Indian Kanoon - Search engine for Indian Law

31. By adverting our attention to the order dated 14/15-2-1989 passed by the Honble Supreme Court, learned counsel submitted that the compensation amount is not towards penalty, fee or fine; the court merely settled all the civil disputes pending against the assessee-company and its parent company by awarding damages. Emphasizing the terms of the order "not as fine, penalty or punitive damage", learned counsel submitted that the tax authorities were not justified in treating it as a compensation for the criminal negligence on the part of the assessee-company. Learned counsel also submitted that while disposing of the appeal for the assessment year 1990-91, Commissioner (Appeals) realised that the compensation is not against criminal negligence of the assessee-company and, therefore, he sought to consider the issue on the limited ground i.e., whether the expenditure is capital or revenue in nature. Adverting our attention to the appellate order for the assessment year 1985-86, learned counsel submitted that the Commissioner (Appeals) treated the expenditure as not incidental to the business, by placing reliance on the observations of Lord Chancellor in the case of Strong & Co. of Romsey Ltd. (supra) page 215 whereas, the said observations were not accepted by the House of Lords in the later decisions and even the Honble Supreme Court of India has not accepted the principle laid down by the Lord Loreburn, i.e., in the aforecited case. To explain the position succinctly, learned counsel has taken us through the decision of the Honble Supreme Court in the case of Indian Aluminium Co. Ltd. v. CIT (1972) 84 ITR 735. The Apex Court held that when a person has a dual capacity, of a trader-cum-owner, as long as the expenditure is in his capacity of trader, it has to be allowed as deduction. Learned counsel, therefore, submitted that the decision in the case of Strong & Co. on which the tax authorities have placed heave reliance, is no longer good law as held by the Apex Court and further submitted that the expenditure in the instant case is wholly and exclusively incurred for the purpose of business, inasmuch as, the factory was constructed and run by the assessee-company to manufacture and sell fertilizers and in order to carry on such business, it is necessary to maintain sufficient stock of chemicals, etc.; Explaining further it was submitted that varieties of poisonous material is used as raw material in order to manufacture pesticides and in this regard numerous statutory regulations were complied with by the assessee and clearance obtained from the Government of India from time to time, and maintained the factory as per norms in order to face the regular checks by the concerned departments. All these indicate that the business carried on by the assessee was in the normal course as is expected of but, unfortunately, disaster was possibly due to water entering into the gas chamber and the consequent chemical reaction resulting in escapement of poisonous gas into the atmosphere which happened in spite of best possible care taken by the assessee and, therefore, the accident and resultant expenditure are inherent and was in the normal course of business, allowable as business expenditure. He has also taken us through the material papers to submit that at the time of erection of the plant and machinery, best possible design available in the world was taken and the best possible training available at that point of time was imparted so as to run the factory smoothly. Larsen and Toubro was given the work of fabrication; American Company supplied the design and imparted training; in spite of all precautions the mishap occurred. Considering the facts and circumstances, it cannot be said that it is due to negligence on the part of the assessee-company and much less can it be attributed to criminal negligence on the part of the company/employees of the assessee-company. Learned counsel submitted that only when damages payable are punitive in nature, the expenditure incurred thereon suffers disallowance, whereas, in the instant case, the Supreme Court order dated 14/15-2-1989 and the subsequent orders make it clear that the damages were connected to the civil liabilities arising out of the accident and this can be further seen from the fact that the criminal complaints filed against the company and its directors were not included in the settlement.

34. On the other hand, learned counsel, appearing on behalf of the revenue, submitted that the claimants are, by and large, outsiders i.e., the claim is not either by the employees of the company or by any trader connected to the assessee-company and, therefore, the payment is not directly or indirectly connected to the business of the assessee. Learned counsel further submitted that the payment was made to the Government of India and not to the claimants which is also a significant factor in order to appreciate as to whether the expenditure is connected to the business or not. Highlighting as to how the negligence of the assessee-company in maintaining the tank resulted in the accident killing thousands of innocent people, the learned counsel submitted that the expenditure incurred by the assessee is not in its capacity as trader and the decision in the case of Strong & Co. applies to the facts and circumstances of this case on all fours. Learned counsel has taken us through the relevant observations of the Commissioner (Appeals) to contend that the assessee-company has not maintained the factory in proper condition as per the report of Dr. Varadrajan & CBI and, therefore, the compensation is on account of criminal negligence of the assessee-company. It was further submitted that the Government of India has proceeded only against the USA company and the first order passed by the Honble Supreme Court dated 14-2-1989 also indicates that the compensation is payable by the parent company of the assessee whereas, to effectuate the terms and conditions of that order the assessee-company was joined as necessary party in the order dated 15-2-1989 wherein a part of the total compensation was directed to be paid by the assessee-company. Such circumstances would highlight the fact that the compensation is payable by USA company and, therefore, cannot be treated as expenditure by the assessee-company wholly and exclusively connected to its business. Explaining the reasons for using the words not as fine, penalty or punitive damage passed in the order issued by the Supreme Court, learned departmental counsel submitted that the dominant reason was to ensure that the individual victims of Bhopal gas tragedy should receive the compensation and but for the specific expression not as fine, penalty or punitive damage, there is likelihood of the compensation not reaching the individual, inasmuch as, amount paid by way of fines and penalties, under law, goes to the Crown. He, therefore, submitted that the background of settlement shows that the compensation is connected to the criminal negligence of the assessee-company though stated to be not in the nature of fine, penalty, etc. Learned counsel further submitted that immediately after the accident, the unit was closed and hence there was no business in the unit during the period when the compensation amount was payable and, therefore, the expenditure incurred by the assessee is not allowable as deduction against the income of the assessee from other units. Referring to the decision of the Honble Supreme Court in the case of Indian Aluminium Co. Ltd. (supra) and the other decisions relied upon by the assessees counsel, it was submitted that all the cases are distinguishable as none of the cases refers to the accident and that too of such a magnitude. He also submits that the assessee-company did not debit the expenditure to the profit & loss account as it was advised that the liability does not attain finality till the review petition is disposed of. Therefore, he contends that the claim of deduction was rightly not entertained by the tax authorities in the assessment year prior to 1992-93.