COMMISSIONER OF INCOME TAX VS N. M. PARTHASARATHY
1996 P T D 579
[212 I T R 105]
[Madras High Court (India)]
Before G. C. Gupta and Janarthanam, JJ
COMMISSIONER OF INCOME TAX
versus
N. M. PARTHASARATHY
Tax Case No. 1325 of 1981 (Reference No. 671 of 1981), decided on 29/04/1994.
Income-tax---
----Business expenditure---Legal expenses---Fines and penalties---Effect of decisions of Supreme Court---Goods confiscated by Customs Authorities---Fine paid under Customs Act exercising option conferred therein---Amount was compensatory in character---Deductible---Fees paid to advocate in penalty proceedings---Deductible---Indian Income Tax Act, 1961, S.37.
In view of the decisions in the case of Prakash Cotton Mills (P.) Ltd. v. C.I.T. (1993) 201 ITR 684 (SC) and C.I.T. v. Ahmedabad Cotton Mfg. Co. Ltd. (1994) 205 ITR 163 (SC), the rule laid down in the case of Haji Aziz and Abdul Shakoor Bros. v. C.I.T. (1961) 41 ITR 350 (SC) cannot be stated to have laid down an inflexible rule of law to be followed in all eventualities and situations with regard to deductibility of fines and penalties. In the case of CIT v. Ahmedabad Cotton Mfg. Co. Ltd. (1993) 205 ITR 163, the Supreme Court held that what needs to be done by an assessing authority under the Income Tax Act, 1961, in examining the claim of an assessee that the payment made by such assessee was a deductible expenditure under section 37 although called a penalty is to see whether the law or scheme under which the amount was paid required such payment to be made, as penalty or as something akin to penalty, that is imposed by way of punishment for breach or infraction of the law or the statutory scheme. If the amount so paid is found to be not a penalty or something akin to penalty due to the fact that the amount paid by the assessee was in exercise of the option conferred upon him under the very law or scheme concerned, then one has to regard such payment as business expenditure of the assessee, allowable under section 37 as an incident of business laid out and expended wholly and exclusively for the purposes of the business.
Held, that, in the instant case, the goods belonging to the assessee had been confiscated under section 111(d) of the Customs Act, 1962, read with section 3 of the Imports and Exports (Control) Act, 1947. However, under section 125 of the Customs Act, 1962, an option had been given to the owner- assessee to pay, in lieu of such confiscation, a fine of Rs. 1,84,000 which had been reduced on appeal to Rs. 84,000 and the goods had been cleared exercising the option. The fine could not, in such a situation, be stated to be penal in nature notwithstanding its nomenclature. It was compensatory and as such deductible under section 37 of the Act.
Prakash Cotton Mills Pvt. Ltd. v. C.I.T. (1993) 201 ITR 684; (1993) 82 FJR 546 (SC) and C.I.T. v. Ahmedabad Cotton Mfg. Co. Ltd. (1994) 205 ITR 163 (SC) applied.
Held also, that the expenses incurred by way of payment of fees to advocates in defending the penalty proceedings was an allowable deduction.
C.I.T. v. Dhanrajgirji Raja Narasingirji (1973) 91 ITR 544 (SC); C.I.T. v. Gajapathy Naidu (A.) (1964) 53 ITR 114 (SC); C.I.T. v. Swadeshi Cotton and Flour Mills Pvt. Ltd. (1964) 53 ITR 134 (SC); Haji Aziz and Abdul Shakoor Bros. v. C.I.T. (1961) 41 ITR 350 (SC) and IRC v. Alexander Von Glehn & Co. Ltd. (1920) 2 KB 553 (CA) ref.
N.V. Balasubramanian for the Commissioner.
P.P.S. Janarthana Raja for Subbaraya Iyer and Padmanabhan for the Assessee.
