IN HIGH COURT OF JUDICATURE AT BOMBAY O.O.C.J. INCOME TAX APPEAL NO. 51 OF 2016 WITH NOTICE OF MOTION NO. 797 OF 2018 IN NOTICE OF MOTION NO. 1975 OF 2016 IN INCOME TAX APPEAL NO. 51 OF 2016 Principal Commissioner of Income Tax -17, Mumbai. .. Appellant Versus Sushil Gupta Legal Representative of Late Shri. Mahabir Prasad Gupta A.Y. 1988-99 PAN : AALPG1065E .. Respondent Mr. Prakash Chandra Chhotaray for Appellant Mr. Vikram Nankani, Senior Counsel with Mr. S.L. Shah i/by M/s. Shah Legal for Respondent CORAM : AKIL KURESHI & B.P. COLABAWALLA, JJ. RESERVED ON : FEBRUARY 13, 2019. PRONOUNCED ON : FEBRUARY 22, 2019 at 2.45 P.M. IN CHAMBER ORAL JUDGMENT (Per Akil Kureshi, J.) 1. This appeal was admitted for consideration of following substantial question of law:- " Whether on facts and in circumstances of case 1 of 36 ::: Uploaded on - 22/02/2019 ::: Downloaded on - 26/02/2019 11:44:30 ::: OS ITXA 51 16.doc and in law, Tribunal was justified in holding that redemption fine of Rs. 75,00,000/- is allowable as business expenditure under Section 37 of Income Tax Act?" 2. appeal arises in following background:- 2.1 Respondent assessee is individual. For assessment year 1988-89, assessee had filed return of income declaring total income of Rs. 1,47,020/-. return was accepted without scrutiny. Subsequently, information was received by Assessing Officer that assessee had made payment of Rs. 75 lacs in two separate installments towards penalty for import of almonds which import was not permissible. On basis of such information, Assessing Officer reopened assessment for said assessment year 1988-89 by issuing notice under Section 148 of Income Tax Act, 1961 ("the Act" for short). 2.2 During course of such assessment proceedings, assessee was called upon to provide various details by Assessing Officer. representative of assessee remained present before Assessing Officer and conveyed that assessee was using import license of M/s. Rajnikant Bros. which is export house. For using license, 2 of 36 ::: Uploaded on - 22/02/2019 ::: Downloaded on - 26/02/2019 11:44:30 ::: OS ITXA 51 16.doc assessee would pay service charges equivalent to 25% of CIF value of goods. It was further pointed that consignment of almond was imported by M/s. Rajnikant Bros. assessee had merely acted as agent in transaction. It was pointed out that upon confiscation of goods, redemption fine and penalty were imposed by Collector of Customs, Madras on M/s. Rajnikant Bros. Tribunal in appeal reduced redemption fine to Rs. 75 Lacs and deleted personal penalty. It was contended that in any case, imports were made by M/s. Rajnikant Bros. and order was passed against M/s. Rajnikant Bros. and not against assessee. It was also contended that penalty was paid by M/s. Rajnikant Bros. and not by assessee. assessee, however, could not produce books of accounts to establish this averment. Assessing Officer, therefore, issued summons to M/s. Rajnikant Bros. asking for copy of agreement dated 14.10.1985 entered between assessee and M/s. Rajnikant Bros. for use of import licence and other details. In response to summons, accountant of M/s. Rajnikant Bros. appeared before Assessing Officer. copy of said agreement dated 3 of 36 ::: Uploaded on - 22/02/2019 ::: Downloaded on - 26/02/2019 11:44:30 ::: OS ITXA 51 16.doc 14.10.1985 was produced. procedure attached to agreement was also produced. statement of accountant of M/s. Rajnikant Bros. was recorded. Relevant portion of which reads as under:- "Q. No. 4 : What is modus operandi of transaction made by Shri. M.P. Gupta regarding use of licence? Ans. : Mr. M.P. Gupta has imported almonds in Madras Port on 20.12.195 by using above said licence. said material imported in name of M/s. Rajnikant Bros. Total consideration of import material along with duty, fine, foreign payment and clearing charges etc. are as under:- Purchases Rs. i. Foreign payment 55,65,487.23 ii. Duty 56,00,000.00 iii. Redemption Fine (Penalty) 75,00,000.00 (As per Madras Customs Order dt. 27.10.86) iv. Clearing Charges & Expenses 15,72,487.10 v. Service Charges of M/s. Rajnikant Bros. 12,50,000.00 (As per Agreement dt. 14.10.85) ------------------------- Total Rs. 2,14,87,974.33 ============== Q. No. 5 : As stated by you redemption fine of Rs. 75,00,000/- paid to Madras Customs House. Please state who has paid sum: Answer : Rs. 75,00,000/- paid as custom fine by Mr. M.P. 4 of 36 ::: Uploaded on - 22/02/2019 ::: Downloaded on - 26/02/2019 11:44:30 ::: OS ITXA 51 16.doc Gupta through Rajnikant Bros. from Banoue Indosuez P. Box 685 A/c No. 11124 201 5301. All transactions were made by Shri. M.P. Gupta hence, he is responsible for above fine. As per agreement, we are only related for our service charges." 