Income Tax Appellate Tribunal - Indore
Late Shri Naresh Rajpal vs Income Tax Officer. on 17 September, 1993
Equivalent citations: (1994)48TTJ(INDORE)395
ORDER
G. E. VEERABHADRAPPA, A.M. :
This appeal of the assessee arises out of the order, dt. 6th January, 1992 of the CIT(A) for the asst. yr. 1988-89.
2. The assessee is manufacturer of soaps and one of the raw materials required is industrial acid oil. During the previous year relevant to asst. yr. 1988-89, the assessee acquired by transfer the following four import licences, which were issued to EMC Steel Ltd. :
Licence No. Date Value Rs.
3159523 21.11.1986 5 lacs 3159524 21.11.1986 5 lacs 0479101 18.05.1987 10 lacs 0479102 18.05.1987 10 lacs EMC Steel Ltd. transferred the aforesaid licences to Bhagchandka Export Ltd. and were transferred to the assessee finally. The said import licences were split licence exports effected in pursuance of contract No. 01/CC/045-075-AL, dt. 11th August, 1981, which was registered in accordance with the provisions of registration of contract, vide Appendix 20 of 1980-81 import policy. The said Appendix 20 permits imports of carbon steel/high tensile steel structurals. By virtue of para 8 of Appendix 20 of 1980-81 policy r/w paras 16, 17 of that Appendix and para 131(1) of that policy, the said licences were valid for import of items of raw material required for use in the factory of the holder of REP licences. In pursuance of these REP licences, the assessee imported acid oil which was one of the raw materials in the manufacture of the soap in their factory. The goods arrived at the port of Cochin. The assessee filed bills of entry No. 498 dt. 28th June. 1987, and No. 589 dt. 31st August, 1987, for home consumption. The Dy. Collector of customs S.I.B. Cochine alleged that the goods imported are canalised under the 1985-86 import policy and held that goods cannot be imported under the four licenses and the assessee was asked to show-cause why the goods should not be confiscated and penal action taken against the assessee. The Customs authorities ordered that 888.346 MT of industrial acid oil covered by the above bills of entry were to be canalised under S. 111(d) of the Customs Act, 1962, r/w S. 32 of the Import & Export Control Act, 1947. However, the assessee was allowed to redeem the goods on payment of fine of Rs. 2,50,000. The assessee in pursuance of the aforesaid order paid the amount of Rs. 2,50,000 and claimed it as deduction in the computation of the income as the additional cost of the goods involved in the import. The assessee claimed before the two Revenue authorities that the import was done without there being any deliberate violation of the law by the assessee.
According to the assessee, the assessee purchased REP licences under the import policy of 1980-81. The industrial acid oil was not canalised and was permitted to be imported on Open General Licence without any restriction. According to the assessee, the saving clause of 131(1), in the import policy 1980-81, enables him to use the REP entitlement for import of the industrial acid oil. The assessee also contended that there was a bona fide intention that such import of industrial acid oil was not violation of the import policy then in force. The contentions of the assessee were not accepted and the CIT(A) reached the conclusion that the payment of the fine was for infraction of law and, therefore, not allowable as deduction. With that view, the disallowance of Rs. 2,50,000 was confirmed. The assessee is aggrieved. The learned assessees counsel took pains in drawing our attention to the import policy of 1980-81. The learned assessees counsel explained that under the import policy of 1980-81, the import of the industrial acid oil was in the open general licence and a purchase of REP licence, in the submission of the learned assessees counsel, was entitled for import of industrial acid oil. The assessee in good faith has purchased these REP licence from the exporters. Relying upon cl. 131(1) of the import policy of 1980-81, it was argued by the assessee that REP licence issued to manufacture/exporter will be valid for import of any raw material, components, consumable and packing materials required by them for use in their factory. The import of industrial acid oil was not in the banned list or it was not canalised. The REP licences were freely transferable and the assessee in good faith had purchased them that under the aforesaid cl. 131(1), the assessee would be entitled to import the industrial acid oil which was raw material for his industry. The learned assessees counsel further argued that the assessee had no iota of doubt that the provisions of import policy will be contravened but in the meantime an import policy of 1985-88 was announced by the Government where the import of industrial acid oil came to be canalised. Under cl. 204(1) of the new policy, the learned assessees counsel submitted that the assessee would be entitled to import industrial acid oil, The assessee, according to the learned counsel for the assessee, drew support from the decision of the Supreme Court in the case of Oswal Woollen Mills Ltd. vs. Union of India. Copy of the decision is on the record. The learned assessees counsel further supported that he had bona fide belief in the matter and the assessee has opened letters of credit with a banker for importing goods. The assessees counsel further relied upon the opinion expressed by M.P. Consultancy Organisation Ltd. on 13th July, 1987.