JUDGMENT
JANARTHANAM, J. ---In this reference under section 2560) of the Income Tax Act, 1961 (for short, "the Income Tax Act"), at the instance of the Commissioner of Income-tax, Tamil Nadu-II, Madras, the following questions of law had been referred to this Court for its opinion:
"(1)Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the redemption fine of Rs.84,000 levied on the assessee by the customs authorities for importing goods without a valid licence is an admissible deduction?
(2) Whether the Appellate Tribunal's view that the redemption fine levied by the customs authorities is an additional duty and it was not infraction of law is sustainable in law?
(3) Whether the Appellate Tribunal was justified in not rendering a decision on the question of allowability of legal expenses for conducting the cases before the customs authorities against the levy of redemption of fine?
(4) Whether, on the facts and circumstances of the case, the assessee was entitled to the deduction of the advocate's fees paid in connection with the penalty proceedings before the customs authorities?"
The assessee, an individual, is running a small scale industry at Vellore, in the name of "Electrotechnik". He is manufacturing and selling heat treatment plants and also heat treatment salts to various organizations, including the defence establishment of the Government of India. In September, 1968, he was granted a licence for importing permissible spare parts for construction machinery and spares of machine tools. Misunderstanding the provisions contained in the handbook of Rules and Procedures, 1968, regarding imports of goods it is said, in March, 1970, he imported on the basis of this licence 400 drums of sodium cyanide from Hungary.
There was a ready purchaser for it in Messrs Shantilal Dharamsay of Bombay, who financed him for this purpose. However, as soon as the goods arrived in Bombay Port, the customs authorities noticed that there was no valid licence covering the consignment and that the provisions of the Customs Act, 1962, have been violated. Even though he pleaded before the Collector of Customs that he obtained sufficient clarification from the Chief Controller of Imports in this respect and that only after being made aware that there would be no transgression by this import, he ventured into this Act, the Collector did not accept it.
On March 20, 1970, he passed a confiscation order, leaving however, an option open for a month to pay a fine of Rs.1,84,000 in lieu of such confiscation and then to clear the goods. Besides he also levied a personal penalty of Rs.1,000 on him for the alleged contravention of the Customs Rules. The option was availed of, fine was paid in lieu of confiscation and goods were cleared. In all these, Messrs Shantilal Dharamsay of Bombay advanced the necessary funds.
An appeal, however, had been preferred before' the Central Board of Excise and Customs against the Collector's order. But the Board rejected his request to waive the fine and personal penalty.
However, he was successful, to some extent, on a further appeal to the Secretary of the Government of India, who, after hearing him, remitted the personal penalty of Rs.1,000 and reduced the redemption fine from Rs.1,84,000 to Rs.84,000 on November 22, 1976.
Meanwhile, he entered in his accounts, the transactions as under, revealing a profit of Rs.14,795, which, but for the payment of fine, would have been much more:
| | (Rs.) |
| (a)Sale of Chemicals to M/s. Shantilal Dharamsay of Bombay | 3,25,927 |
| (b)Cost of purchase including customs duty levied for wrong import amounting to Rs.1;84,000 | 3,11,132 |
| Balance gross profit | 14,795 |
Of course, the said sale, alongwith other sales, was disclosed in the trading accounts and he returned a net business income of Rs.12,319. In the relevant profit and loss account, there was a debit for Rs.2,005 representing legal charges paid to Messrs K. Ramaswamy and Arunachalam for handling the aforesaid customs case.
After hearing the individual-assessee, the Income Tax Officer disallowed the claims, viz., Rs.1,84,000, paid as fine and claimed as deductible business expenditure and so too the other sum of Rs.2,005 paid to advocates as legal charges for handling the Customs Rules violation case before the authorised authorities.
