ORDER
M.V. Nayar, A.M.:
The grievance projected in this appeal by the revenue is that the learned Commissioner (Appeals)-VI was not justified in deleting the addition of Rs. 1,30,000 paid as redemption fine to the Customs department, which is in violation of law and also erred in deleting the addition of Rs. 13,000 paid as personal penalty imposed by the Customs department, which is in violation of law.
2. The assessed is a partnership firm and carries on its business of dealing in dry fruits at Delhi as head office and Amritsar as branch office. The firm had furnished its return of income on 26-2-1993, declaring the total income of Rs. 3,91,030. In respect of this assessment year, the original assessment was completed under section 143(3) vide order dated 28-2-1994, on an income of Rs. 4,63,774. The case was reopened under section 148 on the basis of information received from the Customs department through the officer of ADI (Investigation), Unit III, vide letter No. 622 dated 24-8-1994, that the firm had paid redemption fine of Rs. 1,30,000 along with personal penalty of Rs. 13,000 to the Asstt. Collector of Customs, Group I, New Customs House, Bombay, in respect of dry dates it had imported from Pakistan.
3. The Addl. Collector of Customs vide his order dated 23-1-1992, imposed a total redemption fine of Rs. 1,30,000 in respect of three Bills of Entry, i.e., No. 6938, dated 25-11-1991, 1118, dated 4-12-1991, and 6689, dated 25-11-1991. Apart from this, the Addl. Collector of Customs imposed a personal penalty of Rs. 13,000 on the firm in respect of these Bills of Entry.
4. It is the case of the revenue that the firm had imported dry dates from Pakistan through the three Bills of Entry, as mentioned above. In each of the invoice of the sender of the goods is M/s Sind Punjab Traders. The weight of the dry dates imported has been mentioned as 125 MT in each of the consignment of the three Bilis, of Entry and the number of bags mentioned for each of the consignment was 1,984 bags. The weight of each of the bag with the contents of the goods was 63 kg. and the gross weight was 65 kg. However, according to the customs authority, against the declared net weight of 375 MT of the entire consignment of goods, the actual weight was found to be 390.04 MT against the three Bills of Entry mentioned above. The Addl. Collector of Customs, Group I, accordingly worked out that the value of excess goods works out to be Rs. 1,20,000. Thus, according to the Addl. Collector of Customs if this was not detected, then it would have resulted in the short levy of customs duty on the goods imported by the firm. He accordingly ordered that the goods having been in excess of the weight declared by the firm in respect of the Bills of Entry Nos. 6938, 1118 and 6689, are liable to be confiscated. However, the firm was given an option to get the goods released on payment of redemption fine, which was worked out by him, as under :
Rs.
B/E No. 6938/25-11-1991
50,000
B/E No. 1118/4-12-91
30,000
B/E No. 6689 25-11-1991
50,000
Total redemption fine
1,30,000
Apart from this, the personal penalty of Rs. 13,000 was also levied under the Customs Act, 1962.
5. The assessed-firm was called upon by the assessing officer as to the treatment he meted out to the redemption fine of Rs. 1,43,000, i.e., Rs. 1,30,000 plus Rs. 13,000 paid to the customs authority in its books of accounts. The firm produced its books of accounts and explained that the impugned payment of Rs. 1,43,000 was debited to the dry dates account. The assessing officer also called upon to the firm that the payment made by it to the customs authority is in the nature of fine and following the judgment of Hon’ble Supreme Court of India in the case of Haji Abdul Shakur & Brothers v. CIT (1961) 41 ITR 350 (SC) cannot be allowed as business deduction. It was held by Hon’ble Supreme Court of India in this case according to assessing officer that penalty levied under Sea Customs Act for importing a banned item and the penalty paid for such import cannot be allowed as deduction while computing the income. The assessing officer, therefore, disallowed the payment of Rs. 1,43,000 made by the firm to the custom.s Authority as an allowable expenditure.