The M.P. Consultancy Organisation Ltd., according to the assessee, is a joint venture of IFCI, IDBI and State Corporation and banks and is mainly in the activities of running consultancy services to the entrepreneurs in their business. They have also expressed in their opinion that there should be no problem of importing industrial acid oil in pursuance of REP licences obtained under the import policy of 1980-81 inspite of change in such policy in 1985-88 The learned assessees counsel submitted that the claim for deduction should have been allowed to the assessee. According to him, the assessee had saved his goods from being confiscated by the payment of a sum of Rs. 2,50,000 and he has used such goods in the processing activities and has earned the profit. The profit earned by him could not have been possible but for releasing the goods by paying the fine imposed by the customs authorities. According to him, the entire fine represents the additional cost incurred on the import of goods and such expenditure was incurred in the normal course of business. The learned assessees counsel heavily relied upon the principle laid down by the Delhi High Court in the case of CIT vs. Loknath & Co. (1984) 147 ITR 624 (Del) and also the decision of the Bombay High Court in the case of CIT vs. Pannalal Narottamdas & Co. (1968) 67 ITR 667 (Bom) and also the decision of the Indore Bench of the Tribunal in ITA No. 176/Ind/92 in the case of Jamiyatrai Rajpal, Indore, wherein similar contentions of the assessee have been accepted following the aforesaid cases. The Departmental Representative, on the other hand, strongly opposed the assessees contention. According to the learned Departmental Representative, the assessee failed to get necessary endorsement before importing the canalised item. According to the endorsement in the REP licence, only zinc and carbon products are allowed to be imported. The assessee has deliberately contravened the import policy of the Government by not getting proper endorsement and not following the procedure laid down in the import policy and also for importing industrial acid oil which was not permitted by the authorities. According to the learned Departmental Representative, the assessee purchased REP licences with full knowledge that he would not be eligible for import of industrial acid oil. Still the assessee imported in contravention. The learned Departmental Representative relied upon the following authorities Lakshmi Narayan Gouri Shankar vs. CIT (1975) 100 ITR 143 (Pat), Cawnpore Sugar Mills Ltd. vs. CIT (1992) 196 ITR 274 (All); Sanghi Bros. vs. CIT (1993) 201 ITR 303 (Raj) and CIT vs. Mathura Prasad (1965) 55 ITR 476 (All), to contend that the fines and penalties paid for infraction of law without good faith are liable to be disallowed.
We have carefully considered the rival contentions in the light of the material placed before us. The facts narrated are undisputed. The assessee has purchased REP licences with a view to import industrial acid oil which was required for the purposes of his business. This was possible under the industrial policy of 1980-81. There was a saving clause No. 131(1), in that policy which enables such transactions. The assessee in good faith had purchased these licences.