The rationale for such disallowance is reflected as below:
"The assessee had an 'import licence' for importing permissible spare parts for construction machinery and permissible spare parts of machine tools. The sodium cyanide imported by 'the assessee was not a spare part either of construction machinery or of machine tools. Therefore, the import of sodium cyanide was improper and an offence attracting the punitive provisions of the Customs Act. Any fine or penalty or by whatever name it is called which is imposed for infraction of any law is not an admissible deduction. It is neither a commercial loss nor an expenditure incidental to the business. Vide the decision in Haji Aziz and Abdul Shakoor Bros. v. C.I.T. (1961) 41 ITR 350 ...."
On appeal, the Appellate Assistant Commissioner, accepting the assessee's contention, said thus:
"4. In such matters what one has to essentially see is whether these expenses were incurred by an assessee in his character w a trader or rather whether the transaction in respect of which proceedings are taken arose out of and was incidental to his business. This in short may be taken as a guiding principle laid down in the case of C.I.T. v. Dhanrajgirji Raja Narasingirji (1973) 91 ITR 544 (SC). It may not matter very much whether the proceedings are civil or criminal. Their deductibility should depend on the nature and purpose of the legal proceedings in relation to the business whose profits are under computation irrespective of the final outcome of the proceedings. Similarly, the nature and magnitude of the legal infraction would indicate whether there was any moral turpitude involved in the infraction. On this view it would be unreasonable to style even honest and accidental violations of import restrictions mostly out of a fraudulent mind. In so far as the appellant is concerned, the Customs Collector's order itself indicates that the appellant misunderstood the relevant import provisions. Of course, he was not prepared to believe that the appellant made verbal enquiry before the customs authorities prior to import and that he was verbally informed that he could go ahead. Thus, in so far al the Customs Act was concerned there was violation resulting in levy of the aforesaid redemption fine. However, before the Secretary to the Government of India to whom the appellant preferred a second appeal, he was partly successful. This appellate authority not only took into account the fact that the appellant's trade was a small scale industry but also the fact that the appellant was earlier allowed to import sodium cyanide and that the present import has not been clearly established to be a mala fide one. That is the reason why he remitted the personal penalty and reduced the fine by as much as Rs. 1 lakh. This and other materials in the records amply indicate that what has taken place in this case although amounting to a violation of the Customs Act, was not an intentional act but an accidental one partly arising out of ignorance and misreading the relevant provisions and also partly by alleged verbal sanctions. Any way the case is not so blatant to the violation act as would normally be in the case, of a deliberate infringement of the law. Ordinarily, under such circumstances, any trader would merely attempt to salvage his stock-in-trade and not allow it to be confiscated. Thus, all infractions of law are not of the same type and there can be no uniform decision in respect of all that penalties for such infractions cannot be claimed as deductible for income-tax purposes as not incidental to the concerned business. Instead, it is my view that in certain cases they could be incidental to the trade. I feel that it is so in the instant case...
However, the actual amount of fine that came to stay eventually was only Rs.84,000 and it is but proper that only so much sum is deducted in respect of the sale transaction incorporated in the appellant's accounts of the previous year...
6. With regard to the other disallowance or legal charges for Rs.2,005 for the same reasons, I hold that they are deductible as expenditure incidental to the appellant's business. The disallowance of Rs.2,005 is not in order. It should be allowed ...."
On the above findings, the Income Tax Officer had been directed to re-compute the assessee's total income and tax, by allowing the appeal in part.
The Revenue filed an appeal before the Tribunal against the reduction given by the Appellate Assistant Commissioner to the tune of Rs.1 lakh and Rs.2,005. The assessee, in turn, filed cross-objections stating that the Appellate Assistant Commissioner should have allowed the actual expenditure of Rs.1,84,000 incurred during the year, even though it was open to the Department to assess the sum of Rs.1 lakh in 1976, when the Government passed the reduction order.
