JUDGMENT The judgment of the court was delivered by M. C. DESAI C.J. - This is a statement of a case referred at the instance of the Commissioner of Income-tax, U. P., by the Income-tax Appellate Tribunal, Allahabad Bench, to this court, the question calling for an answer being :
"Whether the sum of Rs. 3,110 paid as penalty to the Pakistan Government, in the circumstances of the case, is admissible as a deduction under section 10(2)(xv) of the Indian Income-tax Act ?"
In the associate case there is a similar statement of another case by the Income-tax Appellate Tribunal at the instance of the Commissioner of Income-tax and the question raised by it is similar, only the amount being different.
From the statements we find that the assessees in the two cases, who carry on business in molasses in village Barhaj of district Deoria, exported molasses to East Pakistan through boats. The import of molasses into Pakistan was prohibited by Pakistan. There had been a trade agreement between India and Pakistan, called the Indo-Pakistan Trade Agreement, under which the two Governments had agreed to allow import of certain goods from the other country. The Indo-Pakistan Trade Agreement did not contain any reference to Pakistan allowing import of molasses from India into Pakistan. Presumably, Pakistan had prohibited import of molasses into Pakistan from India. In spite of this prohibition, the assessees exported molasses to Pakistan through boats. When the boats reached the port in East Pakistan they were seized by the customs authorities of Pakistan. After the seizure, correspondence took place between the Governments of Pakistan and India and ultimately the Pakistan Government was persuaded to allow entry of the molasses into Pakistan on payment by the assessees, penalties of Rs. 3,000 and odd in this case and Rs. 5,000 and odd in the associate case. The penalties were paid by the assessees, the molasses were allowed to enter into Pakistan and were taken possession of by the customers of the assessee. The assessees made profit out of the transaction in spite of their having had to pay penalties in addition to the customs duty. Then the question arose whether they were entitled to deduct the penalties paid by them from their profits for the purpose of income-tax. The assessing authority disallowed the deduction because molasses were not included in the Indo-Pakistan Trade Agreement and could not be, and should not have been exported to Pakistan and the payment of the penalties could not be said to be necessary for the purpose of their business. The Income-tax Appellate Assistant Commissioner on appeal held that the deductions were allowable because the penalties were paid for the purpose of carrying on the business in molasses in East Pakistan and the payment of the penalties was as much obligatory as the payment of the customs duty, but disallowed the deductions because the assessee had not proved the amounts of the penalties paid by them. The assessee produced evidence of the penalties paid by them before the Income-tax Appellate Tribunal in second appeal, and the Tribunal allowed the deductions. It said in its judgment :
"In the export some trouble arose in Pakistan due to some differences between the state of Pakistan and the Indian Government. These commodities were, therefore, seized and were not allowed to pass through. But by negotiations between the two Governments, the Government of Pakistan was prevailed upon to allow the import into their country by payment of a penalty..."
This statement is incorrect and is not supported by the statements of the cases. Apparently, the Income-tax Appellate Tribunal misunderstood the negotiations that took place between the two Governments after the seizure. As a matter of fact the molasses were seized as soon as the boats carrying them reached the port in East Pakistan and then ensued correspondence between the two Governments about the seizure. The seizure must have been under some law of Pakistan beginning entry of molasses from India into Pakistan and not on account of some differences existing between the two Governments. The goods must have been seized under some law of Pakistan and could not have been seized merely because of differences between the two Governments. We ignore what was stated by the Income-tax Appellate Tribunal in its judgment and must accept the statements of the cases which were agreed to by the assessees and the Commissioner of Income-tax. In Commissioner of Income-tax v. Provident Investment Co. Ltd., S. K. Das J. observed that it is not open to the assessee or the Commissioner of Income-tax to go behind a statement of a case and to ask the High Court to give an answer to the question of law raised in the case on different assumptions or in a different set of circumstances and that the answer must be given on the basis of the facts and the instances and that the answer must be given on the basis of the facts and the circumstances as stated in the agreed statements of the case. We, therefore, accept the facts as given in the agreed statements of the cases and ignore what the Appellate Tribunal had said in its judgment. The assessee produced evidence before the Tribunal about the penalties paid by them and the Tribunal deducted the amounts from the profits and gains of the assessees business, taking the same view as the Income-tax Appellate Assistant Commissioner.
These references came up before this court for hearing once before and this court under section 66(4) called upon the Tribunal to submit further statements of cases particularly dealing with certain questions stated in this courts order. The Tribunal did not have any more materials than what was stated in the original statements of the cases and obtained further materials by making fresh enquiries. It is agreed by Sri S. C. Das and Sri R. L. Gulati that the Tribunal had no jurisdiction to bring on the record fresh materials by making enquiries after it had submitted the statements of the cases to this court and that in answering the question referred to us we must ignore all the materials now placed before us in the supplementary statements of the cases.
