Garden Silk Weaving Factory vs Commissioner of Income Tax

The following question has been referred to this court by the Income Tax Appellate Tribunal, Ahmedabad, u/s 256(2) of the Income Tax Act, 1961 :

"Whether, on the facts and in the circumstances of the case, the assessee is entitled to the deduction of Rs. 4,18,000 paid by way of penalty imposed by the customs authorities for breach of section 112 of the Customs Act ?"

The assessee is engaged in manufacturing textiles. It also exports goods manufactured by it. As a result of exports made by it, it became entitled to two licences during the calendar year 1967. The licences were issued on June 25, 1967. In view of the facts now found by the authorities, it can be said that one import licence was of the value of Rs. 12,708 and the other was of the value of Rs. 8,402. But the copies of licences which the assessee got showed figures as Rs. 1,12,708 and Rs. 48,402 instead of Rs. 12,708 and Rs. 8,402. It was on the basis of these two licences that the assessee imported goods. The said goods were seized by the customs authorities as it was found that they were not imported against valid licences inasmuch as the valid licences were for smaller value. Ultimately, in adjudication proceedings, penalty of Rs. 3,43,000 in respect of one licence and Rs. 75,000 in respect of the other licence was imposed upon the assessee. That order was passed by the Collector on April 23, 1971. The assessee had earlier claimed this very amount of Rs. 4,18,000 as deductible business expenditure while submitting the return of its income for the assessment year 1968-69. It also appears that assessment for the assessment year 1968-69 was not Customs. Therefore, while filing the return for the assessment year 1972-73, the assessee again claimed deduction of Rs. 4,18,000 which was paid by way of penalty. The Income Tax Officer disallowed the claim of the assessee on the ground that the claim pertained to the assessment year 1968-69, and that therefore, the question of reconsidering the same did not arise for the assessment year 1972-73. The assessee preferred an appeal to the Appellate Assistant Commissioner who upheld the order of the Income Tax Officer and dismissed the appeal. The assessee then approached the Tribunal by way of second appeal but that appeal also met with the same fate. The assessee then moved the Tribunal for referring the abovestated question to this court u/s 256(1) of the Act, but that attempt also failed. Thereafter, the assessee moved this court u/s 256(2) of the Act and, pursuant to the order made by this court, the abovestated question has been referred to this court.

The claim for deduction made during the assessment proceedings for the year 1968-69 was rejected by the Income Tax Officer following the decision of the Supreme Court in Haji Aziz and Abdul Shakoor Bros. Vs. The Commissioner of Income Tax, Bombay City II, . The appeal filed against that order before the Appellate Assistant Commissioner and the Tribunal failed. Then, on a reference made to this court, it was held that the amount of penalty paid by the assessee did not represent the loss suffered by it in any commercial transaction. It was a penalty paid by it for committing breach of law. The assessee, therefore, was not entitled to deduct it as business expenditure. This court held that an expenditure is not deductible unless it is a commercial loss in trade and penalty imposed for breach of the law during the course of trade cannot be described as such. If a sum is paid by an assessee conducting his business, because, in conducting it, he has acted in a manner which has rendered him liable to penalty, it cannot be claimed as a deductible expense. Even while laying down that principle, this court observed that there is a distinction between an infraction of the law committed in the carrying on of a lawful business and an infraction of law committed in a business inherently unlawful and constituting a normal incident of it. In view of this judgment of this court in the case of the assessee itself and in respect of this very amount, the question referred to us will have to be answered in the negative, that is, against the assessee and in favour of the Revenue.

It was, however, submitted by the learned advocate for the assessee that, in this case, it is not possible to say that the assessee had forged the said two licences or that the assessee had used these licences knowing that they were forged document. For this purpose, he drew our attention not only to the two judgment of this court, but also to the order passed by the Collector of Customs. He then submitted that the assessee treated the said two licences as valid licences, imported goods and, therefore, the amount which the assessee was required to pay by way of penalty should be regarded as expenditure incurred during the course of business even though the said expenditure was required to be incurred as a result of infraction of law. He submitted that, if the goods were confiscated and in compliance with an order for payment of amount in lieu of confiscation, if the assessee had got the goods released, that would have added to the cost of the goods and the assessee would have got all other benefits on that basis under the Act. He also submitted that, if a smuggler can get deduction while computing his income derived from the business which is illegal, there is no reason why the assessee of this type should not get it. He also relied upon two decisions of the Bombay High Court in Commissioner of Income Tax, Bombay Vs. Pannalal Narottamdas and Co., and Commissioner of Income Tax Vs. P.C. Tangal, and one decision of the Calcutta High Court in Apeejay (Private) Limited Vs. Commissioner of Income Tax (Central), . He particularly drew our attention to the observations in the judgment of the Calcutta High Court with respect to the decision of the Supreme Court in Commissioner of Wealth-tax, Gujarat Vs. S.C. Kothari, . On the basis of these judgment, he submitted that, unless it is shown that the assessee was at fault and that he had acted in defiance of law, he should not be deprived of the benefit of deduction as business expenditure of that amount which he is required to pay as a result of it being held subsequently that what he did earlier was not in accordance with law. In our opinion, this court having considered that question in the assessee''s own case and having held that the said amount did not represent the loss suffered by it in a commercial transaction, it is not possible for us to take a different view. This reference is answered accordingly. No order as to costs.

The learned advocate for the assessee prays for a certificate u/s 261 of the Act on the ground that this is a fit case for leave to appeal to the Supreme Court. We are told that, against the judgment of this court in the assessee''s own case in respect of the very claim for the assessment year 1968-1969, the Supreme Court has granted special leave to appeal and the assessee''s appeal is pending before the Supreme Court. For that reason and also because of the judgment relied upon by the learned advocate for the assessee, we are of the opinion that this is a fit case in which the certificate as prayed for should be granted. We, therefore, certify this to be a fit case for appeal to the Supreme Court.