1960 (11) TMI 15 - SC - Income Tax

Penalties for statutory infractions not deductible under s.10(2)(xv): breaches of law and public policy bar deduction

The SC dismissed the appeal with costs, affirming the HC's ruling that penalties for statutory infractions are not deductible under s.10(2)(xv) of the ... Nature of the expenditure - penalty incurred due to the infraction of the law - principles of commercial accounting - Whether, the payment is an allowable expenditure u/s 10(2)(xv) of the Indian Income-tax Act ? Held that:- Infraction of the law is not a normal incident of business and, therefore, only such disbursements can be deducted as are really incidental to the business itself. They cannot be deducted if they fall on the assessee in some character other than that of a trader. Therefore, where a penalty is incurred for the contravention of any specific statutory provision, it cannot be said to be a commercial loss failing on the assessee as a trader the test being that the expenses which are for the purpose of enabling a person to carry on trade for making profits in the business are permitted but not if they are merely connected with the business. In our opinion, no expense which is paid by way of penalty for a breach of the law can be said to be an amount wholly and exclusively laid for the purpose of the business. The distinction sought to be drawn between a personal liability and a liability of the kind now before us is not sustainable because anything done which is an infraction of the law and is visited with a penalty cannot on grounds of public policy be said to be a commercial expense for the purpose of a business or a disbursement made for the purposes of earning the profits of such business. In our opinion, the High Court rightly held that the amount claimed was not deductible and we, therefore, dismiss this appeal with costs. Issues Involved:1. Admissibility of expenditure incurred due to infraction of law.2. Nature of the expenditure as a penalty for illegal acts.3. Allowability of expenditure under section 10(2)(xv) of the Indian Income-tax Act.Detailed Analysis:1. Admissibility of Expenditure Incurred Due to Infraction of Law:The appellant-firm imported dates from Iraq, some of which were brought by steamer, contrary to notifications prohibiting such imports. The goods were confiscated by customs authorities but were released upon payment of fines totaling Rs. 82,250. The appellant sought to deduct this amount as an allowable expenditure under ordinary principles of commercial accounting. The Income-tax Officer and the Appellate Assistant Commissioner disallowed this claim. The Income-tax Appellate Tribunal allowed the deduction by a majority, but the High Court of Bombay held that the amount paid was a penalty for an illegal act and thus not allowable under section 10(2)(xv) of the Indian Income-tax Act.2. Nature of the Expenditure as a Penalty for Illegal Acts:The High Court concluded that the payment of Rs. 82,250 was a penalty incurred due to the infraction of the law. The appellant argued that the order of confiscation was an order in rem against the stock-in-trade and not against the person of the appellant firm, thus making it an allowable expenditure. However, the court noted that the action taken under section 167, item 8 of the Sea Customs Act, was indeed a penalty for the infraction of the law, as it involved the confiscation of goods imported contrary to prohibitions and restrictions.3. Allowability of Expenditure Under Section 10(2)(xv) of the Indian Income-tax Act:Section 10(2)(xv) of the Indian Income-tax Act allows deductions for any expenditure laid out or expended wholly and exclusively for the purpose of the business. The court referred to several precedents, including English cases such as Commissioners of Inland Revenue v. Warnes & Co. and Commissioners of Inland Revenue v. Alexander von Glehn & Co. Ltd., which established that penalties paid for infractions of the law are not allowable deductions as they are not commercial losses connected with the trade. The court emphasized that expenses must be for the purpose of earning profits in the business and not merely connected with the business. Penalties for legal infractions do not meet this criterion as they are not considered commercial losses but rather penalties imposed for breaches of the law.The court dismissed the argument that penalties not involving personal liability should be deductible, stating that any infraction of the law visited with a penalty cannot be considered a commercial expense for the purpose of the business. Public policy dictates that such penalties cannot be allowed as deductions.Conclusion:The Supreme Court upheld the High Court's judgment, affirming that the amount paid as a penalty for the illegal importation of goods was not an allowable expenditure under section 10(2)(xv) of the Indian Income-tax Act. The appeal was dismissed with costs, reinforcing the principle that penalties for legal infractions cannot be deducted as business expenses.