6. The assessed-firm filed an appeal to the Commissioner (Appeals) against the addition of Rs. 1,43,000. The Commissioner (Appeals) considered the submissions made on behalf of the firm. The Commissioner (Appeals) referred to the order imposing the redemption fine on the firm. It is noted by the Commissioner (Appeals) that the firm had imported dry dates from Pakistan vide Bills of Entry No. 6938, dated 25-11-1991, 1118, dated 4-12-1991, and, 6689 dated 25-11-1991. The clearance of the goods was sought by the firm under OGL (i.e., Open General license). It was observed by the customs authority in its order that the dry and wet dates were shifted from OGL with effect from 5-9-1991. The firm had imported the dry dates covered under the Bills of Entry mentioned in the customs order under the LC dated 3-9-1991, which was opened through Oriental Bank of Commerce, Amritsar. The Customs department picked up these Bills of. Entry on the assumption that the LC against which the import was made might have been manipulated by the firm so as to make the import eligible under OGL. However, it was noticed by the Customs department in its order that the LC for the import of goods was in fact opened on 3-9-1991, for an amount of Rs. 30 lacs by the firm. In view of the explanation given by the firm about the opening of LC, the doubt which was lurking in the mind of the customs authority about the import being made as OGL stood clarified. The learned Commissioner (Appeals), therefore, analysed the entire order of the Addl. Collector of Customs and was of the opinion that the firm was imposed the redemption fine on the following count :
(a) The firm misdeclared the tare weight of the bags. The tare weight of the bag was declared at 2 kg. whereas on actual examination and weighment by the customs authority, it was found to be 1. 1 kg.
(b) Against the declared net weight of the consignment as a whole of imported dry dates was 375 MT against the actual net weight found to be 390.4 MT.
(c) The customs authority gave an option to the firm to get the goods released on payment of redemption fine as is the provision under Customs Act, 1962. The learned Commissioner (Appeals) was of the opinion that where penalty was imposed under any statute, the assessing authority is required to examine the scheme of the provisions notwithstanding the nomenclature of the import as given by the statute to find out whether it was compensatory or penal in nature.
7. The reliance was placed on the following decisions by the learned Commissioner (Appeals)
(i) Prakash Cotton Mills (P) Ltd. v. CIT (1993) 201 ITR 684 (SC) .
(ii) CIT v. N.M. Parthasarathy (1995) 212 ITR 105 (Mad).
(iii) CIT v. Ahmedabad Cotton Manufacturing Co. (1994) 205 ITR 163 (SC) .
8. The Commissioner (Appeals) in fact heavily relied on the case of CIT v. N.M. Parthasarathy (supra). In this judgment of Hon’ble Madras High Court considered both the cases reported in (1993) 201 ITR 684 (SC) (supra) and (1994) 205 1TR 163 (SC) (supra) and were discussed and applied to the facts of the case while coming to the conclusion that under section 125 of the Customs Act, 1962, an option has been given to the owner assessed to pay in lieu of such confiscation a fine and clear the goods on exercising the option. The amount thus paid to the Customs Department is compensatory in nature and was held as deductible as an expenditure under section 37 of the Income Tax Act. It was also noted by the Commissioner (Appeals) while referring to the case (1995) 212 ITR 105 (Mad) (supra) that the rule laid down in the case of Haji Aziz & Abdul Shakur Bros. v. CIT (supra) cannot be stated to have laid down any flexible rule of law to be followed in all eventuality and situation with regard to deductibility of fine and penalty. The Madras High Court referring to the decision in (1994) 205 ITR 163 (SC) (supra) held that what needs to be done by an assessing officer is to examine the claim of an assessed though called a penalty to ensure whether the law or scheme under which the amount was paid requires such payment to be made as penalty or as some thing akin to the penalty which is imposed by way of punishment for breach in infraction of law or the statutory scheme. If the amount so paid is found to be not a penalty or something akin to the penalty due to the fact that the amount paid by the assessed was in exercise of the option conferred upon him under the very law or scheme, then one has to refer such a payment as business expenditure of the assessed and consequently allowable under section 37 of the Income Tax Act as an incidence of business laid out and expended wholly and exclusively for the purposes of business.
