ITR/59/1999 15/ 15 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD INCOME TAX REFERENCE No. 59 of 1999 For Approval and Signature: HONOURABLE MR.JUSTICE JAYANT PATEL HONOURABLE MR.JUSTICE AKIL KURESHI ========================================================= 1 Whether Reporters of Local Papers may be allowed to see the judgment ? 2 To be referred to the Reporter or not ? 3 Whether their Lordships wish to see the fair copy of the judgment ? 4 Whether this case involves a substantial question of law as to the interpretation of the constitution of India, 1950 or any order made thereunder ? 5 Whether it is to be circulated to the civil judge ? ========================================================= COMMISSIONER OF INCOME TAX - Applicant(s) Versus VISHNURAM JIVRAM & CO. - Respondent(s) ========================================================= Appearance : MR MANISH R BHATT for Applicant(s) : 1, MR BHARGAV KARIA FOR MR RK PATEL for Respondent(s) : 1, ========================================================= CORAM : HONOURABLE MR.JUSTICE JAYANT PATEL and HONOURABLE MR.JUSTICE AKIL KURESHI Date : 04/07/2008 ORAL JUDGMENT
(Per
: HONOURABLE MR.JUSTICE AKIL KURESHI)
For
the assessment year 1989-90, at the instance of the Revenue,
following question of law has been referred for our consideration:
ýSWhether
on the facts and in the circumstances of the case and in law, the
Honourable Tribunal was justified in law in holding that fine of
Rs.97,000/- for contravention of provisions of customs Act was
deductible u/s 27 of the Act ?ýý
2. Short
facts leading to the present reference need to be noted at this
stage.
2. Assessee
was a firm engaged in the business of wire drawing. During the year
under consideration, the assessee claimed an amount of Rs.97,000/- by
way of business expenditure. Foundation for the said claim was that
silver weighing 29.050 k.g. and another consignment weighing 7.370
k.g. of the assessee was confiscated by the Additional Collector of
Customs. In appeal before the Customs and Gold Control Appellate
Tribunal (CEGAT for short), such confiscation was upheld. But the
assessee was given a option to pay fine of Rs.97,000/- in order to
redeem the confiscated goods.
2.2 The
assessee paid the said amount and claimed it as a deductible
expenditure under section 37 of the Income Tax Act, 1961 (‘the Act’
for short).
2.3 The
Assessing Officer disallowed the claim holding that the assessee
being an experienced business person should have carried all the
documents with the silver he was carrying. The expenditure therefore
could not be termed as one incidental to carrying the assessee’s
normal business. It was further held that the expenditure was
incurred for payment of penalty for breach of law. The Assessing
Officer, therefore, relying on the decision of the Apex Court in the
case of Haji Aziz and Abdul Shakoor Bros. v. C.I.T.,
reported in 41 ITR 350 disallowed the claim of the assessee. C.I.T.
Appeals confirmed the decision of the Assessing Officer. In further
appeal before the Tax Appellate Tribunal, the assessee succeeded. The
Tribunal allowed deduction of the said expenditure as business
expenditure holding that though the amount paid was termed as
penalty, the same was paid by the assessee in exercise of the option
conferred upon by him by law and that therefore the same should be
termed as business expenditure deductible under section 37 of the
Act. The Tribunal was also of the opinion that the amount paid by
the assessee was compensatory in character.
2.4 Reference
has been made before us, therefore, at the instance of the revenue.
3. Facts
are not really in dispute as already noted. Certain consignments of
silver belonging to the assessee were found to be contravening the
provisions of the Customs Act and in particular section 11-K, 11-L,
11-J thereof. For such breach, proceedings were carried out by the
Customs officials. Additional Collector, Customs holding that the
assessee had breached the provisions of the Customs Act ordered
confiscation of the goods. CEGAT, however, while confirming the
confiscation offered redemption to the assessee upon payment of
fine of Rs.97,000/-. Such option was exercised by the assessee. The
question, therefore, calls for our consideration is whether such
expenditure could be termed as one incurred for the purpose of
business so as to be permitted deduction thereof under section 37
of the Act.
4. Learned
counsel Shri M.R.Bhatt appearing for the Revenue submitted that the
assessee had indulged in illegal activity and had breached the
provisions of the Customs Act. Any penalty that the assessee
therefore paid for such breach cannot be given set off against his
income. It was contended that essentially the Customs Authorities had
ordered confiscation of the goods and it was only by way of an option
that the assessee could redeem such confiscation by payment of fine.
