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TMI Blog1978 (2) TMI 80X X X X Extracts X X X X X X X X Extracts X X X X ..... to bank commission and bank guarantee with regard to re-export of goods. The Income-tax Officer added these amounts to the total income of the assessee. The Income-tax Officer in his order stated as follows : " In the P/L a/c this amount has been claimed as deduction for re-exporting some sheets which were imported in the past. Examination of the case revealed that in the past the assessee imported some steel sheets from foreign country without any valid licence. On its arrival the materials were not allowed to be taken away by the assessee on the ground that the import was made illegally. After protracted correspondence and in order to avoid demurrage the company approached the Iron and Steel Controller who refused to oblige the company but issued a customs clearance permit to enable the company to take possession of the materials from the customs to avoid demurrage, etc., with a clear direction that the materials must have to be re-exported. The company agreed to do so. During this year, the materials were re-exported and a total amount of Rs. 26,574 was incurred by way of freight and other expenses. The assessee was asked to show cause as to why the expenditure should not be d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has referred to the report of the Sarkar Committee, as mentioned hereinbefore. In the report of the Sarkar Committee it was, inter alia, observed as follows : " The question that arises for this Committee on these facts is whether the imports by Messrs. Amin Chand Payare Lal and Messrs. Apeejay (Private) Limited were irregular and without a licence. Not much difficulty arises on the question, because it would be apparent from what we have stated earlier that the Steel Controller's Organisation did not treat them as regular or proper imports, and that Organisation directed the re-export. But a further question arises as to whether the Steel Controller had power to direct such re-export. We should mention here that the Solicitor to the Central Government in Calcutta, Shri S. N. Sen, had expressed the opinion that there was no such power. But the Steel Controller, Shri Banerjee, disagreed with that view and directed re-export. We find that the licensing authority has powers under clause 5(1)(i) of the Import (Control) Order, 1955, to issue a licence directing disposal of goods covered by a licence in a certain manner and under clause 5(1)(iii) of the same Order to take a bond from t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iew of the events that actually happened at the end, viz., the order of the Steel Ministry setting aside Shri Banerji's decision and treating the goods as legal imports, it is unnecessary now to go into the question of the propriety of Shri Banerji's order. As we have no reason to think that there was any dishonest motive it would at the worst only mean that Shri Banerji had misinterpreted his statutory powers. We, therefore, come to the conclusion that, in respect of the orders of re-export of the goods which Messrs. Amin Chand Payare Lal and Messrs. Apeejay (Private) Limited had imported without valid licences and in respect of which the Steel Controller issued the Customs clearance permits on condition of re-export, it would not be justifiable to find fault with the action of the Steel Controller, Shri Banerji. From the order of the Income-tax Officer, the assessee preferred an appeal before the Appellate Assistant Commissioner and contended that the expenses were of revenue nature and were incurred wholly and exclusively for the purpose of the business. The Appellate Assistant Commissioner, inter alia, observed as follows : " I have carefully considered all the facts and ci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Act of 1961. But the case could be viewed from both the angles. Action taken against the property which is imported illegally can by no process of reasoning be said to be trading or commercial loss or commercial expenses connected with or incidental to the assessee's business. In this view of the matter alone the claim of the assessee can be rightly rejected. But as already stated in the beginning the problem is not of any easy solution because of the number of case laws cited. " Thereafter, the Tribunal referred to section 2 as well as section 23 of the Indian Contract Act and observed further as follows : " It is in this light, Anson, in the Principles of the English Law of Contract, 22nd edition, stated the agreements which tend to abuse the legal process and which tend to encourage litigation, which is not bona fide and speculative in nature. The Supreme Court in the case of Commissioner of Income-tax v. S. C. Kothari [1971] 82 ITR 794 has reversed the decision of the Gujarat High Court [1968] 69 ITR 1 in part. The Supreme Court has stated that a contract has to be an enforceable contract and not an unenforceable one by reason of any taint of illegality resulting in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on I says that where the speculative transactions are of such a nature as to constitute a business, the business shall be deemed to be distinct and separate from any other business. Explanation 2 defines a speculative transaction as a transaction in which a contract for purchase and sale of any commodity is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity. The words ' actual delivery ' in Explanation 2 mean real as opposed to notional delivery. For income-tax purposes speculative transaction means what the definition of that expression in Explanation 2 says. (underlined by us). Whether a transaction is speculative in the general sense or under the Contract Act is not relevant for the purpose of this Explanation. The definition of ' delivery ' in section 2(2) of the Sale of Goods Act which has been held to include both actual and constructive or symbolical delivery has no bearing on the definition of speculative transaction in the Explanation. A transaction which is otherwise speculative would not be a speculative transaction within the meaning of Explanation 2 if actual delivery of the commodity or the scrips has taken place ; on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enses that the assessee had incurred were in connection with the said re-exportation of the goods. There is no dispute that such expenses were incurred by the assessee in the capacity as a trader. The cause for such re-exportation of the goods was the importation of the goods by the assessee in infraction of the law. In those circumstances, the question that falls for consideration is whether such expenses can be allowed. It is clear that the amounts were not the amounts which had been imposed upon the assessee as any penalty or any fine for the infraction of law. In the case of Commissioner of Income-tax v. S. C. Kothari [1971] 82 ITR 794, at page 802, the Supreme Court observed that if the business was illegal neither the profits earned nor the losses incurred would be enforceable in law. But that did not take the profits out of the taxing statute. Similarly, the taint of illegality in the business could not detract from the losses being taken into account for computation of the amount which would be subject to tax as profits under section 10(1) of the Act of 1922. The tax collector could not be heard to say that he would bring the gross receipts to tax. He could only tax profi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... kshmi Narayan Gouri Shankar v. Commissioner of Income-tax [1975] 100 ITR 143. In the case of Parshva Properties Ltd. v. Commissioner of Income-tax [1976] 104 ITR 631 (Cal), this court was concerned with two kinds of expenses, viz., fine imposed for infraction of law as well as the expenses incurred in defending the employees of the company in criminal proceedings. So far as the fine imposed was concerned, it was held that such amount could not be deducted but, so far as the expenses incurred for defending the employees were concerned, it was held that such expenses were incurred in the capacity of a trader, and, as such, were allowable. The principle which governed this case is to determine the nature and the purpose of the expenditure incurred and also to determine in what capacity the expenditure was incurred. In this case, because of the manner in which the assessee had carried on the business, viz., the illegal importation of the goods in question, the assessee might have incurred the expenditure but the purpose of the expenditure was for carrying on of the business and the expenditure was incurred in the capacity of a trader. The expenditure was not a liability imposed for v ..... X X X X Extracts X X X X X X X X Extracts X X X X
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