Under section 10(2)(xv) of the Income-tax Act profits of business are to be computed after making allowances on account of "any expenditure... laid out or expended wholly or exclusively for the purpose of such business" and the question before us is that whether the penalties paid by the assessees in the circumstances stated above are expenditure laid out or expended wholly or exclusively for the purpose of their business. The onus of providing that the penalties were such expenditures undoubtedly rested upon the assessees; they claimed the allowances and it was for them to establish that the allowances were permissible. We find as a matter of fact that the penalties were paid because Pakistan had banned import into Pakistan of molasses from India. When import of molasses from India into Pakistan was banned no business in molasses in Pakistan could be carried on by any dealer of India. When dealer in India could not carry on any business in molasses in Pakistan the assessees exporting molasses into Pakistan cannot be said to be an act done by them for the purpose of their business and the penalties paid by them to the Pakistan Government for its allowing the molasses to be imported into Pakistan cannot be said to be an expenditure of the nature mentioned in section 10(2)(xv). The Pakistan Government after seizing the molasses could have confiscated them. But it was on account of negotiations that the Government of India carried on with the Pakistan Government that the latter agreed, against its own laws, to allow the entry of the molasses into Pakistan on payment of certain penalties. The assessees knew that entry of molasses into Pakistan was prohibited and that they could not carry on business in molasses with a Pakistan customer. In spite of this knowledge they exported molasses to Pakistan and when the Pakistan Government allowed them to entry into Pakistan after receiving penalties, it cannot be said that the payment of the penalties was an expenditure laid out or expended wholly or exclusively for the purpose of the assessees business. Paying a penalty for doing a prohibited act cannot be said to be such an expenditure. We do not know under which law exactly the Pakistan Government seized the molasses. It may be similar to the Indian Sea Customs Act or some other Act. We also do not know whether the Act prohibiting entry into Pakistan of molasses from India contains any provision for payment of penalties for infringement of the ban. The penalties imposed by the Pakistan Government in the two cases were in addition to the customs duty payable on the molasses; consequently, the ban imposed on the entry of molasses into Pakistan from India could not have been for revenue purposes and must have been for other reasons. The assessees, therefore, could not know that the Pakistan Government would agree to allow molasses to be imported into Pakistan on payment of penalties and had no justification to export them into Pakistan and their exporting them into Pakistan could not be said to be carrying on business. It was by the chance that the Pakistan Government allowed the molasses to enter into Pakistan after realizing the penalties; it could have very well refused entry and confiscated the molasses. If the assessee would not have been entitled, in the event of the confiscation, to deduct the cost price from their profits they should not be entitled to deduct the penalties under section 10(2)(xv). In Commissioner of Inland Revenue v. Warnes & Co. Ltd., it was held that a penalty paid by an assessee on account of irregularities committed by him in the course of his business of exporting oil was not deductible from his profits in the assessments of income-tax. Rowlatt J. said that a penal liability of his kind cannot be regarded as a loss connected with or arising out of trade and that loss connected with or arising out of a trade must amount to something in the nature of a loss which is contemplable and in the nature of commercial loss. This case was approved of by the Supreme Court in Haji Aziz and Abdul Shakoor Bros. v. Commissioner of Income-tax.
S. K. Das J., speaking for the Supreme Court, observed at page 668 :
".... expenses which are permitted as deductions are such as are made for the purpose of carrying on the business, i.e., 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 are concerned with or made out of the profits of the business but they must also before the purpose of earning the profits of the business ...... an expenditure is not deductible unless it is a commercial loss in trade and a 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. It must be a commercial loss and in its nature must be contemplable as such. Such penalties which are incurred by an assessee in proceedings launched against him for an infraction of the law cannot be called commercial losses incurred by an assessee in carrying on his business. Infraction of the law is not a normal incident of business and, therefore, only such disbursements can be deducted as are really incidental to the business itself. They cannot be deducted if they fall on the assessee in some character other than that of a trader. Therefore, where a penalty is incurred for the contravention of any specific statutory provision, it cannot be said to be a commercial loss falling on the assessee as a trader, the test being that the expenses which are for the purpose of enabling a person to carry on trade for making profits in the business are permitted but not if they are merely connected with the business."
These observations fully support the view that we take.
We have proceeded on the basis that a Pakistani law prohibited entry into East Pakistan of molasses from India. Even if it be said that there is no material on the record to show that there did exist such a law in Pakistan it would not help the assessees because as we said earlier it was for them to show that the penalties paid by them were not for infraction of a law in force in Pakistan and that they could carry on business in molasses in Pakistan though subject to certain conditions.
In the result, we answer the question in the negative.
We direct that a copy of this judgment under the seal of the court and the signature of the Registrar shall be sent to the Appellate Tribunal.
We further direct that the Commissioner of Income-tax will be entitled to his costs of this reference which we assess at Rs. 100 from the opposite party. Counsels fee is also assessed at Rs. 100.
Income-tax Reference No. 57 of 1954.
For the reasons stated in our judgment in I. T. Reference No. 402 of 1954 we answer the question referred to this court in the negative.
We direct that a copy of this judgment under the seal of the court and the signature of the Registrar shall be sent to the Appellate Tribunal.
We further direct that the Commissioner of Income-tax will be entitled to his costs of this reference which we assess at Rs. 100 from the opposite party. Counsels fee is also assessed at Rs. 100.
Questions answered in the negative.