The Tribunal, while dismissing the Department's appeal as well as the assessee's cross-objections expressed thus:
"5.On a consideration of the facts we find that the sum of Rs.1,84,000 subsequently reduced to Rs.84,000 cannot be said to be a penalty imposed on the assessee for infraction of the law in the circumstances of the case. A sum of Rs.1,000 was levied by the customs authorities as personal penalty. This was in fact the penalty for infraction of law. The Government on appeal relieved the assessee of this penalty, thus going to show that the assessee's action in importing sodium cyanide was not regarded as an infraction of the regulations at all. As pointed out by the Appellate Assistant Commissioner, the appellate authority took into account the fact that the assessee was carrying on a small scale industry importing sodium cyanide in the earlier years and the present import could not be regarded as having been made mala fide. There was an option open to the assessee to take the goods and sell the same or surrender the goods and not pay the sum of Rs.1,84,000. If it had been a penalty for an infraction of law or regulations no one would be given an option. The accused in a criminal case does not have the option to suffer the punishment or not. The sum of Rs.1,84,000 demanded, therefore, could only be treated as either the duty originally or additionally computed by the customs authorities having regard to the nature of the commodity imported which should normally be paid by the assessee for the import of this commodity. The sum of Rs.1,000 levied on him was a personal penalty for infraction of law. As stated above, this had been cancelled by the Government. In the above background, it would not be proper to say that the assessee has been levied a penalty of Rs.1,84,000 for not obeying any provisions of law or for infraction of the law. The decisions dealing with the allowance of penalty paid for non-obedience of law do not, therefore, support the Department in this case. If the assessee had not retrieved the goods by paying a sum of Rs.1,84,000 reduced to Rs.84,000 subsequently, it could certainly not be said that the assessee was an accused at large not having suffered punishment. It was purely a trading transaction, a trading option exercised by the assessee to pay the additional duty and retrieve the goods or to lose the goods as is usually done in normal transactions where in normal transactions where no delivery of goods is taken. In so far as the sum of Rs.1,84,000 cannot thus be said to have any semblance of penalty embedded in it, it has to be regarded as an expenditure, in this case as an amount laid out in connection with the purchase going to increase the purchase price, and be allowed as a deduction in the trading account itself. We, therefore, see no reason to interfere with this part of the Appellate Assistant Commissioner's order. Looked at as above, the reduction of the quantum of Rs.1,84,000 to Rs.84,000 is a pure business transaction. In connection with the above assessment, the assessee was claiming that no amount was payable, the maximum amount was put at Rs.1,84,000, i.e., the amount demanded by the customs authorities. Though negotiation went on, the assessee could either have debited no amount in view of his objecting to the payment by filing an appeal or claimed it based on the actual amount finally paid, namely, Rs.84,000. In this view of the matter, the Appellate Assistant Commissioner is also correct in holding that the allowance for the year under appeal would be only Rs.84,000 and not Rs.1,84,000 with the balance of Rs.1 lakh being regarded as assessable when the order of the Government was passed. The decisions in C.I.T. v. A. Gajapathy Naidu (1964) 53 ITR 114 (SC) and C.I.T. v. Swadeshi Cotton and Flour Mills (P.) Ltd. (1964) 53 ITR 134 (reported at page 135 of the same ITR) do not apply to the assessee's case in so far as the assessee was not negotiating for a price but was objecting to the payment of any amount at all but got it fixed at a particular amount lesser than the maximum claimed."
Mr. N.V. Balasubramanian, learned junior standing counsel for income-tax cases, placing implicit reliance upon the decision in the case of Haji Aziz and Abdul Shakoor Bros. v. C.I.T. (1961) 41 ITR 350 (SC) would, with all vehemence, submit that any expenses, which was paid by way of penalty for a breach of the law, even though it would involve no personal liability, could be said to be an amount wholly and exclusively laid out for the purpose of the business of the assessee within the meaning of section 37(1) of the Income Tax Act and the fine paid by the assessee was not an allowable deduction under that section. It is further argued that the corollary consequence that would flow from what is submitted as above, is that any legal expenses incurred by way of advocate's fees in defending the penalty proceedings also must not be construed as expenses incurred for the purpose of business and consequently such expenditure is not an allowable deduction.