The assessees bona fides are supported by the decision of the Supreme Court in the case cited supra, which has more or less same facts. The assessee further obtained the opinion of the Consultancy Organisation of the State Govt. which is very much concerned with the import and export activities of the entrepreneurs of the State. Such authority has also expressed the opinion that the assessee could import industrial acid oil. The assessee obtained such opinion on 13th July, 1987. The assessee in pursuance of this has also opened letter of credit in the banking system before the import of the goods. The assessee placed contract for import of the goods. When the assessees goods were in shipment on 26th August, 1987, on coming to know that an endorsement was necessary, he applied before the authority for such endorsement. All these show that the assessee had honest and bone fide belief which was held in good faith that the import of industrial acid oil would be possible to him in pursuance of the REP licences, which was obtained under the import policy of 1980-81. The assessee at no point of time had any iota of doubt that there would be contravention of import policy of 1985-88. The whole transaction if one has to examine from the inception, it leaves no doubt that the assessee acted all along in good faith without any slightest intention of contravening the provisions of law. The conduct of the assessee at each stage amply demonstrate the bona fides of the assessee. In the case of CIT vs. Pannalal Norottamdas (cited supra), the assessee in the course of business has purchased certain bills of lading and other shipping documents from the party in respect of some consignment of goods imported from Africa. When the goods arrived in India and were sought to be cleared through the customs by the assessee on the basis of the documents purchased by it. It was found that the import was unauthorised and goods were confiscated and a penalty imposed.
The assessee paid penalty to save the goods from being confiscated. The Assessing Officer disallowed the claim on the ground that the penalty paid to the Collector of Custom was for infringement of Import Control Regulation and was, therefore, not allowable. The assessee contended that the amount paid was a part of the purchase price of the goods and also contended that he has purchased the documents in good faith. The AAC did not accept these contentions. In appeal before the Tribunal, the Tribunal took a view that the assessee is entitled to deduction, as the documents were purchased in good faith for consideration and the penalty was paid to safeguard the goods which had become its property and the penalty so represents the cost of the goods imported. The High Court has confirmed this decision of the Tribunal. The facts of this case are quite identical to the facts before the Bombay High Court. Again in the CIT vs. Loknath & Co., the Delhi High Court took a view that payment of compensation to regularise certain deviations of the building construction from the sanctioned plan in the assessees business of construction represents the saving or loss of the closing stock of the assessee. The Delhi High Court took a view that the expenses so incurred were to preserve or in other words to save the closing stock from extinction. The Delhi High Court further took a view that such payment was not in the nature of penalty for infraction of law and the claim has to be accepted. In our view, likewise the Indore Bench of the Tribunal in ITA No. 176/Ind/92 followed the same view and deleted the disallowance of similar nature. It, therefore, leaves no doubt in our mind that the Tax authorities have erred in law and on facts to have denied the assessees claim. In our view the payment of Rs. 2,50,000 represents the addition cost of goods which should be set off in arriving at the business profit in accordance with the commercially accepted principle. Considering the bona fides and good faith at all stages of the transaction, there is no deliberate contravention by the assessee.
However, before parting with the issue, we may deal with the citation relied upon by the Revenue in the case of Laxminarayan Gaurishankar (Patna High Court), the penalty for infraction of law in a commercial transaction was found by the Tribunal that such action was not done in good faith and, therefore, the penalty was liable for disallowance. In the case before us, we have already made it clear that the assessee had acted in good faith. In the case of Cawnpore Sugar Works. Ltd. (Allahabad), the facts were that there were various amounts of penalties aggregating to Rs. 64,014 under the provision of U.P Sugarcane Cess Act, 1956, and the U.P. Sugarcane (Purchase) Act, 1961, for non-payment of cane cess the assessee claimed them that such payment could not be made in time due to financial difficulties and there was no contumacious conduct. The Court in that case after considering the fact of the particular case has come to the conclusion that infraction of law is not a normal incident of business and such disbursement cannot be deducted while deducing the profit of business. In our view, the penalty was for regular defaults and looking to the facts of that case, the penalty was clearly for infraction of law and such infraction was deliberate. In Sanghi Bros. vs. CIT (supra), penalties were levied under sales-tax infraction of law. On the facts of that case, the Rajasthan High Court held that the penalties levied were not deductible under S. 37 of the IT Act. The amount of sales-tax collected by the assessee in that case was not deposited in the Govt. Treasury in accordance with the Sales-tax Law of the State and for that the Sales-tax Department levied penalty. The non-deposit of the sales-tax which was collected is a clear infraction of law and such infraction was clearly deliberate. We, therefore, do not find any support from this decision. In the light of the discussion, the assessees ground of appeal on the issue stands allowed.
