Allowability u/s 37(1) of fine /penalty for redemption of goods ordered to be confiscated for breach of import conditions – High Court explains the Law
ABCAUS Case Law Citation:
ABCAUS 2801 (2019) (02) HC
Important Case Laws Cited/relied upon by the parties
CIT V/s. Ahmedabad Cotton Mfg. Co Ltd. [1994] 205 ITR 163 (SC)
CIT Vs. Pannalal Narottamdas & Co
Khemchand Tejoomal Vs. CIT
Commissioner of Income Tax Vs. Hero Cycles Ltd.
CIT, Gujarat V/s. Ahmedabad Cotton Mfg. Co Ltd & Ors (1994) 1 SCC 632
Prakash Cotton Mills Pvt Ltd. Vs. CIT (1993) 201 ITR 684
Rohit Pulp & Paper Mills Vs. CIT (1995) 215 ITR 919/79 Taxman 168 (Bom)
CIT Vs. N.M. Parthasarathy (1995) 212 ITR 105
M.S.P. Senthikumara Nadar & Sons Vs C.I.T.
Agra Leatheries Ltd Vs. CIT
Maddi Venkataraman & Co P Ltd Vs. CIT (1998) 2 SCC 95
Haji Aziz & Abdul Shakoor Bros. Vs. CIT 41 ITR 350 (SC)
In the instant case, the Revenue had challenged the order of the Tribunal in holding that the redemption fine paid by the assessee for illegal import of dry fruits was allowable as business expenditure under Section 37 of the Income Tax Act, 1961 (the Act).
The respondent assessee was an individual. For the relevant assessment year, the assessee had filed return of income which was accepted without scrutiny.
Subsequently, information was received by the Assessing Officer that the assessee had made payment towards penalty for import of goods of which import was not permissible. On the basis of such information, the Assessing Officer reopened the assessment by issuing the notice under Section 148 of the Act.
The assessee explained that that he was using import license of an export house. For using the license in lieu of payment of service charges.
It was further pointed that the consignment was imported by the Export House and the assessee had merely acted as an agent in the transaction. It was pointed out that upon confiscation of the goods, redemption fine and penalty were imposed by the Collector of Customs on the Export house.
It was contended that in any case, the imports were made by the Export House and the order was also passed against the export house and not against the assessee. It was also contended that the penalty was paid by the export house and not by the assessee.
The assessee, however, could not produce the books of accounts to establish this averment. The Assessing Officer, therefore, issued summons to export house.
The accountant of the export house appeared before the Assessing Officer and produced the agreement entered with the assessee for the use of import licence and other details.
However, in the statement recorded, the said accountant stated that the custom fine was paid by the assessee and not by the export house.
The assessee when confronted, contended that he had only made advances to the export house from time to time as per the requirements but had not paid penalty.
The Assessing Officer did not accept the said explanation particularly in view of the failure of the assessee to produce books of accounts.
Therefore, the AO treated that the penalty paid as covered under the provisions of section 69C of the Act as being incurred by the assessee from unexplained source and without offering any satisfactory explanation.
The penalty proceedings u/s 271(1)(c) was also initiated.
In the context of the addition under Section 69C of the Act, the Commissioner Appeals rejected the assessee’s plea.
The assessee raised additional contention that when the expenditure was attributed to the assessee, the same should be considered as business expenditure. However the CIT(A) rejected this contention also.
However the Tribunal allowed the appeal of the assessee by recognizing the expenditure as business expenditure and came to following conclusions:-
(i). The assessee and the Export House were under bonafide belief that the subject goods was one of the items allowed for import against additional licence granted;
(ii). That the Customs Tribunal had held that there was no malafide on the part of the assessee as there was certain amount of vagueness in the import policy and therefore, redemption fine was reduced and penalty was deleted;
(iii). The Tribunal noted the decision of the Supreme Court wherein it was found that the fault or defect in the licence was not attributable to the assessee and had not indulged in any offence or incurred any expenditure for the purpose which is prohibited by law and the assessee had to pay redemption fine in order to save and protect themselves.
The Hon’ble High Court opined that the Tribunal without adverting to the relevant facts and materials on record granted benefit to the assessee on the lines followed by the High Court in other case.
The High Court also noted that the Tribunal without discussing the relevant materials compared the case of the assessee with the facts arising in the judgment of the Supreme Court.
The High Court opined that the Tribunal totally ignored the statement of the accountant of the export house in which he attributed the entire transaction of import and payment or fine to the assessee.
According to the Hon’ble High Court the Tribunal merely referred to the terms of the agreement overlooking the ground realities and therefore the entire consideration had been vitiated on account of this vital error.
Even otherwise, the Hon’ble High Court observed that the facts on record showed that it was the assessee who had imported the goods by utilizing the advance licence of the export house who merely received service charges.
