ASSAM ROLLER FLOUR MILLS VS COMMISSIONER OF INCOME-TAX
1999 P T D 1865
[227 I T R 43]
[Rajasthan High Court (India)]
Before V.K. Singhal and M.A.A. Khan, JJ.
ASSAM ROLLER FLOUR MILLS
Versus
COMMISSIONER OF INCOME-TAX
D.B. Income-tax Reference No. 17 of 1986, decided on 22/04/1996.
Income-tax---
----Business expenditure---Mercantile system of accounting---Expenditure in which year allowable---Penalty imposed on assessee for infraction of Customs Act in assessment year 1979-80---Government setting aside order of penalty in 1982---By applying the doctrine of "relating back" liability stood wiped out in assessment year 1979-80 itself---Deduction not allowable merely because payment was made.
The general rule is that deduction can be permitted in respect of only those expenses or losses which have accrued in the relevant accounting year. This general rule, however, is required to be applied after taking into account subsequent events which have a bearing on the issue being decided by the authority concerned. It is, therefore, permissible in law to take into consideration, at the time of deciding an issue, such subsequent events, consideration, at the time of deciding an issue, such subsequent events, legal or factual, which may have an effect on the decision of the issue. It is necessary to do so for the obvious reason that the aim of law is to do substantial justice between the parties and to impart to them not merely legal or technical justice but, as far as possible, real and substantial justice.
During the accounting period relevant to the assessment year 1979-80, the assessee-firm carried on its business activities with head office at place J and a branch office at place B and was maintaining its accounts on the mercantile system of accountancy. On December 5, 1977, the assessee firm, through its branch office at B, entered into a contract with a foreign company to import crude palm oil and accordingly obtained an import licence on December 30, 1977 from the concerned authorities and also obtained on January 6, 1978, a letter of credit from a bank. As per this letter of credit, the expiry date of shipment was February 3, 1978. This letter of credit was, however, later on cancelled by the bank. On January 13, 1978, the Government of India issued a public notice whereby the import of crude oil was banned. The rigours put by this public notice were, however, partially relaxed by issuing another public notice on February 22, 1978, to the effect that licences issued prior to January 13, 1978, were to be treated as valid even though the imports were not covered by an irrevocable letter of credit but certain restrictions like selling the imported goods only to Government or its agencies at specified rates or selling to non-Government parties only after obtaining requisite permission from the Government were also placed by the second public notice of February 22, 1978. When the goods reached India they were confiscated by the Customs Authorities under section 125 of the Customs Act, 1962, but the assessee was given the option either to pay reshipment expenses at Rs.43,000 in lieu of confiscation and fine or to pay a sum of Rs.6,50,000 for clearance of the goods into town. Simultaneously, the Collector of Customs imposed a personal penalty of Rs.4,00,000 on the assessee. The assessee opted to pay the clearance charges of Rs.6,50,000 as also the personal penalty of Rs.4,00,000. The order passed by the Collector of Customs was confirmed in appeal by the Central Board of Excise and Customs by their order, dated January 28, 1980, but on a revision preferred by the assessee to the Government of India, the Government by its order, dated February 20, 1982, set aside the order of confiscation of goods as well as the order levying personal penalty. The assessee claimed deduction of the entire amount of Rs.10,50,000 plus Rs.4,000 paid as interest on the borrowed amount of Rs.4,00,000 as business expenditure. The Income-tax Officer disallowed the deduction of the amount of penalty and interest on the ground that the personal penalty was imposed for infraction of law and was, therefore, not a deductible business expenditure. The Commissioner of Income-tax (Appeals) allowed the deduction, of Rs.4,00,000 plus interest of Rs.4,000 on the ground that the expenditure was incurred by the assessee in carrying on its business and that the same was not expended in respect of any infringement of law. However, he directed the Income-tax Officer to charge tax on the aforesaid amount as and when the same was refunded to the assessee by the Customs Department. On further appeal, the Tribunal