3. The next issue relates to the addition of Rs. 4,76,144 representing the value of 30.444 MT of industrial acid oil received short during transit from Cochin to Bombay and Cochin to Indore. The undisputed facts giving rise to this issue are the first consignment of goods arrived at Cochin Port vide bill of lading dt. 31st August, 1987. The total weight in bill of lading was 724.621 MT of industrial acid oil. The goods were lying in Cochin port before they were finally transported to Bombay between 6th November, 1987 to 11th March, 1988. In the course of transit from exporting station till they reached the destination, there were different shortages. One such shortage was at the ship and the other was in transit. The shortage at ship was certified by the survey report and such shortage was actually allowed by the Assessing Officer. The Assessing Officer did not allow the transit shortage of the first consignment which was arrived at 19.880 MT The shortage was arrived at by the assessee on the basis of weighment certified by Hindustan Lever. All these details are filed before us in the paper book. The invoicing was done as per the certified weighment. Similarly, the second consignment of industrial acid oil arrived in drums and total weight according to the bill of landing dt. 26th August, 1987 was 163.725 MT of industrial acid oil. There was a shortage on account of 62 drums received in damaged condition as per the survey report. The Assessing Officer accepted the shortage as per survey report. However, the claim of the assessee was that there was a transit shortage, as the drums were received in leaking condition and such shortage was claimed at 10.233 MT. This shortage was arrived in the transport from Cochin to Indore at the assessees premises based on the actual receipt at the place of the assessee. The actual transportation from port was from 4th October, 1987 to 19th October, 1987. The Department has not accepted the assessess claim for shortage on the ground that the claim of the assessee has not been supported by independent agency and the transporter is responsible to deliver the exact quantity loaded as per the weighment and if any loss occurs in transit, the transported should have been responsible to make up the losses. Another ground on which the disallowance has been sustained is that such goods should have been insured and the assessee having not followed such practice should suffer the disallowance.
4. The learned assessees counsel relying upon the facts submitted that the shortage at ship has been accepted by the Assessing Officer and the transit shortage in respect of the first consignment is on the basis of weighment of Hindustan Lever, who purchased the goods. The assessee contended, the long gape between the arrival of the goods and the transportation of the goods to the point of destination are the reasons for such loss of weight. The assessees counsel submitted that in the case of second consignment, the shipment was in the drums and they arrived in a very bad damaged condition and whatever has been received has been accounted.
The learned Departmental Representative relied upon the observations made by the Assessing Officer and the CIT(A). In support of the contentions, the learned Departmental Representative further argued that the claim of the transit loss is not supported by any independent evidence and in the case of transit loss in respect of the second consignment, the same is based on internal evidences created by the assessee.
5. We have considered the rival contentions and perused the material. The Assessing Officer has himself accepted the shortage of industrial acid oil which occurred in the ship. The fact that there was shortage in the transportation, therefore, is partly accepted by the Department. The major reason given for shortage is that the goods were in the ship for nearly 4 months in the case of first consignment and for nearly 2 months in the case of the second consignment. The shortage is approximately 2.8% in the first case and 6.5% in the second case. The transit shortage in the first case has been evidenced by the bills of Hindustan Lever who were invoiced as per their certified weighment. The assessee, in our view, has no hand in determining the shortage. The entire claim of 19.880 MT in the first shipment, in our view, should have been allowed as deduction. The second transit shortage of 10.233 MT works out at 6.5% is slightly on the higher side and the material were lying at the Cochin port for about 2 months and the industrial acid oil was in drums, were in damaged condition as certified by the survey report is accepted while allowing the shortage at ship. The fact that there should have been higher amount of loss in transit in the case of second consignment cannot be wholly ruled out, looking at the condition of the drums in which the industrial acid oil was transported. However, since the assessee has no independent evidence to substantiate the loss of 10.233 MT, we direct the Assessing Officer to accept the loss of 5.233 MT as a transit shortage and in respect of balance 5 MT, transit shortage is directed to be disallowed for want of independent evidence in the matter, since the basis for the claim of this loss is only internal certificates of receipt of goods. The assessee gets partial relief.
6. In the result, the appeal is partly allowed.