1996 (4) TMI 47 - HC - Income Tax

Penalty for Customs Act violation not deductible as business expense; interest on penalty also non-deductible.

Assam Roller Flour Mills Versus Commissioner Of Income-Tax

The court held that the penalty imposed for contravention of the Customs Act was not deductible as a business expense, even though the imports were not ... Assessment Year, Mercantile System Issues Involved:1. Whether the imports made by the applicant were contraband and if the penalty paid u/s 112(d) of the Customs Act is deductible.2. Whether the penalty imposed by the Collector of Customs is a necessary business expense and deductible from the income of the assessee.3. Whether the interest paid on the money borrowed to pay the penalty is deductible as a business expense.Summary:Issue 1: Contraband Imports and Penalty DeductionThe Tribunal disallowed the deduction of the penalty amount on the grounds that it was imposed for infraction of the Customs Act, 1962. Despite the revisional authority's finding that the imports were not contraband, the Tribunal maintained that the penalty was for contravention of the law, making it non-deductible as a business expenditure. The court upheld this view, stating that the liability for the penalty did not accrue as it was later canceled, thus it could not be allowed as a deduction.Issue 2: Penalty as Business ExpenseThe Tribunal and the court both concluded that the penalty imposed by the Collector of Customs was not a necessary business expense. The court noted that the liability for the penalty, which was initially imposed for the contravention of the Customs Act, was later nullified by the Government of India. Therefore, under the mercantile system of accounting, the mere payment of the penalty did not justify its allowance as a business expense. The Tribunal's decision to disallow the deduction was affirmed.Issue 3: Interest on Borrowed Money for Penalty PaymentThe Tribunal disallowed the interest paid on the money borrowed to pay the penalty, reasoning that since the penalty itself was not an allowable business expense, the interest on the borrowed amount for paying such a penalty was also not deductible. The court agreed with this reasoning, affirming that the interest paid did not partake the character of an allowable business expenditure.Conclusion:The court answered all the referred questions in the affirmative, i.e., for the Revenue and against the assessee. The penalty and the interest on the borrowed amount for paying the penalty were not considered deductible business expenses. The Tribunal's findings were upheld, and the record was to be communicated to the Tribunal for further action according to law.