disallowed the assessee's claim for deduction of the penalty amount on the ground that the penalty was imposed for infraction of the provisions of the Customs Act, 1962. Alternatively, the Tribunal held that if it was permissible to take into account the final order of the Secretary to the Government in revision passed on February 20, 1982, to hold that the assessee-firm had not contravened the provisions of the Customs Act, then it could also be said that the said order would relate back to the date of import and there was absolutely no liability on the assessee to pay the penalty, and that since the firm maintained accounts on mercantile basis, the mere payment of the amount of penalty would not justify the claim for deduction because the liability did not at all accrue, there being no order levying penalty since the penalty had finally been cancelled. The Tribunal held that the same reasoning would apply also to the interest paid on the amount of Rs.4,00,000 borrowed from the bank and in this regard also, the amount was rightly disallowed by the Income-tax Officer and the Commissioner of Income-tax was in error in allowing it. On a reference:
Held, (i) that in the year of account, liability to pay personal penalty of Rs.4,00,000 had accrued or arisen against the assessee with the passing of the order by the Collector of Customs. Such liability would have been an allowable deduction in the year of account but in view of the principle laid down in Haji Aziz and Abdul Shakoor' s case (1961) 41 ITR 350 (SC), it was not so allowable as the liability related to a penalty imposed for infringement of the provisions of the Customs Act, 1962;
(ii) that, however, taking into account the subsequent order of the Government of India knocking off the penalty in 1982, and on taking the effect of such order of the Government of India to the year of account with the help of the doctrine of "relating back", the resulting position was that in the year of account the liability stood wiped out and did not survive for deductibility as a business expenditure. Thus, from either of the two angles, as rightly held by the Tribunal, the amounts of the penalty and the interest paid for raising funds to pay such penalty did not partake of the character of allowable business expenditure;
(iii) that since the assessee was .adopting the mercantile system of accounting the mere payment of the liability would not make it an allowable deduction.
CIT v. Ashokbhai Chimanbhai (1965) 56 ITR 42 (SC); CIT v. Pannalal Narottamdas & Co. (1968) 67 ITR 667 (Bom.); CIT v. Piara Singh (1980) 124 ITR 350 (SC); CIT v. Shri Goverdhan Ltd. (1968) 69 ITR 675 (SC); Haji Aziz and Abdul Shakoor Bros. v. CIT (1961) 41 ITR 350 (SC); Kedarnath Jute Mfg. Co. Ltd. v. CIT (1971) 82 ITR 363 (SC); Parshva Properties Ltd. v. CIT (1976) 104 ITR 631 (Cal.) and Soni Hinduji Kushalji & Co. v. CIT (1973) 89 ITR 112 (AP) ref.
V. Bhojwani and Sunil Bhojwani for the Assessee.
K.S. Gupta for G.S. Bapna for the Commissioner.
JUDGMENT
M.A.A. KHAN, J.---The Income-tax Appellate Tribunal, Jaipur Bench, Jaipur (for short, "the Tribunal"), has referred under section 256(1) of the Income Tax Act, 1961 (for short, "the Act"), to this Court for its opinion the following questions, viz:
"(1)Whether, on the facts and in the circumstances of the case, the finding of the Income-tax Appellate Tribunal that the imports made by the applicant during the accounting year relevant to the assessment year 1979-80 were contraband in view of the Collector of Customs order, dated April 13, 1978, and the appellate authority (CBR) order, dated and so the applicant shall be said to have made the payment of Rs.4 lakhs, as a penalty under section 112(d) of the Customs Act, for the contravention of law which is not his business, in spite of the finding of fact to contrary by the revisional authority to the effect that imports, in question, were not contraband, is wrong, illegal, perverse, bad in law, and without jurisdiction?
(2) Whether, on the facts and in the circumstances of the case, the above said amount of penalty of Rs. 4, lakhs, imposed by the Collector of Customs, even when the imports were bona fide and in conformity with the Policy of the Government and the provisions of law, as found by the revisional authority under the Customs Act, 1962, is necessary expense of the business? And whether the said expenditure is a liability deductible from the income of the assessee of that year and incurred in that year, i.e., ending March 31, 1979, relevant to the assessment year 1979-80, even though the assessee has maintained account books on the mercantile basis?
