TaxTMI 
TaxTMI 
2019 (2) TMI 1472
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.... the Assessing Officer that the assessee had made payment of Rs. 75 lacs in two separate installments towards penalty for import of almonds which import was not permissible. On the basis of such information, the Assessing Officer reopened the assessment for the said assessment year 1988-89 by issuing the notice under Section 148 of the Income Tax Act, 1961 ("the Act" for short). 2.2 During the course of such assessment proceedings, theassessee was called upon to provide various details by the Assessing Officer. The representative of the assessee remained present before the Assessing Officer and conveyed that the assessee was using import license of M/s. Rajnikant Bros. which is an export house. For using the license, the assessee would pay service charges equivalent to 25% of CIF value of the goods. It was further pointed that the consignment of almond was imported by M/s. Rajnikant Bros. The assessee had merely acted as an agent in the transaction. It was pointed out that upon confiscation of the goods, redemption fine and penalty were imposed by the Collector of Customs, Madras on M/s. Rajnikant Bros. Tribunal in the appeal reduced the redemption fine to Rs. 75 Lacs and deleted ....
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.... time to time as per the requirements but had not paid penalty of Rs. 75 Lacs. 2.4 The Assessing Officer did not accept the said explanation particularly in view of the failure of the assessee to produce books of accounts. He was also of the opinion that the stand of the assessee was in conflict with the agreement dated 14.10.1985. He did not accept the assessee/s version of mere advances being made to M/s. Rajnikant Bros. He, therefore, held as under:- "All the above facts clearly established that the assessee viz. Shri. M.P. Gupta, user of the licence standing in the name of M/s. Rajnikant Bros., has made the custom penalty of Rs. 75,00,000/-. I, therefore, treat that this expenditure is covered u/S. 69C of the Act and has been incurred by the assessee from unexplained source of which the assessee has no explanation about the source nor the assessee offered any satisfactory explanation. The penalty proceedings u/S. 271(1)(c) is being initiated separately." 2.5 The assessee carried the matter in appeal and reiterated his stand. In the context of the addition under Section 69C of the Act, the Commissioner rejected the assessee's plea by making following observations:- "As r....
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....alty / fine paid cannot be regarded as wholly laid out for the purpose of business. Thus, in the face of the specific findings of the Custom Tribunal and Madras High Court, the appellant's contention is without force." 2.7 The assessee carried the matter in further appeal before the Tribunal. In such appeal, the assessee raised both the contentions. In addition to questioning the very addition of Rs. 75 Lacs under Section 69C of the Act, he also challenged the decision of the CIT(A) not accepting the contention that in any case, the expenditure was made wholly and exclusively for the the purpose of business and therefore, allowable as business expenditure. 2.8 The Tribunal, in the impugned judgment, referred to the documents under which the import of almond was held to be unlawful. The Tribunal noted that the Collector of Customs, Madras had confiscated the goods, imposed redemption fine 1.20 crore and penalty of Rs. 20 lacs on M/s. Rajnikant Bros. Ms/. Rajnikant Bros. had filed appeal before the Customs Tribunal, Madras which had reduced redemption fine to Rs. 75 Lacs and deleted the penalty. The Tribunal, while allowing the appeal of the assessee and recognizing the expendi....
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.... Bros. The assessee had merely entered into an agreement with M/s. Rajnikant Bros. for purchase of imported almond which in turn would be sold by the assessee to local consumers / manufacturers for commission. The sum of Rs. 75 Lacs was thus paid to prevent the imported consignment being forfeited. The expenditure was thus made on business considerations. Sum of Rs. 75 Lacs thus, was an additional cost of purchase in the hands of the assessee. In the hands of the assessee, it would not partake the character of penalty. He placed reliance on the decision of this Court in the case of CIT, Bombay Vs. Pannalal Narottamdas & Co (1968) 67 ITR 667 (Bom). He also referred to several other judgments reference to which would be made at proper stage. 5. Before dealing with the rival contentions, we may record the genesis of the present dispute. M/s. Rajnikant Bros. and another who were diamond exporters had applied for grant of Export House Certificates under the Import Policy 1978-79 which was denied to them on the ground that they had not diversified their exports. They had, therefore, filed writ petition before the Bombay High Court claiming that they were entitled to Export House Certifi....