9. The Commissioner (Appeals) relying on the above referred judgment and quoting from Madras High Court in (1995) 212 ITR 105 (Mad) (supra), came to the conclusion that the disallowance of Rs. 1,43,000, consisting of Rs. 1,30,000 and Rs. 13,000 paid to the customs authority is an allowable expenditure while computing the income of the firm and consequently, deleted the addition made on this account.
10. The learned Departmental Representative argued that an Explanation has retrospectively been inserted with effect from 1-4-1962, after section 37(l). This Explanation was added by the Finance (No. 2) Act, 1998. The Explanation inserted is as under
“The Finance (No. 2) Act, 1998
New Explanation has retrospectively been inserted with effect from 1-4-1962, after section 37(l). For the removal of doubts it is hereby declared that
(a) any expenditure incurred by an assessed for any purpose
which is an offence; or
which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure.”
It is thus, sought to be argued by the learned Departmental Representative that in view of the retrospective amendment, the’payment made to the Customs Authority towards redemption fine is an expenditure which is prohibited by law and, therefore, should not be allowed as deduction while computing the income of the firm.
11. The learned Departmental Representative referred to the decision of Hon’ble Delhi High Court in the case of Free Wheels India Ltd. v. CIT (2001) 252 ITR 877.(Del). It was argued by the learned Departmental Representative that in the case before the Hon’ble Delhi High Court, the penalty which was imposed by the customs authority in lieu of confiscation of goods under the Customs Act was held to be not eligible for deduction in the computation of business profits. The learned Departmental Representative also referred to the decision of ITAT Delhi ‘B’ Bench in the case of Jain Exports (P) Ltd. v. Dy. CIT (1999) 68 ITR 126 (Del). The learned Departmental Representative stated that in the case before ITAT Delhi ‘B’ Bench, the facts of the case were that tho appellant had imported two separate consignments of coconut oil. But as per the import policy of 1980-81, this was a canalized item which could be imported through State Trading Corporation only. The assessed had contended that only edible variety of coconut oil was a canalized item. This contention of the assessed was not accepted by the concerned authorities. The Collector of Customs and Central Excise ordered confiscation of both the consignments with an option to redeem the goods on payment of fine as provided under section 125 of the Customs Act. On the basis of these facts, the learned Departmental Representative vehemently argued that the redemption fine claimed as deduction by the assessed in Jain Exports (P) Ltd. v. Dy. CIT (supra) being disallowed and the facts of the case in the present appeal being identical to the facts of the case of Jain Exports (P) Ltd., therefore, the disallowance of the expenses claimed by the firm at Rs. 1,43,000 should be sustained. The order of assessing officer, therefore, should be restored.
12. The learned counsel for the assessed in reply pleaded that though there is a retrospective amendment made by insertion of Explanation to section 37 prohibiting the claim of expenditure, which is in the nature of an offence or which is prohibited by the Act, yet, the payment of redemption fine by the firm cannot fall into the category either of an offence or an act prohibited by the law. The learned counsel referred to clause 17 of the Finance Bill which introduced the Explanation after sub-section (1) of section 37. This clause 17 of the Finance Bill was explained in memo explaining provision in Finance (No. 2) Bill 1998 and it is printed at (1998) 231 ITR (St) 84. The memo explaining the disallowance of illegal expenses is reproduced as under
“Disallowance of fllegal expenses
It is proposed to insert an Explanation after sub-section (1) of section 37 to clarify that no allowance shall be made in respect of expenditure incurred by an assessed for any purpose which is an offence or which is prohibited by law. The proposed amendment will result in disallowance of the claim made by certain tax payers of payments on account of protection money, extortion, hafta, bribes, as business expenditure.
This amendment will take effect from 1-4-1962, and will accordingly apply in relation to the assessment year 1962-63 and subsequent years.”
In the context of the memo explaining the insertion of the Explanation, the learned counsel stated that there are specific expenses which have been pointed out in the above referred memo which could only be disallowed and none other. The learned counsel explaining meaning of word offence stated that offence is generally equivalent to a crime. An offence is transgression of law, a breach of the law established for the protection of the public.
