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TMI Blog1960 (11) TMI 15X X X X Extracts X X X X X X X X Extracts X X X X ..... by steamer and were valued at Rs. 5 lakhs were confiscated by the customs authorities under section 167, item 8, of the Sea Customs Act, but under section 183 of that Act the appellant was given an option to pay fines aggregating Rs. 1,63,950 which sum on appeal was reduced to Rs. 82,250. This sum was paid and the dates were released. On the sale of the goods certain profits accrued out of which it sought to deduct Rs. 82,250 paid as penalty on ordinary principles of commercial accounting. The Income-tax Officer disallowed this claim which was also disallowed by the Appellate Assistant Commissioner. On appeal to the Income-tax Appellate Tribunal, this sum was held to be allowable by a majority of two to one. At the instance of the respondent the Tribunal referred the following question to the High Court for its opinion : "Whether on the facts and in the circumstances of the case, the payment of Rs. 82,250 is an allowable expenditure under section 10(2)(xv) of the Indian Income-tax Act ?" The High Court held that the above amount of Rs. 82,250 could not be said to have been paid for salvaging the goods but was paid as a penalty incurred in consequence of an illegal act on the pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the appellant firm and it would be an allowable expenditure. The action taken against the appellants was one under section 167, item 8, which is in Chapter XVI dealing with offences and penalties and provides : " 167. The offences mentioned in the first column of the following schedule shall be punishable to the extent mentioned in the third column of the same with reference to such offences respectively : Section of this Act Offences to which offence has Penalties reference 8. If any goods, the importation such goods shall be liable to or exportation of which confiscation ; and any person is for the time being prohibited concerned in any such offence or restricted by or under 18 & 19 shall be liable to a penalty Chapter IV of this Act, be not exceeding three times imported into or exported the value of the goods or not from (India) contrary to such exceeding one thousand prohibition or restriction ; or rupees." Option is given in cases governed by this section under section 183 which provides : "Whenever confiscation is authorised by this Act, the officer adjudging it shall give the owner of the goods an option to pay in lieu of confiscation such fine as the officer t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the other two cases cited by counsel for the appellants, i.e., Leo Roy Frey v. Superitendent, District Jail, Amritsar, and Thomas Dana v. State of Punjab, is the same, In Dana's case Subba Rao, J., said at page 298 : "If the authority concerned makes an order of confiscation it is only a proceeding in rem and the penalty is enforced against the goods. On the other hand, if it imposes a penalty against the person concerned, it is a proceeding against the person and he is punished for committing the offence. It follows that in the case of confiscation there is no prosecution against the person or imposition of a penalty on him." In Maqbool Hussain's case the question for decision was whether after proceedings had been taken under the Sea Customs Act an accused person could be prosecuted and could or could not rely upon the plea of double jeopardy, it was held that he could not. In Shewpujanrai's case the contention raised was that after proceedings had been taken under the Foreign Exchange Regulation Act it was not open to the customs authorities to take any action under the Sea Customs Act. The other two cases were similar to Maqbool Hussain's case. The contention now raised be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s connected with or arising out of' the trade within the meaning of this rule." This statement of the law was approved in Commissioners of Inland Revenue v. Alexander von Glehn & Co. Ltd. where also in similar circumstances by consent of the assessee penalty of pound 3,000 was paid and the penalty plus the costs were claimed as deduction in arriving at the profits. The Special Commissioners had found that the penalty and costs were incurred by the assessee in the course of carrying on their trade and so incidental thereto and were admissible deductions. Rowlatt, J., on a reference held it to be a non-deductible item. This judgment was affirmed on appeal by the Court of Appeal. Lord Sterndale, M. R., was of the opinion that it was immaterial whether technically the proceedings were criminal or not. The money that was paid was paid as a penalty and it did not matter if in the information it was called a forfeiture. It was argued by the assessees in that case that no moral obliquity was attributed to them and that it did not matter whether the expense was incurred in consequence of an infraction of the law or whether it was a penalty for doing an illegal act. At page 565 Lord Ster ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... law, and for that breach of the law, they were fined. That, as it seems to me, was not a loss connected with the business, but was a fine imposed upon the company personally, so far as a company can be considered to be a person, for a breach of the law which it had committed. It is perhaps a little difficult to put the distinction into very exact language, but there seems to me to be a difference between a commercial loss in trading and a penalty imposed upon a person or a company for a breach of the law which they have committed in that trading. For that reason I think that both the decision of Rowlatt, J., in this case, and his former decision in Inland Revenue Commissioners v. Warnes & Co. which he followed, were right, and that this appeal should be dismissed with costs." In Spofforth and Prince v. Golder the assessee was a firm of chartered accountants, who claimed a deduction for certain legal costs paid in connection with a successful defence of one of the partners in a Police Court, The assessee firm also sought legal advice in regard to matters connected with some proceedings. Summons were issued against the assessee firm but were eventually dismissed. The assessee cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d von Glehn's case held that the amount did not constitute an expenditure falling within section 10(2)(xii). The Madras High Court in Senthikumara Nadar & Sons v. Commissioner of Income-tax held that payments of penalty for an infraction of the law fell outside the scope of permissible deductions under section 10(2)(xv). In that case the assessee had to pay liquidated damages which was akin to penalty incurred for an act opposed to public policy, a policy underlying the Coffee Market Expansion Act, 1942, and which was left to the Coffee Board to enforce. Reference was also made during the course of arguments to Commissioner of Income-tax v. Hirjee. In that case the assessee was prosecuted under the Hoarding and Profiteering Ordinance but was finally acquitted and claimed the amount spent in defending himself under section 10(2)(xv) in his assessment. It was held that the distinction between the legal expenses on a successful and unsuccessful defence was not sound and that the deductibility of such expenses under section 10(2)(xv) must depend on the nature and purpose of the legal proceedings in relation to the business whose profits are in computation and are unaffected by the fi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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