(3) Whether, on the facts and in the circumstances of the case, the interest paid on the money borrowed to pay the amount of Rs. 4, lakhs, referred to in question No.2 above, is the necessary expenses of the business of the applicant and deductible from his income?"
Shorn of avoidable details the facts relevant and sufficient to answer the referred questions are these:
During the accounting period relevant to the assessment year 1979-80, which is under reference, the assessee was a registered firm carrying on its business activities with its head office at Jaipur and a branch office at Bombay. It was maintaining its accounts on the mercantile system of accountancy. On December 5, 1977, the assessee-firm, through its branch office at Bombay, entered into a contract with Patel Holdings, Bangkok, Malaysia, to import 995-970 M.T. of crude palm oil and accordingly obtained an import licence on December 30, 1977, from the concerned authorities and also obtained on January 6, 1978, a letter of credit from the Vysya Bank Ltd., Bombay. As per this letter of credit, the expiry date of shipment was February 8, 1978. This letter of credit was, however, later on cancelled by the bank. On January 13, 1978, the Government of India issued Public Notice No.5 whereby the import of crude oil was banned. The rigours put by this public notice were, however, partially relaxed by issuing another public Notice No.20 of 1978 on February 22, 1978, to the effect that licences issued prior to January 13, 1978, were to be treated as valid even though the imports were not covered by an irrevocable letter of credit by certain restrictions like selling the imported goods only to Government or its agencies on specified rates or selling to non-Government parties only after obtaining requisite permission from the Government were also placed by Public Notice No.20 of 1978 of February 22, 1978.
On the goods, shipped on March 6, 1978, reaching Bombay, the Collector of Customs at Bombay, by his order, dated April 13, 1978, made under section 111 (d) of the Customs Act, 1962, confiscated the same but by passing an order under-section 125 of the said Act gave an option to the assessee either to pay reshipment expenses at Rs.43,000 in lieu of confiscation and fine or to pay a sum of Rs.6,50,000 for clearance of the goods into town. Simultaneously, the Collector of Customs imposed a personal penalty of Rs.4,00,000. The assessee opted to pay the clearance charges of Rs.6,50,000 as also the personal penalty of Rs.4,00,000. The order so passed by the Collector of Customs was confirmed in appeal by the Central Board of Excise and Customs, vide their Order No.36 of 1980, dated January 28, 1980, but on a revision having been preferred by the assessee to the Government of India, the secretary to the Government, vide his order, dated February 20, 1982, set aside the order of confiscation of goods as well as the order levying personal penalty.
It was under the above background that the assessee, claimed deduction of the entire amount of Rs.10,50,000 plus Rs.4,000 paid as interest on the borrowed amount of Rs.4,00,000 as being business expenditure. The Income-tax Officer, following the instructions of the Inspecting Assistant Commissioner given under section 144-B of the Act, allowed deduction of Rs.6,50,000 but following the Supreme Court decision in the case of Haji Aziz and Abdul Shakoor Bros. v. CIT (1961) 41 ITR 350 disallowed the deduction of the amount of penalty and interest on the ground that the personal penalty was imposed for infraction of law and was, therefore, not a deductible business expenditure. In appeal the learned Commissioner of Income-tax (Appeals) allowed the deduction of Rs.4,00,000 plus interest of Rs.4,000 on the ground that the expenditure was incurred by the assessee in carrying on its business and that the same was not expended in respect of any infringement of law. However, he directed-the Income-tax Officer to charge tax on the aforesaid amount as and when the same was refunded to the assessee by the Customs Department.