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....dit after that date. 14. The writ petition is allowed and the respondents Nos. 10 and 11, M/s. Rajnikant Brothers and M/s. Everest Gems are restrained from importing dry fruits during the period 1985-88 under the Additional Licences granted to them under the Import Policy 1978-79. In the circumstances there is no order as to costs." With this background, we may refer to the facts on hand. As noted, the Assessing Officer in the order of assessment after giving ample opportunities to the assessee came to the conclusion that the assessee M.P. Gupta was the user of the licence in the name of M/s. Rajnikant Bros. and all transactions including the payment of penalty had been carried out by him. He did not accept the version of the assessee that the assessee had merely advanced the money to M/s. Rajnikant Bros. in time of its need. It was held that the assessee had paid the customs fine of Rs. 75 Lacs. Since, it could not shown the legitimate source of this amount, the Assessing Officer treated the same as assessee's unexplained expenditure. Before the CIT(A) also, the assessee failed to persuade the Appellate Authority that the addition under Section 69C of the Act was wrongly mad....
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....nore the hard facts that the imports were made by the assessee himself. M/s. Rajnikant Bros. had merely allowed the licence to be used for such purpose. In essence,therefore, whatever the fault, defect or error of law in such import, would attach to the assessee. In the context of considering whether the expenditure incurred in the process of importing the goods could be claimed by way of expenditure regard being had to the first explanation to subsection (1) of Section 37, would therefore have to be decided on the anvil of this conclusion. 7. Once this much is clear, everything else would fall in line. There is a clear line of distinction between two lines of authorities, one led by the judgment of the Supreme Court in the case of Hazi Aziz (supra) and the other adopted by this Court in the case of Pannalal (supra) as pointed out by learned counsel for the assessee. 8. In case of Hazi Aziz (supra), the facts were that the assessee was a firm doing the business of importing dates from abroad and selling them in India. During the accounting year under consideration, the assessee had imported dates from Iraq. At the relevant time, import of dates by steamer was prohibited but permi....
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....s are permitted but not if they are merely connected with the business. It was argued that unless the penalty is of a nature which is personal to the assessee and if it is merely ordered against the goods imported it is an allowable deduction. That, in our opinion, is an erroneous distinction because disbursement is deductible only if it falls within 10(2)(iv) of the Income-tax Act and no such deduction can be made unless it falls within the test laid down in the cases discussed above and it can be said to be expenditure wholly and exclusively laid for the purpose of the business. Can it be said that a penalty paid for an infraction of the law, even though it may involve no personal liability in the sense of a fine imposed for an offence committed, is wholly and exclusively laid for the business in the sense as those words are used in the cases that have been discussed above. 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 anyth....
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....cy to allow the benefit of deduction under one statute of any expenditure incurred in violation of the provisions another stature or any penalty imposed under another statute. In the instant case, if the deductions claimed are allowed, the penal provisions of FERA will become meaningless. It has also to be borne in mind that evasion of law cannot be a trade pursuit. The expenditure in this case cannot, in any way, be allowed as wholly in this case cannot, in any, way be allowed as wholly and exclusively laid out for the purpose of assessee's business." 10. In case of Rohit Pulp and Paper Mills Ltd Vs. C.I.T. [1995] 215 ITR 919 (Bom), the assessee had imported goods which were found by Customs Authorities not covered by a valid licence. The Deputy Collector of Customs ordered confiscation of the goods and offered redemption on payment of fine. This amount was claimed by the assessee as a deduction. Rejecting such a claim, the High Court observed as under:- "We do not find that the above amount paid by the assessee is anything else than a penalty. It is, therefore, not allowable as a deduction under the Income Tax Act. The Income Tax Officer and other authorities were justified....
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....e profit ? The answer seems to me obvious, that they were not, they were unfortunate incidents which followed after the profits had been earned." 12. In case of Agra Leatheries Ltd Vs. CIT [1993] 200 ITR 792 (Allahabad), the Division Bench of Allahabad High Court considered the case where the assessee had obtained licence for import under which the assessee had imported plastic sponges. The Customs Authorities held that under the licence, the assessee could have imported only natural sponges and not plastic sponges and the import of plastic sponges was thus illegal. The assessee claimed penalty for infraction of law by way of expenditure. The Allahabad High Court relied on the decision of the Supreme Court in the case of Hazi Aziz (supra), ruled against the assessee by making following observations:- " The question whether penalty levied for infraction of law is a permissible deduction is not res integra. In Haji Aziz and Abdul Shakoor Bros. v. CIT [1961] 41 ITR 350, the Supreme Court held that in a case where the penalty has to be incurred because of the fault of the assessee himself, as for instance for the reason of his having carried on his business in an unlawful manner or i....