The Hon’ble High Court opined that since the export house made the declarations and filed bill of entries, the Customs Authorities might have offered redemption fine and imposed penalty on it, but in the context of income tax liability, the hard facts cannot be ignored that the imports were made by the assessee himself. In essence, therefore, whatever the fault, defect or error of law in such import, would attach to the assessee.
The Hon’ble High Court opined that in the context of considering whether the expenditure incurred in the process of importing the goods could be claimed by way of expenditure regard being had to the first explanation to subsection (1) of Section 37, would therefore have to be decided on the anvil of conclusion drawn as above.
The Hon’ble High Court noted that there was a clear line of distinction between two lines of judgments, one by the Supreme Court and the other adopted by the High.
The Hon’ble High Court analysed the various judgments of the Hon’ble Supreme Court and High Courts on the subject.
In one case, the assessee was a firm doing the business of importing dry fruits from abroad and selling them in India. At the relevant time, import of dates by steamer was prohibited but permitted to be brought by country craft.
The goods ordered by the assessee were received partly by steamer and partly by country craft. Consignments imported by steamer were confiscated by the Customs Authorities and the assessee was given an option to pay fine for redemption of goods, upon payment of which the dates were released. The assessee claimed the redemption fine amount by way of deduction while computing profit arising out of sale of the goods.
In this background, the issue reached the Supreme Court. The Supreme Court held that the expenditure was in the nature of penalty for infraction of law and therefore, not a deductible expenditure.
The Hon’ble High Court noted that in another case, the assessee company had remitted to a party abroad certain amounts in violation of law. The proceedings were undertaken against the assessee for infringement of the relevant provisions of Foreign Exchange Regulation Act which ultimately resulted into penalty being imposed against the assessee. The Supreme Court held that evasion of law cannot be a trade pursuit and expenditure cannot, in any way, be allowed as wholly and exclusively laid out for the purpose of assessee’s business.
The Hon’ble Bombay High Court in a case upheld the disallowance where redemption fine was paid for confiscated goods for import of goods which were found by Customs Authorities not covered by a valid licence.
A Division Bench of Madras High Court considered a case where the assessee firm which was carrying on the business in coffee had entered into contract with India Coffee Board and purchased coffee at a rate far below the price of coffee to be sold within India with the contractual obligation to export the whole of the coffee so purchased to the places outside India. The assessee, however, exported part of it and sold the rest within India. The Coffee Board, in terms of the agreement levied damages from the assessee for breach of the contract. The High Court held that the liquidated damages claimed and paid was more akin to a penalty than the damages suffered for breach of contract in the course of normal trading activities, whether or not that breach of a contract was also dishonest.
A Division Bench of Allahabad High Court considered the case where the assessee had obtained licence for import under which the assessee had imported plastic sponges. The Customs Authorities held that under the licence, the assessee could have imported only natural sponges and not plastic sponges and the import of plastic sponges was thus illegal. The assessee claimed penalty for infraction of law by way of expenditure. The Allahabad High Court relied on the decision of the Supreme Court and ruled against the assessee.
In yet another case the Bombay High Court considered a case where the assessee was a registered firm doing business mainly in cloth. The assessee had acquired a licence for importing automobile spare parts. The assessee then entered into a contract for import and sale to a firm. The purchaser was to bear all expenses including customs duty. Pursuant to the agreement, the assessee placed an order of capacitors and the goods were imported. However, it was found that the goods did not conform to some of the specifications in the licence and the Customs Authorities confiscated the goods and offered the option to pay penalty for clearance of goods. The assessee paid the penalty and claimed it as business expenditure. Before the High Court, it was argued that the assessee was a mere nominal licence holder and the penalty was really levied on the said firm to whom the goods have been sold and therefore, the assessee should be allowed to claim the penalty paid. However the High Court held otherwise.
Thus, the Hon’ble High Court opined that that consistently, various High Courts following the decision of the Supreme Court have held that fine or penalty for redemption of goods ordered to be confiscated for breach of import conditions is not an allowable deduction. The Hon’ble High Court was of the view that the assessee squarely falls in this category.
With respect to the decision of the Bombay High Court relied upon by the assessee, the Hon’ble High Court noted that
in the said case, the assessee purchased bills of lading and other shipping documents from certain parties in respect of some consignments of gum imported by them. When the goods arrived in India, the assessee sought to clear them on the basis of the documents purchased by it. It was found that the imports were unauthorized and the goods were liable to be confiscated and penalty liable to be imposed. The assessee paid the penalty for saving the goods being confiscated.