He, therefore, contended that the fine paid by the assessee was
purely penal in nature and not compensatory. Relying on various
decisions of the Apex Court as well as of the High Courts and in
particular in the case of Haji Aziz (supra), he contended that the
Tribunal erred in permitting deduction of such expenditure incurred
by the assessee.
5. Placing
heavy reliance on the decision of Haji Aziz (supra), it was
contended that the Tribunal committed grave error in allowing the
deduction. In the case of Haji Aziz (supra), the assessee who was
carrying on the business of importing dates from abroad and
selling in India had imported certain quantity of dates from Iraq by
steamer and country craft. At the time when the import was made,
import of dates by steamer was prohibited. Dates which were imported
by steamer were confiscated by the Customs Authorities, but the
assessee was given an option to pay fine and upon his paying the
fine, the dates were released. In computing its profit, the assessee
sought to deduct the amount paid as fine as an allowable
expenditure under the Income Tax Act. Apex Court, however, turned
down the claim holding that no expenditure which was paid by way of
penalty for breach of law even though it might involve no personal
liability could be said to be an amount wholly and exclusively paid
for the purpose of business of the assessee within the meaning of
section 10(2)(xv) of the Act and the fine paid by the assessee was
not an allowable deduction under the said section. It was observed
that the expenses which are permitted are deductions which are made
for the purpose of carrying on business, that is to say, to enable a
person to carry on and earn profit in that business. It is not
enough that the disbursements are made in the course of or arise out
of or concerned with or made out of the profits of the business, but
they must also be for the purpose of earning the profits of the
business. They cannot be deducted if they fall on the assessee in
some character other than that of a trader.
6. Reliance
was placed on the decision of the Apex Court in the case of Maddi
Venkataraman & Co. (P) Ltd. v. C.I.T reported in 229 ITR
534. In the said decision, the Apex Court relying on the earlier
decision of Haji Aziz (supra), disallowed the claim of the assessee
for deduction of the expenses incurred in the transaction carried out
in violation of the provisions of FERA. The assessee company was
carrying on the business of exporting tobacco. In the year 1968, it
had accumulated certain quantity of sub-standard tobacco which it
could not export for three years. Since the tobacco was of
substandard quality, the same could not be sold at the floor price
fixed by the Government of India. According to the assessee, it had
no alternative but to sell the tobacco at a discount of 20% to a
Singapore party. On paper, therefore, the assessee received full
sale price from the Singapore party, but in reality, 20% thereof was
remitted back to the Singapore party. A sum of Rs.2,88,000/- so
remitted was claimed as business expenditure. The assessee claimed
deduction from its earning. The Supreme Court disallowing the claim
held that the assessee had indulged in transactions in violation of
the provisions of FERA. The assessee was engaged in tobacco business
and was expected to carry on the business in accordance with law.
If the assessee contravened the provisions of FERA to cut down its
losses or to make larger profits, it was only to be expected that
proceedings would be taken against for violation of that Act. The
expenditure incurred for evading the provisions of the Act and also
penalty levied for such evasion cannot be allowed as deduction. It
was observed that it would be against the public policy to allow the
benefit of deduction under one statute of any expenditure incurred
in violation of the provisions of another statute or any penalty
imposed under another statute. It was further observed that if such
deductions are allowed, penal provisions of FERA could become
meaningless. It has to be borne in mind that evasion of law cannot
be a trade pursuit.
7. Reliance
was also placed on the decision of the Madhya Pradesh High Court in
the case of C.I.T. v. Jamiyatrai Rajpal, reported in 232 ITR
437 wherein the assessee had imported palm kernel seeds. The
consignment was not covered under the open general license. Customs
Authorities, therefore, confiscated the consignment under the
Customs Act. The assessee got the goods released after paying Rs.27
lacs as fine and claimed the said amount as business expenditure.
The High Court relying on the decision of Haji Aziz (supra) turned
down the claim holding that amount of Rs.27 lacs represented fine
for violation of Customs Act and was therefore not an allowable
deduction.
8. Reliance
was placed on the decision of a Division Bench of this Court in the
case of Orient Trading Co. v. C.I.T., reported in 202 ITR
481. In the said case, the assessee was required to pay penalty of
Rs.28,843/- under the Gujarat Sales Tax Act as it had not paid the
tax within the stipulated time. The assessee claimed the said payment
as interest and claimed deduction thereof under section 37 of the
Income Tax Act. The High Court negatived the claim holding that the
payment was by way of penalty and the same was not compensatory in
nature.