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....by the Tribunal clearly show that it was the assessee who had got the import licence. It was the assessee who imported the goods in question, and it was the fault of the assessee if the goods in question imported did not conform to the specifications of the licence. In these circumstances, there is no escaping the conclusion that the penalty was levied on the assessee for the default of the assessee itself and not on the ground of any other person's default. Nor is this a case in which the assessee can be regarded in any sense as a nominal licence-holder. It is not as if the assessee gave its licence to M/s. Bipin Automobiles for importing the goods in question and M/s. Bipin Automobiles imported the goods. The licence was utilized by the assesses-firm itself and that fact cannot be altered by the circumstance that they had agreed to sell the goods to be imported by them to M/s. Bipin Automobiles. It is well settled that if an assessee has to pay a penalty to the customs authorities in respect of goods imported by the assessee on account of its own default, the amount of that penalty cannot be deducted in the computation of taxable profits of the assessee. Coming to the case o....
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....e held that fine or penalty for redemption of goods ordered to be confiscated for breach of import conditions is not an allowable deduction. The case of the assessee squarely falls in this category. 14. We may now refer to the decisions cited by Mr. Nankani, the learned counsel for the respondent. The decision in the case of Pannalal (supra) would require close examination. It was the case in which the assessee, a registered firm was dealing inter alia in gum. In the course of its business, the assessee purchased bills of lading and other shipping documents from certain parties in respect of some consignments of gum imported by them from Africa. When the goods arrived in India, the assessee sought to clear them on the basis of the documents purchased by it. It was found that the imports were unauthorized and the goods were liable to be confiscated and penalty liable to be imposed. The assessee paid an amount of Rs. 31,302/- by way of penalty for saving the goods being confiscated. This amount the assessee claimed by way of allowable deduction. The assessee had argued that the amount must be regarded as a part of purchase price of the gum. It was argued that the assessee had purcha....
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.... Profits or gains of business would be the excess of the sale price over the cost price and in determining the profits or gains, therefore, the cost has to be deducted from the proceeds realized on sale of the goods. On the facts and circumstances of the present case, the actual cost of the goods to the assessee was not only what it had paid to the importers, but in addition thereto what it had to pay by way of penalty, in order to save the goods from being confiscated and lost to it. The penalty paid by it could, therefore, be regarded as part of the cost of the goods to it. It can also be regarded as an amount expended by it wholly and exclusively for the purposes of the business, because unless the said amount was expended, the goods could not have been saved from confiscation. It may be pointed out that, in cases where the penalty has to be incurred be incurred because of the fault of the assessee himself, as for instance, for the reason of his having carried on his business in an unlawful manner or in contravention of certain rules and regulation, the penalty paid by the assessee for such conduct thereof, could not be regarded as wholly laid out for the purpose of the business....
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....ndustry was granted a licence for importing permissible spare parts for construction machinery and spare of machine tools. On the basis of such licence, the assessee imported 400 drums of sodium cyanide from Hungary. When the goods arrived, the Customs Authorities noticed that there was no valid licence covering the consignment and that the provisions of Customs Act, 1962 were violated. This resulted into confiscation of the goods and imposition of redemption fine in lieu of confiscation. The assessee claimed the amount of redemption fine of Rs. 1,84,000/- by way of business expenditure which was disallowed by the Revenue Authorities. The High Court noticed the decision of the Supreme Court in the case of Hazi Aziz (supra) and the ratio laid down therein but observed that in view of later decisions in the case of Prakash Cottom Mills (supra) and Ahmedabad Cotton Mfg Co Ltd (supra), the ratio laid down in the case of Hazi Aziz (supra) cannot be stated to have laid down an inflexible rule of law to be followed in all eventualities and situations. 18. In our opinion, the ratio laid down by the Supreme Court in the case of Hazi Aziz (supra) continues to hold the field even post decisi....