In second appeal, the Tribunal decided the issue in the following manner:
"(1) This leaves for consideration the amount of Rs.4 lakhs paid as penalty and Rs.4,000 as interest on the amount borrowed from the bank to pay the said penalty. The amount of penalty was disallowed by the Income-tax Officer on the ground that it could not be allowedas a deduction as a business expenditure but the learned Commissioner of Income-tax (Appeals) has allowed it on the sole ground that the penalty has later been cancelled in revision by the Secretary to the Government, Ministry of Finance and, therefore, it should be allowed as a deduction for this year and section 41(2) would apply in the year in which the liability ceased. As a purely academic exercise, we asked learned counsel for the assessee when the amount of Rs.4 lakhs has been offered for assessment in a later year. But, we were told that it has not, been returned as the assessee's income because there was a fire in the firm's premises in June 1982, and the business was closed and the company was formed later on to take over the business. The amount stands credited in the books of the company as a general reserve. Therefore, the only reason why the Commissioner of Income-tax (Appeals) allowed the deduction does not survive really as a correct basis.
(2) The question whether any deduction is allowable or not has to be considered in the year in which the claim is made. What subsequently happens is only of interest as a historical measure but should not govern the allowance of deduction. Here, the penalty has been levied by the Collector of Customs for contravention of provisions of the Customs Act under section 112 of the Act. The assessee had gone in appeal before the Board of Customs and Central Excise but had lost. It succeeded in a revision application before the Secretary to the Government of India. So far as the year of levy of penalty is concerned, the amount was merely disallowable because it is not the business of A firm to contravene the provisions of the Customs Act and to import goods in contravention of the Act. That, according to the Collector of Customs and the Board, the assessee had done. Therefore, in the year under appeal, the Supreme Court ruling in (1961) 41 ITR 350 in the case of Haji Aziz would directly apply. Therefore, the amount was disallowable. We hold accordingly.
(3) Alternatively, if it is permissible to take into account the final order of the Secretary to the Government in revision passed on February 20, 1982, to hold that the assessee-firm had not contravened the provisions of the Customs Act, then it could also be said that the said order would relate back to the date of import and there was absolutely no liability on the assessee to pay the penalty. Since the firm maintains accounts on the mercantile basis, the mere payment of the amount of penalty would not justify the allowance of the claim because the liability did not at all accrue, there being no order levying penalty since the penalty has finally been cancelled. In either view of the matter, therefore, the amount of penalty could not be allowed as a deduction. We hold accordingly, allow .the appeal and reverse the order of the Commissioner of Income-tax (Appeals) and restore that of the Income-tax Officer. The same would apply also to the interest paid on this amount of Rs.4,00,000 borrowed from the bank and in this regard also, the amount was rightly disallowed by the Income-tax Officer and the Commissioner of Income-tax was in error in allowing it. We reverse the order."
It is out of the above findings recorded by the Tribunal that the three referred questions are stated to have arisen.
We heard the parties at sufficient length and carefully examined the material on our record and the law applicable thereto.
Referred questions Nos. l and 3 have, it may be noted, arisen out of the Tribunal's findings recorded in paragraph 15 of its order. The Tribunal has disallowed the assessee's claim for deduction of the penalty amount on the ground that the penalty was imposed for infraction of the provisions of the Customs Act, 1962. The contention of Mr. Bhojwani, learned senior counsel for the assessee, is that in recording its finding the Tribunal overlooked the vital facts that the Government of India, in exercise of its revisional jurisdiction in the matter, had finally held that there was no infraction of law in importing its goods by the assessee. According to Mr. Bhojwani, this subsequent event was relevant to the issue and the Tribunal should have taken due note of it.
In the mercantile system of accountancy, income is charged to tax and liability is allowed as deduction on the basis of accrual or "arisal". The two words "accruing" or "arising" are used in contradistinction to the words "receive" or "pay". As held by the apex Court in CIT v. Ashokbhai Chimanbhai (1965) 56 ITR 42 (SC), income is said to be received when it reaches the assessee; when the right to receive the income becomes vested in the assessee, it is said to accrue or arise. The same is true of a liability also. A liability is said to be discharged when it is paid. When the obligation to pay a liability, may be it is not ascertained at that point of time, is cast on the assessee, it is said to have accrued or arisen. The legal position, as observed by the Supreme Court in CIT v. Shri Goverdhan Ltd. (1968) 69 ITR 675, is that a liability depending upon a contingency is not a debt in praesenti, or in future till the contingency happens. But if the liability has crystalized into a debt, the fact that the amount has to be ascertained does not make it any the less a debt if the liability is certain and what remains is the quantification of the amount: debitum in praesenti solvendum in futuro. Once a liability or loss, in the mercantile system of accountancy, accrues, it becomes an allowable deduction at that point of time.
