an assessee conducting his business, because in conducting it he has acted in a manner, which has rendered him liable to penalty, it cannot be claimed as a deductible expense. It must be a commercial loss and in its nature must be contemplable as such. Such penalties which are incurred by an assessee in proceedings launched against him for an infraction of the law cannot be called commercial lo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... violation of law. The proceedings were undertaken against the assessee for infringement of the relevant provisions of Foreign Exchange Regulation Act which ultimately resulted into penalty being imposed against the assessee. The Supreme Court held and observed as under:- 20. The case of Haji Aziz Abdul Shakoor Bros. (supra ) is important for another reason. It was categorically held in this case that no distinction can be made in this regard between a personal liability and a liability of any other kind. So long as the payment has to made for infraction of law, it cannot be said that it was made in course of carrying out of the trade. 23. In the instant case, the assessee had indulged in transactions in violation of the provision of Foreign Exchange (Regulation) Act. The assessee's plea is that unless it entered into such a transaction, it would have been unable to dispose of the unsold stock of inferior quality of tobacco. Another words, the assessee would have incurred a loss. Spur of loss cannot be a justification for contravention of law. The assessee was engaged in tobacco business. The assessee was expected to carry on the business in accordance with law. If t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... within India with the contractual obligation to export the whole of the coffee so purchased to the places outside India. The assessee, however, exported part of it and sold the rest within India. The Coffee Board, in terms of the agreement levied damages from the assessee for breach of the contract. This amount was paid by the assessee and and claimed by way of expenditure. The High Court referred to various judgments on the issue and observed as under:- From what we have said above it should be clear that it was not a case of a payment of damages for a mere breach of contract with nothing more. It was not of course a case of penalty paid under the terms of a statute for contravention of any specific statutory provision. In the circumstances of this case, the liquidated damages claimed and paid was, however, more akin to a penalty than the damages suffered for breach of contract in the course of normal trading activities, whether or not that breach of a contract was also dishonest. That is why we said that it may not be necessary to rest our decision in this case on the rule laid down in Masks case [1943] 11 ITR 454. In our opinion it is the principle laid down in Von Glehns c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d before the Court which was distinguished. 13. This Court in a decision in the case of T. Khemchand Tejoomal Vs. CIT 161 ITR 492 (Bom) considered a case where the assessee was a registered firm doing business mainly in cloth. The assessee had acquired a licence for importing automobile spare parts. The assessee then entered into a contract for import and sale of capacitors to one Bipin Automobiles. The purchaser would bear all expenses including customs duty. Pursuant to the agreement, the assessee placed an order of capacitors and the goods were imported. However, it was found that the goods did not conform to some of the specifications in the licence and the Customs Authorities confiscated the goods and offered the option to pay penalty for clearance of goods. The assessee paid the penalty and claimed it as business expenditure. Before the High Court, it was argued that the assessee was a mere nominal licence holder and the penalty was really levied on Bipin Automobiles to whom the goods have been sold and therefore, the assessee should be allowed to claim the expenditure as business expenditure. The Court held and observed as under: The submission of Mrs. Jagtiani, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... found that the imports were unauthorized and the goods were liable to be confiscated and a penalty was liable to be imposed under section 167(8) of the Sea Customs Act, 1878. The assessee paid the penalty for saving the goods from being confiscated. The Tribunal took the view that the assessee was entitled to plead that it had purchased the documents of title in good faith and had paid consideration thereon, and, thereafter, it had to pay the penalties in order not to lose the goods which had become its property and, in these circumstances, the penalty could be legitimately regarded as part of the cost of the goods. It was held by the Division Bench that, on the facts and circumstances, the actual cost of the goods to the assessee was not only what it had paid to the importers but in addition thereto what it had to pay by way of penalty in order to save the goods from being confiscated and lost to it. It is significant that the observations of the Division Bench set out at page 672 of the aforesaid report show that the Division Bench clearly took the view that in cases where penalty had to be incurred because of the fault of the assessee himself, as for instance, by reason of his ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the hands of the assessee. The Revenue Authorities rejected such contention. The Income Tax Appellate Tribunal, however, had taken a view that the assessee was correct in contending that it had purchased the documents of title in good faith and therefore, it had to pay the additional cost not to loose goods which had become its property. In this context, a reference was made to the High Court on following substantial question of law:- Whether the penalties totaling ₹ 31,302/- paid in breach of the Sea Customs Act in respect of imports of stock-in-trade, but on bills of lading, purchased in good faith, is a proper deduction under Section 10(1) of the Income Tax Act? The Department objected to the framing of the question and insisted that the following question be reframed by the High Court:- Whether, on the facts and in the circumstance of the case, the penalty of ₹ 31,302 paid by the assessee to the customs authorities for infringement of Import Control Regulations constitutes an allowable deduction under Section 10 of the Income-tax Act? The High Court first rejected any modification to the question as desired by the Revenue observing that the Trib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his goods released from the customs authorities. In the present case, therefore, the expenses incurred by the assessee could be regarded as wholly and exclusively incurred for the purpose of his business. In our opinion, therefore, the conclusion arrived at by the Tribunal that the sum of ₹ 31,302 was allowable to the assessee as proper deduction is correct and the deduction is capable of being allowed under section 10(1) of the Income Tax Act as held by the Tribunal or even under section 10(2)(xv) of the Act. This case, thus, is clearly distinguishable. On facts, the Tribunal had held that the assessee was not responsible for the breach of law, a finding on the basis of which the High Court proceeded. It was in this background that the Court upheld the Tribunal's decision allowing deduction of the amount in question as an expenditure emphasizing that such amount in the hands of the assessee was not penalty but an additional cost for purchase of goods. 15. In case of CIT, Gujarat V/s. Ahmedabad Cotton Mfg. Co Ltd Ors.(1994) 1 SCC 632, the assessee company had to pay to the Textile Commissioner an amount in view of the non production and non packing of the m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Hazi Aziz, the ratio laid down therein would squarely apply. The later decision cited by the learned counsel for the assessee emphasizes that not the nomenclature of fine or penalty, but the true character of payment must be taken into consideration. If the payment is compensatory in nature, it would be allowable deduction. Judgment of this Court in Pannalal (supra) proceeded on the basis that the infraction of law for which penalty was imposed, was by the importer and not the assessee who had purchased the goods, though the fine was borne by the assessee. It was in this background, the Court had held that the payment in question was in the nature of additional cost of the goods for the assessee. 19. Reliance was also placed on the decision of Punjab Haryana High Court dated 9.12.2008 in the case of Commissioner of Income Tax Vs. Hero Cycles Ltd. However, this decision does not lay down any ratio which can be applied in the present case. The observations in the judgment that: there is no doubt that payments made in the nature of penalty or fine for any wrongful act cannot be allowed as permissible deductions but mere label of the payment is not conclusive. Certain pay ..... X X X X Extracts X X X X X X X X Extracts X X X X
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