Mr. P.P.S. Janarthana Raja, learned counsel for the assessee, would, however, repeal such submissions and chose to tread the path chosen by the Appellate Tribunal in echoing the very same reasons, as penned down in its order for justifying the deduction, allowed.
We may now enter into the arena of discussion to find out the tenability or otherwise of the aforesaid rival submissions.
Questions Nos. 1 and 4, we rather feel, can conveniently be grouped together and considered, inasmuch as they relate to one and the same subject matter, in the sense that question No. 4 is after all a corollary to question No. 1. Question No.l is relatable to expenses incurred by way of penalty for breach of law, even though it might involve no personal liability. Question No.4 is relatable to the expenses incurred by way of fees paid to advocates for defending the penalty proceedings before the customs authorities.
Haji Aziz and Abdul Shakoor Bros. v. C.I.T. (1961) 41 ITR 350 (SC) was the earliest case, wherein the apex Court of this country had the occasion to consider the question as to whether the expenses incurred by way of penalty for breach of the law, even though it might involve no personal liability, could be construed as an allowable deduction under section 10(2)(xv) of the Income Tax Act (old), the equivalent of which, in the present new Income Tax Act, is section 37. For understanding the principles evolved therein, we feel it is better to pen down the facts therein in a crisp fashion.
(a) The assessee, which carried on the business of importing dates from abroad and selling them in India, imported dates from Iraq partly by steamer and partly by country craft, at a time when import of dates by steamer was prohibited. The dates, valued at Rs.5 lakhs, which were imported by steamer, were confiscated by the customs authorities under section 167 (item 8) of the Sea Customs Act and the assessee, having given an option under section 183 of the said Act to pay fines, aggregating to Rs.1,63,950, which sum, on appeal was reduced to Rs.82,250, paid the fine and the dates were released. In computing its profits, the assessee sought to deduct the amount paid as fine as an allowable expenditure under section 10(2)(xv) of the Income Tax Act (old). The Income Tax Officer disallowed the claim, which was also disallowed by the Appellate Assistant Commissioner. On appeal to the income Tax Tribunal, this sum was held to be allowable by a majority of two to one. At the instance of the Commissioner of Income-tax, the Tribunal referred the following question to the High Court for its opinion:
"Whether, on the facts and in the circumstances of the case, the payment of Rs. 82,250 is an allowable expenditure under section 10(2)(xv) of the Income Tax Act?''
(b) The High Court held that the above amount of Rs.82,250 could not be said to have been paid for salvaging the goods; but was paid as a penalty incurred in consequence of an illegal act on the part of the assessee-appellant and was, therefore, not an allowable item under section 10(2)(x') of the Income Tax Act (old).
(c) Against the said judgment, the assessee-appellant came in appeal before the apex Court by way of special leave. Three questions were raised by learned counsel for the appellant thus:
(1) an expenditure does not become inadmissible because ft is occasioned by an infraction of the law not involving moral turpitude;
(2) in any event, the expenditure incurred was as a result of an order in remagainst the stock-in-trade of the appellant-firm and was, therefore, allowable as a deduction; and
(3) on the facts of this case, there was no infraction by the appellant-firm.
(d) The last question was not seriously pressed and it was without substance. The correspondence which has been placed on the record does not support the contention of the appellant firm. It was really the second point which was pressed by counsel, although the first point was not given up.
