Allahabad High Court
Agra Leatheries Ltd. vs Commissioner Of Income-Tax on 2 April, 1992
Equivalent citations: [1993]200ITR792(ALL)
JUDGMENT Om Prakash, J.
1. By order dated November 19, 1977, the Income-tax Appellate Tribunal (Delhi Bench-A, Delhi), has referred the following question under Section 256(1) of the Income-tax Act, 1961 (briefly "the Act, 1961"), for the opinion of this court :
"Whether, on the facts and in the circumstances of the case, the penalty of Rs. 46,500 paid by the assessee to the customs authorities on import of 'plastic sponges' constitutes an allowable deduction under Section 28 or 37(1) of the Income-tax Act ; or in the alternative, could the amount of the aforesaid penalty paid form part of the cost of the goods to be assessed?"
2. The facts as found in its order dated January 11, 1977, by the Appellate Tribunal in I. T. A. No. 4296 of 1974-75 pertaining to the assessment year 1971-72, briefly, are that the assessee had obtained licences for import from Agra Charen Kala Kendra Pvt. Ltd. and thereunder the assessee imported plastic sponges. The, Customs Authorities held that, under those import licences, the assessee could have imported only natural sponges and not plastic sponges but the latter had been illegally imported without any import licence. The Tribunal found that, under the import licences, import of natural sponges alone was permissible and that penalty has been levied for infraction of law to the tune of Rs. 46,500.
3. The assessee claimed deduction of the aforesaid amount as business expenditure which claim was negatived by the Tribunal on the ground that the penalty, having been paid for infraction of law, was not a permissible deduction. It was held that the aforesaid expenditure was not laid out wholly or exclusively for the carrying on of business. The Appellate Tribunal also rejected the contention of the assessee that if the said amount is not held to be business expenditure, then the assessee be permitted to add that amount towards the cost of the goods.
4. Before us, learned counsel for the assessee contends that the Tribunal erred in holding that the aforesaid amount had been paid as penalty. It is urged by him that the goods had been confiscated by the Customs Authorities on the ground that, under the import entitlements, the assessee was not entitled to import plastic sponges but natural sponges only. He says that for violating the terms of the import entitlements, the Customs Authorities merely imposed a fine of Rs. 46,500 to enable the assessee to take away the confiscated goods for home consumption. He also contends that the Tribunal was wrong in holding that only natural sponges could have been imported under the import entitlements.
5. Whether or not the true nature of the aforesaid amount was penalty, fine or something else and whether the assessee could have imported items other than natural sponges under the import licences, these questions are no more open to the assessee, inasmuch as the question referred to this court at the instance of the assessee by the Tribunal, does not raise any factual controversy. If the assessee believed that the sum of Rs. 46,500 was not penalty in nature but something else and that import of other items was also permissible, then the assessee could have sought rectification of the order of the Appellate Tribunal under Section 254(2) of the Act of 1961. The facts can no more be agitated before us because the correctness of the facts as found by the Tribunal was never disputed before it after its decision. No rectification was sought before the Appellate Tribunal raising the controversy that the Tribunal was in error in holding that penalty had been levied on it and that only natural sponges could have been imported under the import licence. Had the assessee applied for rectification before the Tribunal that the aforesaid amount was not paid as penalty, but as fine only to save the goods from being confiscated, then only there would have been a controversy relating to the true nature of the amount. Similarly, the Tribunal's order does not raise the controversy about the scope of the import licences. This court has only advisory jurisdiction and the opinion will be recorded on the basis of the facts found by the Appellate Tribunal on the question as referred to it. The question referred to this court by the Appellate Tribunal at the instance of the assessee raises the precise controversy whether or not the penalty of Rs. 46,500 is a permissible deduction.
6. The Appellate Tribunal clearly found that it is the assessee who imported plastic sponges in violation of the terms of import licence and, therefore, the penalty levied was not a permissible deduction. Import of plastic sponges being without import entitlement was contrary to law. The penalty was, therefore, levied for infraction of law.
7. 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 in contravention of certain rules and regulations, the penalty paid by the assessee for such conduct could not be regarded as wholly laid out for the purpose of the business, because the incurring of the said expenses has not been necessitated by the business but by the conduct of the assessee in trying to carry on the business in unlawful manner. We, therefore, do not see any legal infirmity in the view taken by the Tribunal.
8. Then comes the other submission of the assessee that, if the aforesaid amount is not held to be business expenditure, then the same be allowed to be added towards the cost of the goods. The submission was rejected by the Appellate Tribunal. If a given expenditure sought to be deducted as business expenditure is held not to be business expenditure then that cannot automatically be permitted to be added towards the cost of the goods. According to the factual finding of the Appellate Tribunal the correctness of which was not disputed before the Tribunal under Section 254(2) of the Act of 1961, the assessee had to pay the penalty because the assessee had imported plastic sponges in contravention of law without import licence in respect of them. This kind of expenditure cannot be attributed to the acquisition of goods and, therefore, cannot be allowed to be added towards the cost of goods.
9. Relying on CIT v. V. Pannalal Narottamdas and Co. [1968] 67 ITR 667 (Bom), learned counsel for the assessee urged that the penalty amount be allowed to be added towards the cost of the goods. The facts in the case of Pannalal Narottamdas and Co. [1968] 67 ITR 667 are that the assessee, a registered firm, in that case purchased in the course of his business, bills of lading and other shipping documents from certain parties in respect of a consignment of gum imported by them from Africa, When the goods arrived in India and were sought to be cleared through customs by the assessee on the basis of 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 the Sea Customs Act. The assessee paid an amount of Rs. 31,302 by way of penalty for saving the goods from being confiscated. In the course of assessment proceedings, the assessee claimed the aforesaid amount as an allowable deduction under Section 10 of the old Indian Income-tax Act, 1922. Whereas the Income-tax Officer and the Appellate Assistant Commissioner rejected the contention of the assessee, the Appellate Tribunal allowed the assessee to add the aforesaid amount towards the cost of the goods. Then the dispute was carried to the High Court of Bombay by the Revenue which held that the said amount was a permissible deduction as business expenditure and that the same could also be added to the cost of the goods, which view was taken by the Appellate Tribunal.
10. The Bombay High Court took this view on the fact that the assessee bona fide purchased the bills of lading and other shipping documents from other parties who imported the goods under the documents which were found to be unauthorised at the time of clearance. As there was no violation of law of the part of the assessee and as the goods had been imported by other parties under unauthorised documents, the Bombay High Court held that the assessee had to pay penalty to save the goods from being confiscated. On these facts, the expenditure was held allowable as business expenditure as well as allowed to be added towards the cost of the goods.
11. The facts of the case before us are entirely different, inasmuch as the assessee itself imported plastic sponges in place of natural sponges for which the import entitlement was there. Thus, the assessee itself violated the law and on that account it was visited with the penalty. If the submission of the assessee's counsel that the penalty amount be allowed to be added towards cost of the goods is accepted then that would tantamount to putting a premium on the illegality having been committed by the assessee. The penalty, having been paid for infraction of law, cannot be said to be a business expenditure and on the facts of this case, the assessee cannot be permitted to add the said amount towards the cost of the goods.
12. For the reasons, the whole question referred to us is answered in the negative and in favour of the Revenue.
13. The record of this case will be remitted to the Appellate Tribunal under Section 260(1) of the Act of 1961, to enable it to dispose of the case conformably to this judgment.