13. In reply to the case law cited by the learned Departmental Representative of Hon’ble Delhi High Court (2001) 252 ITR 877 (Del) (supra) the learned counsel for the assessed pointed out that in the case before the Hon’ble Delhi High Court the imports of goods were unauthorised and the goods were liable to be confiscated. In the said case, it was observed by the Hon’ble Delhi High Court that in a case where the penalty has to be incurred because of the failure of the assessed himself the penalty paid by the assessed could not be regarded as wholly laid out for the purposes of business. Similarly, the case relied upon by the learned Departmental Representative (1999) 68 ITD 126 (Del) (supra) is also distinguishable on facts. The learned counsel referred to the fact that in the said judgment the appellant had taken the matter to the Apex Court regarding the import it had made of the coconut oil. The observation of the Hon’ble Supreme Court while deciding the matter of redemption fine levied, had observed on pp. 20 and 21 as reproduced on p. 132 of ITD as under :
“For the forgoing reasons we are satisfied that the importer’s contention that the redemption fine should be wholly waived or substantially reduced as their action in importing the goods under OGL was bona flde, is not well founded. Even if the transaction has in fact resulted in a loss (we cannot belve into it for the first time in this Court) it will not make any difference. We feel that taking cover under the earlier orders passed in the case of Jain Shudha Vanaspati Ltd. and the letter of the STC, the importers have tried to create the impression that they were innocent victims of the subsequent interpretation put on the relevant entry, ignoring the fact that the licenses were revalidated on certain terms and conditions which did not permit except through the STC. We are, the refore, satisfied that the import under OGL was not a bona flde Act. We, therefore, dismiss both the appeals as well as the writ petition with costs. Hearing cost quantified at Rs. 10, 000. ”
The learned counsel referred to the decision bf Madras High Court in the case of CIT v. Chemical Construction (2000) 243 ITR 858 (Mad). In this decision, the Madras High Court had considered the observation of Hon’ble Supreme Court of India in the case of Maddi Venketaraman & Co. (P) Ltd. v. CIT (1998) 229 ITR 534 (SC). However, Madras High Court has distinguished that in the case before Hon’ble Supreme Court where penalty was levied under the provisions of Foreign Exchange Regulation Act for the violation of the relevant provision of the Act and there was no question of compensatory element being part of such penalty. In the case before the Madras High Court, it was held that the amount recovered though termed as penalty was in fact compensatory as the assessed had to pay only what should have been paid initially as tax. Accordingly, the amounts so paid were eligible for deduction as business expenditure. The learned counsel also referred to the decision of Hon’ble Supreme Court of India in the case of Malwa Vanaspati & Chemical Co. v. CIT (1997) 225 ITR 383 (SC). In this case, it was held that penalty, which was paid under section 17(3) of the Madhya Pradesh General Sales-tax Act cannot be allowed as deduction. However, the amount payable under section 8(2) of the Madhya Pradesh General Sales-tax is an allowable expenditure. It was held that the amount payable under section 8(2) of the Madhya Pradesh General Sales Tax Act partakes the element of compensation.
14. We have heard submissions of learned Departmental Representative and the counsel of the firm. We have gone through the materials placed before us and the cases cited by both the learned representatives. Section 125 of the Customs Act provides an option to an assessed that in lieu of confiscation of goods it can pay redemption fine and get the goods released. The word prohibition in section 125 of the Customs Act means not only absolute provision but provision subject to condition where the condition has not been fulfillled. In view of the matter, it would also include restriction in the nature of prohibition with a condition. If the goods are prohibited from being imported except under license, the obtaining of license is clearly a condition for importation. In this view of the matter, the assessed-firm imported the dry dates from Pakistan against a valid LC and it has been thoroughly checked by the customs authority and found to be in order. Thus, there is no violation of any of the provisions of the Customs Act so far as the importation of dry dates are concerned. The difference in weighment of the bag and consequently, imposition of redemption fine is neither an offence nor prohibited by the law. Therefore, the retrospective amendment made through Explanation of section 37 has no application to the facts of the case of the assessed.
15. In the result, the appeal of the revenue is dismissed.
16. The cross-objection filed by the assessed is late by 2 days and the request for condensation of delay is rejected as being out of time.
17. In the result, the cross-objection filed by the assessed is dismissed.