9. On
the other hand, learned advocate Shri Bhargav Karia appearing for the
assessee submitted that the assessee had paid fine in lieu of
confiscation and the payment was, therefore, compensatory in nature.
Relying on the provisions of section 125 of the Customs Act, he
strenuously urged that the fine paid by the assessee was not penal,
but compensatory in nature.
10. Reliance
was placed on the decision of the Apex Court in the case of
Dr.T.A.Quereshi v. C.I.T., reported 287 ITR 547. In the said
case, the assessee was found indulging in illegal activity of selling
heroin. A consignment of heroin belonging to the assessee was seized.
The assessee claimed deduction of value of such consignment as loss
of stock in trade. His claim was allowed by the Apex Court observing
that though the assessee had committed a highly immoral act in
illegally manufacturing and selling heroin, the case ought to be
decided on legal principles and not on moral values. In the said
decision, one may however notice that reliance was placed in the
case of CIT v. Piara Singh, reported in 124 ITR 40 wherein
the Apex Court allowed by way of business loss to the assessee the
amount of currency confiscated by the authorities as the assessee
was carrying on smuggling activity.
11. Reliance
was placed on the decision of the Apex Court in the case of C.I.T. v.
Ahmedabad Cotton Mfg. Co. Ltd., 2005 ITR 163, wherein the assessee, a
textile company, instead of producing and packing minimum quantity
of specified type of clothes as required under the Government order,
paid certain sum of money to the Textile Commissioner by exercising
option available to it and claimed such expenditure as the business
expenditure. The Apex Court allowed the claim holding that the
amount paid by the assessee was in the nature of penalty, but was an
exercise of option given to it by the law or the statutory scheme
and the expenditure was thus in course of business as a measure of
business expediency and the amounts were therefore allowable as
business expenditure under section 37 of the Act.
12. Reliance
was also placed on a decision of the Madras High Court in the case of
C.I.T. v. N.M.Parthasarthy, 212 ITR 105 in which a Division
Bench of the Madras High Court was pleased to hold that fine paid by
the assessee in lieu of confiscation of goods under the Customs Act
should be allowed to be deducted from the income of the assessee.
The Bench was of the opinion that such fine cannot be stated to be
penal in nature notwithstanding its nomenclature.
13. From
the material on record, it can thus be seen that certain consignments
of silver belonging to the assessee was seized. It was found that
the assessee had contravened the provisions contained in section 11K,
L and J of the Customs Act. Quantity of silver was, therefore,
liable for confiscation under section 113 of the Customs Act. In
exercise of the powers under section 125 of the Customs Act, however,
CEGAT offered the option to the assessee to pay fine in lieu of
confiscation.
14. Section
113 of the Customs Act makes certain goods liable to confiscation.
Clause (l) thereof in particular provides that any specified goods
in relation to which any provisions of Chapter IV-B or any rule under
the Act for carrying out the purposes of that Chapter have been
contravened shall be liable to confiscation. Chapter IV-B which
contains besides others, section 11K, L and J, pertains to prevention
or detection of illegal exports of goods. These provisions are made
in Chapter IV-B for proper maintenance of record, movement of goods,
etc. for prevention or detection of illegal exports of goods and
contravention of any of the provisions may result into confiscation
of the goods. Section 125 of the Customs Act, however permits the
Authority under certain circumstances to give an option to the owner
or the person in possession of such goods to pay fine in lieu of
confiscation. Section 125 of the Customs Act reads as under:
ýS125.
Option to pay fine in lieu of confiscation. (1) Whenever
confiscation of any goods is authorised by this Act, the officer
adjudging it may, in the case of any goods, the importation or
exportation whereof is prohibited under this Act or under any other
law for the time being in force, and shall, in the case of any other
goods, give to the owner of the goods or, where such owner is not
known, the person from whose possession or custody such goods have
been seized, an option to pay in lieu of confiscation such fine as
the said officer thinks fit:
Provided
that, without prejudice to the provisions of the proviso to
sub-section (2) of section 115, such fine shall not exceed the
market price of the goods confiscated, less in the case of imported
goods the duty chargeable thereon.
(2) Where
any fine in lieu of confiscation of goods is imposed under
sub-section (1) the owner of such goods or the person referred to in
sub-section (1) shall, in addition, be liable to any duty and charges
payable in respect of such goods.ýý
Under
sub-section (1) of section 125 of the Customs Act, thus when the
goods being confiscated of which the importation or exportation is
prohibited under the Act, it is discretionary on the competent
authority to offer redemption. In other cases, however, option to pay
fine in lieu of confiscation is to be granted.
