Fine paid under section 125(1) Customs Act for goods redemption is compensatory expenditure allowable under section 37(1) Income Tax Act

ITAT Delhi held that fine paid under section 125(1) of Customs Act 1962 for redemption of confiscated goods is compensatory in nature and allowable as expenditure under section 37(1) of Income Tax Act. The assessee imported digital printers without DGFT license, leading to confiscation and option to redeem goods by paying fine. However, penalty imposed under section 112(a) of Customs Act is penal in nature and inadmissible expenditure. The tribunal distinguished between compensatory fine (allowable) and penal penalty (disallowed), deciding partly in favor of assessee.

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Issues Involved:
1. Whether the fine and penalty paid by the Assessee under sections 125(1) and 112(a) of the Customs Act, 1962, respectively, are allowable as business expenditure under section 37(1) of the Income-tax Act, 1961.

Detailed Analysis:

1. Background and Facts:
The Assessee, engaged in importing "used digital multifunctional printer and copying machines," filed its return of income for the assessment year 2015-16. The case was selected for limited scrutiny due to discrepancies in custom duty and invoice values. The Assessing Officer (AO) added Rs. 65,61,700/- to the Assessee's income, which included fines and penalties paid to Customs Authorities for importing goods without the necessary licenses and undervaluation.

2. Assessee's Arguments:
The Assessee argued that the expenses were compensatory and allowable under section 37(1) of the Act, and relied on various judgments to support their claim. They contended that the fines and penalties were necessary to get the goods released and were not for any illegal activities.

3. Assessment and Commissioner’s Findings:
The AO and the Commissioner observed that the Assessee imported goods without the required licenses under the Foreign Trade Policy and the Environment Protection Act. The Commissioner upheld the AO’s decision, stating that the fines and penalties were penal in nature and not allowable as business expenditure under section 37(1) of the Act.

4. Tribunal’s Examination:
The Tribunal examined the nature of the fines and penalties. It referred to various judgments, including those from the Delhi High Court and the Supreme Court, to determine whether the fines were compensatory or penal.

Fine under Section 125(1) of the Customs Act:
- Legal Provision: Section 125(1) allows an option to pay a fine in lieu of confiscation.
- Tribunal’s View: The Tribunal observed that the fine imposed for redeeming the goods is compensatory in nature and thus allowable as business expenditure under section 37(1) of the Act. This view was supported by the Delhi High Court's judgment in Usha Micro Process Control Ltd. and the Madras High Court in CIT Vs. Parthasmarathy.

Penalty under Section 112(a) of the Customs Act:
- Legal Provision: Section 112(a) imposes penalties for acts leading to confiscation under section 111.
- Tribunal’s View: The Tribunal held that the penalty is penal in nature, meant to punish for violations of law, and thus not allowable as business expenditure under section 37(1) of the Act. This aligns with the statutory fiction under Explanation 1 to section 37(1), which prohibits deductions for expenditures incurred for any purpose that is an offence or prohibited by law.

5. Conclusion:
The Tribunal allowed the fine paid under section 125(1) as a deductible expenditure but disallowed the penalty under section 112(a). The appeal was partly allowed, affirming the addition related to the penalty and deleting the addition related to the fine.

Key Judgments Referenced:
1. Usha Micro Process Control Ltd. vs. CIT: Redemption fine under section 125(1) is compensatory and allowable.
2. CIT vs. Parthasmarathy: Redemption fine is compensatory and allowable.
3. Prakash Cotton Mills Pvt. Ltd. vs. CIT: Distinction between compensatory and penal payments for determining allowable expenditure.
4. CIT vs. Pannalal Narottamdas & Co.: Penalty under Sea Customs Act not allowable if for the fault of the Assessee.

Order:
The appeal was partly allowed, with the fine under section 125(1) being deductible and the penalty under section 112(a) being non-deductible. The order was pronounced on 31/05/2022.

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