(e) The apex Court, after considering the various authorities on the subject re datable to the second question, ultimately, expressed thus (at page 359 of 41 ITR):
"A review of these cases shows that expenses which are permitted as deductions are such as are made for the purpose of carrying on the business, i.e., to enable a person to carry on and earn profit in that bossiness. It is not enough that the disbursements are made in the course of or arise out of or are concerned with or made out of the profits of the business but they must also be for the purpose of earning the profits of the business. As was pointed out in IRC v. Alexander Von Glehn & Co. Lid. (1920) 2 KB 553 an expenditure is not deductible a unless it is a commercial loss in trade and a penalty imposed for breach of the law during the course of trade cannot be described as such. 'If a slum is paid by an assessee conducting his business, because in conducting,, it he has acted in a manner which has rendered him liable to penalty, it cannot be claimed as a deductible expense. It must be a commercial loss and in its nature must be contemplable as such. Such penalties which are incurred by an assessee in proceedings launched against him for an infraction of the law cannot be called commercial losses incurrea1 by an assessee in carrying on his business. 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 falling 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.
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 with' section 10(2)(xv) 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 out 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 out for the business in the sense 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 out 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."
So rigid a view, the apex Court took on the subject as above, held the field fairly long and, in fact, various High Courts implicitly followed the rule so laid down. A new dimension and complexion had been given to such a moot and vexed question by the apex Court in the case of Prakash Cotton Mills P. Ltd. v. CIT (1993) 201 ITR 684, wherein their Lordships laid down the rule thus (at pages 690-691):
" ....whenever any statutory impost paid by, an assessee by way of damages or penalty or interest is claimed as an allowable expenditure under section 37(1) of the Income Tax Act, the assessing authority is required to examine the scheme of the provisions of the relevant statute providing for payment of such impost notwithstanding -the nomenclature of the impost as given by the statute, to find whether it is compensatory or penal in nature. The authority has to allow deduction under section 37(1) of the Income Tax Act wherever such examination reveals the concerned import to be purely compensatory in nature. Wherever such impost is found to be of a composite nature, that is, partly of compensatory nature and partly of penal nature, the authorities are obligated to bifurcate the two components of the impost and give deduction to that component which is compensatory in nature and refuse to give deduction to that component which is penal in nature."
Useful reference, we feel in this connection, may also be made to the case of CIT v. Ahmedabad Cotton Mfg. Co. Ltd. (1994) 205 ITR 163 (SC).During the accounting period relevant to the assessment year 1972-73, the respondent-company, which ran a textile mill, instead of producing and packing the minimum quantity of specified type of cloth as required by the Textile Commissioner in directions issued under the Cotton Textiles (Control) Order, 1948, paid to the Textile Commissioner a sum of Rs. 1,70,766, in exercise of the option available to the respondent under clause 21C(1)(b) of the Control Order. Similarly, since it had not fulfilled its export obligation under a bond entered into as regards exporting a certain quantity of Sanforized cloth, the respondent paid Rs. 5,17,781 to the Textile Commissioner, in exercise of its option available under the terms of the bond. The question was whether these amounts were allowable as business expenditure. The High Court held that these amounts were not in the nature of penalty or something akin to penalty and were allowable as business expenditure.
(a) On appeal, the Supreme Court held, affirming the decision of the High Court, that the sums of Rs.1,70,766 and Rs. 5,17,781 were not in the nature of penalty or something akin to penalty but were made in exercise of the option given to the respondent by the law or the statutory scheme and the, expenditure was incurred in the course of business as a measure of business expediency and the amounts were, therefore, allowable as business expenditure under section 3 of the Income Tax Act, expressed thus (at pages 174-175):
....what needs to be done by an assessing authority under the Income Tax Act, 1961, in examining the claim of an assessee that the payment made by such assessee was a deductible expenditure under section 37 of the Income Tax Act although called a penalty is to see whether the law or scheme under which the amount was paid required such payment to be made as penalty or as something akin to penalty, that is imposed by way of punishment for breach or infraction of the law or the statutory scheme. If the amount so paid is found to be not a penalty or something akin to penalty due to the fact that the amount paid by the assessee was in exercise of the option conferred upon him under the very law scheme concerned, then one has to regard such payment as business expenditure of the assessee, allowable under section 37 of the Income Tax Act, as an incident of business laid out and expended wholly an exclusively for the purposes of the business. However, such payment of the assessee is one which is made in exercise of the option given to such assessee by the law or the statutory scheme and there arises no need for the assessing authority to go into the question whether the payment could be regarded as one made as a measure of business expediency, for, it cannot ignore the fact that the law or the statutory scheme enables incurring of such expenditure in the course of the assessee's business."
