(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)