Customs penalty for breach of import licence conditions was held nondeductible in business income computation.

A customs penalty paid by an assessee for importing goods in breach of its own licence conditions was not deductible in computing business income under section 28 of the Income-tax Act, 1961. The High Court treated the payment as a penalty for the assessee's own default, not as part of the cost of goods or an amount incurred on behalf of another party. The fact that the sale price was fixed after taking the penalty into account did not change the character of the payment. The penalty was therefore held to be nondeductible, and the issue was decided in favour of the Revenue.

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Issues: Whether the customs penalty of Rs. 4,400 paid by the assessee was allowable as a deduction in computing business income under section 28 of the Income-tax Act, 1961.

Analysis: The assessee itself held the import licence, imported the goods, and incurred the penalty because the goods did not conform to the licence specifications. The payment was therefore a penalty for the assessee's own default and not an amount levied on a nominal licence-holder for another party's default. The fact that the sale price to the purchaser was fixed after taking the penalty into account did not alter the character of the payment. The cited decision concerning penalty as part of the cost of goods turned on different facts and did not assist the assessee.

Conclusion: The penalty was not an allowable deduction under section 28 and the answer was against the assessee.

Final Conclusion: The reference was decided in favour of the Revenue, and the customs penalty was held to be nondeductible in the computation of taxable profits.

Ratio Decidendi: A penalty paid by an assessee for its own default in importing goods in contravention of licence conditions is not an expenditure deductible in computing business income.

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