On the face of the decision in the cases of Prakash Cotton Mills P. Ltd. v. CIT (1993) 201 ITR 684 (SC) and CIT v. Ahmedabad Cotton Mfg. Co. Ltd. (1994) 205 ITR 163 (SC), the rule laid down in the case of Haji Aziz and Abdul Shakoor Bros. v. CIT (1961) 41 ITR 350 (SC) cannot at all be stated to have laid down an inflexible rule of law to be followed in all eventualities and situations.
The aforesaid two latest rulings of the apex Court, we rather feel, give a wider scope to consider the question in a broad spectrum analysis, in examining; the scheme of the provisions of the relevant statute, providing for payment of such imposts notwithstanding the nomenclature of the impost as given by the statute, to find out whether it is compensatory or penal in nature. The authority has to allow deduction under section 37(1) of the Income Tax Act, whenever such examination reveals the concerned impost to be purely compensatory in nature. Whenever such impost is found to be of composite nature, that is, partly of compensatory nature and partly of penal nature, the authorities are obliged to bifurcate the two components of the impost and give deduction to that component which is compensatory in nature and refuse to give deduction to that component which is penal in nature.
Coming to the facts of the case on hand, the goods belonging to the assessee had been confiscated under section 111 (d) of the Customs Act, 1962, read with section 3 of the Imports and Exports (Control) Act, 1947-. However, under section 125 of the Customs Act, 1962, an option had been given to the owner-assessee to pay, in lieu of such confiscation, a fine of Rs.1,84,000 which had been reduced on appeal to Rs.84,000 and the goods had been cleared exercising the option. If the seized goods, without the exercise of option, had been confiscated once and for all, it goes without saying that the property in the goods shall vest in the Government, in the sense of the Government becoming the absolute owner thereof. The fine amount, whatever be its quantification, that is t-o .say, whether it is equivalent to or below the value of the goods seized, cannot at alt, in such at situation, be stated to be penal in nature, notwithstanding its nomenclature, but it is reparatory or compensatory in nature. Once it is compensatory in nature, it goes without saying that the authority has to allow deduction wider section 37(1) of the Income Tax Act as laid down by the apex Court in, the two latest decisions aforecited. Further, the expenses incurred by way of payment of fees to advocates in defending penalty proceedings must also be construed; as an allowable deduction. We, therefore, answer questions Nos. 1 and 4 in the affirmative and against the Revenue.
For the reasons given for answering questions Mos. 1 and 4, we concur e conclusion reached by the Tribunal as being correct, though no for the with the reasons assigned by it.
We may now refer to one of the erroneous or fallacious reasonings, namely that the redemption fine levied by the customs authorities is an additional duty and, therefore, there was no infraction of law, which gave rise to and question, which in the circumstances of the case, cannot at all the second question commend acceptance at our hands and this question is answered accordingly.
No doubt true it is that the third question involving on the liability for expenses, for defending cases before the customs authorities against the legal of redemption fine had not at all been adverted to and considered by the levy Tribunal. The non-consideration of such a question, involving a minimal amount of RS.2,005, we feel, in the circumstances, is an inadvertent slip, which cannot be taken serious note of, especially, when the Tribunal, in the ultimate analysis, dismissed the appeal, affirming the conclusions arrived at by the Appellate Assistant Commissioner, who had, however, considered such a question and A rendered a fording in favour of the assessee. Accordingly, this question is answered.
We accordingly answer the questions referred to as stated earlier. There shall, however, be no order, in the circumstances, as to costs.
M.B.A./ 1063/Tax Reference answered.