For the penalty so paid the assessee argued that the amount must be regarded as a part of purchase price of the gum. It was argued that the assessee had purchased the consignments of gum in good faith and was not aware of any faults committed by the importers in such importation. It was only when the goods arrived in India that the assessee found that the imports were unauthorized. It was further argued that in the circumstances, the penalty amount which the assessee had to bear was in the nature of additional cost of the goods in the hands of the assessee. The Revenue Authorities rejected such contention. The Income Tax Appellate Tribunal, however, had taken a view that the assessee was correct in contending that it had purchased the documents of title in good faith and therefore, it had to pay the additional cost not to loose goods which had become its property. In this context, a reference was made to the High Court.
On reference, the High Court answered the question referred in favour of the assessee. The High Court noted that the Tribunal gave the finding that the penalty had been imposed not for the fault of the assessee but he had to bear the same for the purpose of getting his goods released from the customs authorities.
Accordingly, it was held that the penalty paid was part of the cost of the goods as an amount expended by it wholly and exclusively for the purposes of the business, because unless the said amount was expended, the goods could not have been saved from confiscation.
The High Court clarified that penalty due to 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 regulation, the penalty paid by the assessee for such conduct thereof, 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 but by the conduct of the assessee in trying to carry out the business in an unlawful manner
The Hon’ble High Court pointed out that the case relied upon thus, were clearly distinguishable as the Tribunal had held that the assessee was not responsible for the breach of law.
The Hon’ble High Court noted that in another decision of Hon’ble Supreme Court, the assessee company had to pay to the Textile Commissioner an amount in view of the non production and non packing of the minimum quantity of specified types of cloth. It was, in this background, that the payment was held to be allowable expenditure.
Further, the Hon’ble Supreme Court in yet another case had emphasized on the nature of statutory imposts paid by the assessee, be it in the nature of damages or penalty or interest in the context of assessee’s claim of expenditure under Section 37(1) of the Act. The test laid down was whether such payment was compensatory or penal in nature.
The Hon’ble High Court also noted that the Madras High Court where it considered the case where the assessee, an individual running a small scale industry was granted a licence for importing permissible spare parts for construction machinery and spare of machine tools. On the basis of such licence, the assessee imported chemical. When the goods arrived, the Customs Authorities noticed that there was no valid licence covering the consignment and that the provisions of Customs Act, 1962 were violated. This resulted into confiscation of the goods and imposition of redemption fine in lieu of confiscation. The assessee claimed the amount of redemption fine by way of business expenditure which was disallowed by the Revenue Authorities. The High Court noticed the decision of the Supreme Court and the ratio laid down therein but observed that in view of later decisions, the ratio laid down could not be stated to have laid down an inflexible rule of law to be followed in all eventualities and situations.
The Hon’ble High Court opined the ratio laid down by the Supreme Court in the case of Hazi Aziz continues to hold the field even post decisions. In neither of these two decisions, the ratio laid down in the decision in case of Hazi Aziz which was a decision of Bench of three Judges can be seen to have been diluted. In other words, what the facts of the case are materially similar as the facts before the Supreme Court in the case of Hazi Aziz, the ratio laid down therein would squarely apply.
The Hon’ble High Court opined that the later decision cited by the learned counsel for the assessee emphasizes that not the nomenclature of fine or penalty, but the true character of payment must be taken into consideration. If the payment is compensatory in nature, it would be allowable deduction.
The Hon’ble High Court firther opined that its judgment relied ipon by the Tribunal proceeded on the basis that the infraction of law for which penalty was imposed, was by the importer and not the assessee who had purchased the goods, though the fine was borne by the assessee. It was in this background, the Court had held that the payment in question was in the nature of additional cost of the goods for the assessee.
The Hon’ble High Court also noted that the assessee had placed reliance on the decision of Punjab & Haryana High Court. In the said decision, the High Court had held that there is no doubt that payments made in the nature of penalty or fine for any wrongful act cannot be allowed as permissible deductions but mere label of the payment is not conclusive. Certain payments may be incidental to the business and have to be allowed on the test of ‘commercial expediency’, if no violation of law or public policy is involved. Where penalty is not for deliberate violation of law.
The Hon’ble High Court opined that the above decision did not lay down any ratio which can be applied in the present case and it can at best be seen as passing remarks, obiter dicta but not ratio.
The Hon’ble High Court held that In the present case, the Tribunal, without proper justification or detailed examination of material on record, followed the line of logic adopted by the High Court whereas the facts squarely fall within the parameters of the decision of the Supreme Court.
The Hon’ble High Court was of the view that there was ample evidence on record suggesting that the assessee had made imports through his direct involvement by using the import licence and that the export house merely received an agreed commission.
The Hon’ble High Court opined that the assessee cannot disassociate or divest himself from the irregularities or illegalities committed in the process of importing the goods. Thus, the penalty was for the infraction of law committed by the assessee.
The Hon’ble High Court answered the question in the negative i.e in favour of the Revenue and against the assessee. The impugned judgment of the Tribunal was accordingly set aside.
