Income-tax---

----Business expenditure---Fines and penalties---Fine for violation of customs Act---Not deductible---Indian Income Tax Act, 1961, S.37---[CIT v. Pannalal Narottamdas & Co. (1968) 67 ITR 667 (Bom.) dissented from].

Expenditure in the nature of penalty for infraction of law is not a commercial loss falling on the assessee as a trader. It is not incidental to the carrying on of business nor can it be said to be expended wholly and exclusively for carrying it on:

Held, accordingly that the amount of Rs.27 lakhs representing fine for violation of the Customs Act and the Imports and Exports (Control) Act was not deductible.

Haji Aziz and Abdul Shakoor Bros. v. CIT (1961) 41 ITR 350 (SC); Raghubir Prasad Gupta v. CIT (1979) 120 ITR 789 (Cal) and Lakshmi Narayan Gouri Shankar v. CIT (1975) 100 ITR 143 (Patna) fol.

CIT v. Pannalal Narottamdas & Co. (1968) 67 ITR 667 (Bom.) dissented from.

CIT v. Mihir Textiles Ltd. (1976) 104 ITR 167 (Guj)1ref.

D.D. Vyas for the Commissioner. Nemo for the Assessee.

JUDGMENT

A. K. MATHUR, C.J.---This is an income-tax reference under section 256(1) of the Income-tax Act at the instance of the Revenue and the following question of law has been referred by the Tribunal for the answer of this Court:

"Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in deleting the addition of Rs.27 lakhs representing fine for violation of the Customs and the Imports and Exports (Control) Acts and claimed as business expenditure by the assessee, in spite of the clear cut findings of the ,Calcutta High Court in the case of Raghubir Prasad Gupta v. CIT (1979) 120 ITR 789?"

The brief facts giving rise to this reference are thus: The assessee had imported palm kernel seeds weighing 3776-32 mt. The consignment was covered under S.T.C./H.V. D.C. and not under the open general licence. The Collectors of Customs, Cochin and Calcutta,. had confiscated the consignment under section 111(d) of the Customs Act, 1962, and section 3(2) of the Imports and Exports (Control) Act, 1947. The assessee got the goods released after paying Rs.27 lakhs as fine. The assessee claimed this amount of fine to have been paid in the regular course of business as business expenditure in view of the Bombay High Court's decision in The case .of CIT v. Pannalal Narottamdas & Co. (1968) 67 ITR 667. The Assessing Officer did not accept the assessee's submissions in view of the Calcutta High Court's decision in the case of Raghubir Prasad Gupta v. CIT (1979) 120 ITR 789, wherein it was held that any amount paid against release of seized goods cannot be allowed as business expenditure but had to be treated as expenditure incurred for violation of law. It was alleged by the assessee that palm seed was an item under the open general licence whereas palm seed kernel was not under the open general licence (O.G.L.). It is alleged that the assessee came to know of this fact only on July 27, 1987, as a result of public notice issued by the Government, and, thereafter, the business conduct of the assessee was to save his business interest, and therefore, he had. to pay the aforesaid penalty in a sum of Rs.27 lakhs. Therefore, the Assessing Officer disallowed the claim of the assessee as business expenditure.

Aggrieved against the order of the Assessing Officer, the assessee preferred an appeal before the Commissioner of Income-tax (Appeals). The assessee's appeal was rejected by the Commissioner of Income-tax (Appeals) and the disallowance was affirmed by the Commissioner of Income-tax (Appeals). Aggrieved against the order of the Commissioner of Income-tax (Appeals), an appeal was also preferred before the Tribunal alongwith other issues and Tribunal set aside the order of the Commissioner of Income-tax (Appeals), as well as that of the Assessing Officer on the ground that in fact, the assessee came to know of this fact by issue of clarification by the State Government, on July 27, 1987, that palm seeds kernel was not covered under the Open General Licence. The Tribunal observed that there was no deliberate violation on the part of the assessee of any law or regulations. It was further observed that as soon as the assessee came across the public notice, dated July 27, 1987, he took all reasonable steps to get out of the tricky situation created as a result of the public notice even though the nature of contract was firm and irrevocable. The amount of fine paid by the assessee was nothing but consideration for getting his stock released against confiscation thereof. Under these circumstances, the orders of the Commis sioner of Income-tax (Appeals) and the Assessing Officer were set aside.