The general rule is that deduction can be permitted in respect of only those expenses or losses which have accrued in .the relevant accounting year. This general rule, however, is required to be applied after taking into account such subsequent events which have a bearing on the issue being decided by the authority concerned. It is, therefore, permissible in law to take into consideration at the time of deciding an issue, such subsequent event, legal or factual, which may have an effect on the decision of the issue. It is necessary to do so for the obvious reason that the aim of law to do substantial justice between the parties and to impart to them riot merely legal or technical justice but, as far as possible, real and substantial justice. Justice is to be imparted in accordance with law and not simply in subordination to law. The former expression promotes and advances expansion and development of law; the latter makes law, rather, stagnant and static. A developing society needs developing legal notions.
Coming to questions Nos.l and 3 referred to us the position comes to this. In the year of account the liability to pay personal penalty of Rs.4 lakhs had accrued or arisen against the assessee with the passing of the order by the Collector of Customs, Bombay. Such liability, in view of the principle laid down in Kedarnath Jute Mfg. Co. Ltd. v. CIT (1971) 82 ITR 363 (SC) would have been an allowable deduction in the year of account but in view of the principle laid down in Haji Aziz' s case (1961) 41 ITR 350 (SC), it was not so allowable as the liability related to a penalty imposed for infringement of the provisions of the Customs Act, 1962. That was the position in the year under account.
However, taking into account the subsequent events which mainly consisted of a fire breaking out in the assessee's business premises in June, 1982, closure of the assessee's business and later on a company taking over the remains of the assessee's business, and the order of the Government of India knocking off the penalty in question in 1982 and on taking the effect of such order of the Government of India to the year of account with the help of the doctrine of "relating back", the position comes to this that in- the year of account the liability in question stood wiped out and did not more survive for Allow ability or deductibility as a business expenditure. Thus, from either of the two angles, as right held by the Tribunal, the amounts of penalty and interest paid for raising funds to pay such penalty did not partake of the character of allowable business expenditure.
In view of the above discussion, questions Nos. l and 3 are required to be answered in the affirmative, i.e., for the Revenue and against the assessee.
Question No.2, in fact, stands answered in favour of the Revenue and against the assessee by the discussion made so far by us. What we would like to add here is that the Tribunal has recorded no such finding that the imports made by the assessee were bona fide and in conformity with the policy of the Government and the provisions of law. We endorse the view of the Tribunal that since the assessee was adopting the mercantile system of accounting the mere payment of the liability would not make it an allowable deduction.
In answering the three questions we have considered the ratio decidendi of the cases in Haji Aziz and Abdul Shakoor Bros. v. CIT (1961) 41 ITR 350 (SC), CIT v. Pannalal Narottamdas & Co. (1968) 67 ITR 667 (Bom), Soni Hinduji Kushalji & Co. v. CIT (1973) 89 ITR 112 (AP), CIT v. Piara-Singh (1980) 124 ITR 350 (SC) and Parshva Properties Ltd. v. CIT (1976) 104 ITR 631 (Cal), relied upon by Mr. Bhojwani. Since in the light of the decisions of the Supreme Court in the cases referred to above by us the cases relied upon by Mr. Bhojwani render no assistance to us in accepting his arguments, we need not discuss them.
In the result, we answer all the questions, as reproduced above, in the affirmative, i.e., for the Revenue and against the assessee. Let our answer, alongwith the record of the Tribunal, if any, be communicated to the Tribunal for the needful according to law.
M.B.A./2037/FCReference answered.