15. Combined
reading of the above noted provisions would reveal that fine that
the owner or the person in possession of the goods pays to the
Customs Authorities is to avoid confiscation. Confiscation is to be
ordered since it is found that the owner has breached certain
provisions of the Act. To our mind, therefore, nature of fine is
penal and cannot be termed as compensatory.
16. Facts
in the case on hand are very similar to those involved in the case of
Haji Aziz (supra) decided by the Apex Court. As already noted, it
was a case wherein the assessee had imported consignment of dates
through shipment which was prohibited for which goods were liable to
be confiscated. The assessee was, however, given an option to pay
fine in lieu of confiscation which the assessee agreed to pay. Fine
so paid was not allowed as business expenditure by the Apex Court.
The ratio laid down therein, in our view, would squarely apply in the
present case also.
The
Apex Court in the said decision observed that no expenditure which
was paid by way of penalty for breach of law could be said to be an
amount wholly and exclusively laid for the purpose of the business
of the assessee.
A
Division Bench of this Court, as noted above, in the case of Orient
Trading Co. (supra) had disallowed the interest paid by the assessee
for delayed payment of sales tax dues terming such interest as penal
interest and not compensatory in nature.
Madhya
Pradesh High Court in the case of CIT v. Jamiyatrai Rajpal (supra),
relying on the case of Haji Aziz had turned down the claim of the
assessee for deduction of expenditure towards payment of fine for
violation of Customs Act.
17. The
case of Dr.T.A.Quereshi (supra) decided by the Apex Court, reliance
on which was placed by the assessee, is based on vitally different
factual background. It was a case wherein the assessee was involved
in illegal business of trading in heroin. The assessee claimed
deduction of the value of heroin seized from his gross income
claiming it to be loss of stock in trade. Relying on the principles
laid down in the case of CIT v. Piara Singh (supra), the Apex Court
allowed his claim. Here, however, there is discernible line of
distinction. In the case of Piara Singh and in the case of
Dr.T.A.Quereshi wherein assessee’s income from wholly illegal
activities were sought to be taxed, in that context, it was found
that the loss of stock in trade should be granted deduction from the
income of the assessee. In case of Haji Aziz (supra), however, the
assessee was involved in legal business who claimed deduction for
expenditure incurred for payment of penalty. This distinction has
been brought out by the Apex Court in the case of Maddi Venkataraman
& Co. (P) Ltd. (supra) while observing that if a sum has to be
paid by an assessee because in conducting his business he had acted
in a manner which had rendered him liable for penalty for infraction
of law, it could not be claimed as a deduction and that infraction
of law is not a normal incident of business. The Apex Court observed
that one exception to this rule recognized by the courts is where
the entire business of the assessee is illegal and that income is
sought to be taxed by the Income Tax Officer, then the expenditure
incurred in the illegal activities will also have to be allowed as
deduction. But if the business is otherwise lawful and the assessee
resorts to unlawful means to augment his profits or reduce his loss,
then the expenditure incurred for these unlawful activities cannot be
allowed to be deducted.
18. In
view of the above decisions of the Apex Court and in view our our
opinion that the expenditure incurred by the assessee for payment of
fine in lieu of confiscation was penal in nature, we are unable to
uphold the view of the Tax Tribunal.
19. It
is true that a Division Bench of the Madras High Court in the case of
C.I.T. v. N.M.Parthasarthy (supra) has taken a different view under
very similar factual background. However, we are unable to persuade
ourselves to adopt the said view in view of the decisions of the
Apex Court in the case of Haji Aziz (supra) and in the case of Maddi
Venkataraman & Co. (P) Ltd.(supra). As noted, Madhya Pradesh
High Court has also in the case of C.I.T. v. Jamiyatrai Rajpal
(supra) taken a similar view.
20. To
our mind, the ratio laid down by the Apex Court in the case of Haji
Aziz (supra) has not been diluted or deviated by the subsequent
decisions and in fact it is reiterated in the case of Maddi
Venkataraman & Co. (P) Ltd. (supra). In the case of Piara Singh
and later on in the case of Dr.T.A.Quereshi (supra)the income of the
assessee derived from wholly illegal activities was sought to be
taxed which is not the situation in the present case.
21. In
the result, we hold that the Tribunal erred in allowing the
deduction of fine paid by the assessee in lieu of confiscation of its
goods under the Customs Act. We, therefore answer the question in the
negative, i.e. in favour of the Revenue and against the assessee.
The reference is disposed of accordingly.
(Jayant
Patel, J.)
(Akil
Kureshi, J.)
(vjn)