None appeared on behalf of the assessee despite service. Therefore, the question is whether disallowance made under section 37 of the Act is permissible or not. Before we advert to this fact, it may be relevant to go to the decision of the Supreme Court given in Haji Aziz and Abdul Shakoor Bros. v. CIT (1961) 41 ITR 350, and in that their Lordships have taken a view that such kind of fine or penalty cannot be allowed. The question before the Supreme Court was under the Indian Income-tax Act, 1922 and in that case, the assessee, who 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 which were imported by steamer were confiscated by the Customs Authorities under section 167 of the Sea Customs Act (item 8), and the assessee, being given an option under section 183 of that Act to pay a fine, paid the fine and the dates 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, but it was negatived. A similar view was taken in Raghubir Prasad Gupta (1979) 120 ITR 789, by the Calcutta High Court. There also, the question arose whether the amount paid to the Customs Authorities by way of fine in lieu of confiscation of goods imported without valid licence cannot be said to be expenditure incurred wholly and exclusively for the purpose of the business of an assessee and is not deductible under section 37(1) of the Act. In this connection, their Lordships further observed that an infraction of law is not a normal includence of business and a penalty paid for an infraction of the law is not a business loss in the commercial sense. Therefore, such a payment is not deductible in computing the profits or gains of business under section 28(i) of the Income Tax Act, 1961. Similarly in CIT v. Mihir Textiles Ltd. (1976) 104 ITR 167, their Lordships of the Gujarat High Court have taken a view that the betterment charges paid under a Town Planning Act is in the nature of capital expenditure and, it is not, therefore, deductible under section 37 of the Income-tax Act. It was further observed that damages can be recovered from an employer who makes a default in payment of any contribution to the provident fund. An amount paid as damages for delay in making provident fund contributions is not deductible as business expenditure.

In Lakshmi Narayan Gouri Shankar v. CIT (1975) 100 ITR 143, the same view has been taken by the Patna High Court and it was held that expenditure in the nature of penalty for infraction of law is not a commercial loss falling on an assessee as a trader. It is not incidental to the carrying on of business nor can it be said to be expended wholly and exclusively for carrying it on. Hence, the said expenditure is not deductible. A contrary view has been taken by the Bombay High Court in Pannalal Narottam Das & Co. (1968) 67 ITR 667, but in that case, the decision of the Supreme Court given in Haji Aziz and Abdul Shakoor Bros.' case (1961) 41 ITR 350 was not brought to their notice and in that case also, certain goods were purchased from abroad and when the goods arrived in India and were sought to be cleared through customs by the assessee on the basis of the documents purchased by it, it was found that the imports were unauthorised and the goods were liable to be confiscated and a penalty was liable to be imposed under section 167(8) of the Sea Customs Act, 1878.

Now, coming to the facts as mentioned above, the palm kernel seeds, was not there in the open general licence; but the order was placed by the assessee though a clarification was issued on July 27, 1987, by the Government that palm seeds kernel is not covered by the open general licence but still he confirmed the supply even belatedly and the period was extended up to March 31, 1988. On the factual aspect also, it is apparent that the assessee was not bona fide ignorant about the situation, he bad taken a risk of ordering such goods which were not included in the open general licence and he only took a chance by showing that on July 27, 1987, the Government issued a notification clarifying the position. This will not be of any avail to the assessee, but this item was not included in the open general licence and still he took risk knowing fully well that this item is not included in the open general licence. The assessee wanted to take the benefit of it and when the Government issued a Notification on July 27, 1987, therefore. he wanted to take the benefit thereof. Therefore, the penalty which is being levied, is not something which the assessee was not aware of. Hence, in these circumstances, we are of the opinion that this expenditure cannot be deductible under section 37 of the Act and it has to be added in the income of the assessee and charged to tax.

In the result, we answer the aforesaid question in favour of the Revenue and against the assessee.

M.B.A/3241/FCReference answered.