2.3 Assessing Officer confronted assessee with factum of payment of penalty of Rs. 75 Lacs. assessee in written response dated 28.2.1997 contended that he had only made advances to M/s. Rajnikant Bros from time to time as per requirements but had not paid penalty of Rs. 75 Lacs. 2.4 Assessing Officer did not accept said explanation particularly in view of failure of assessee to produce books of accounts. He was also of opinion that stand of assessee was in conflict with agreement dated 14.10.1985. He did not accept assessee/s version of mere advances being made to M/s. Rajnikant Bros. He, therefore, held as under:- " All above facts clearly established that assessee viz. Shri. M.P. Gupta, user of licence standing in name of M/s. Rajnikant Bros., has made custom penalty of Rs. 75,00,000/-. I, therefore, treat that this expenditure is covered u/S. 69C of Act and has been incurred by assessee from unexplained source of which assessee has no explanation about source nor 5 of 36 ::: Uploaded on - 22/02/2019 ::: Downloaded on - 26/02/2019 11:44:30 ::: OS ITXA 51 16.doc assessee offered any satisfactory explanation. penalty proceedings u/S. 271(1)(c) is being initiated separately." 2.5 assessee carried matter in appeal and reiterated his stand. In context of addition under Section 69C of Act, Commissioner rejected assessee's plea by making following observations:- " As regards addition u/S. 69C, appellant has claimed that payment was made through funds arranged by assessee through M/s. Mangla Bros and debited to M/s. Rajnikant & Bros accounts. copy of confirmation filed by M/s. Mangla Bros. as Certificate dated 24.11.1997 it states that payments have been made to Collector of Customs, M.P. Gupta account, M/s. Rajnikant & Bros. which gives DD No., date, amount and name of party to whom payment was arranged. Certificate does not carry any PAN/GIR No. of M/s. Mangla Bros. and thus, itself of limited validity. In absence of books of account and valid confirmation source of expenditure is not satisfactorily explained and payment is liable to be treated as unexplained expenditure u/s 69C of Act." 2.6 assessee had raised additional contention that when expenditure was attributed to assessee, same should be considered as business expenditure. In this context, question of such expenditure incurred for any purpose which is offence or which is prohibited by law came up for consideration. assessee had raised additional contention, though grounds of appeal were 6 of 36 ::: Uploaded on - 22/02/2019 ::: Downloaded on - 26/02/2019 11:44:30 ::: OS ITXA 51 16.doc confined to questioning additions made by Assessing Officer under Section 69C of Act. Commissioner of Income Tax (Appeals) ["the CIT(A) for short], therefore, considered whether expenditure was in nature of compensatory expenditure or towards fine in contravention of law. CIT(A) while rejecting this contention, observed as under:- " appellant's plea is that expense is allowable as cost u/S. 37 in accordance with case laws cited. It is found that after considering judgments of Bombay High Court in (a) CIT Vs. Pannalal Narottamdas & Co (supra) which laid down that redemption fine is additional cost for goods purchased and (b) judgment in Rohit Pulp & Paper Mills Vs. CIT (1995) 215 ITR 919/79 Taxman 168 (Bom), where also there was confiscation of goods u/s. 111(d) of Customs Act and fine was paid u/s. 125 of Customs Act, and High Court held that payment was in nature of penalty, ITAT, Mumbai in Dimexon's case (supra) has held that where penalty / fine has to be incurred because of fault of assessee himself, i.e, carrying on of business in unlawful manner or in contravention of certain rules and regulations, penalty / fine paid cannot be regarded as wholly laid out for purpose of business. Thus, in face of specific findings of Custom Tribunal and Madras High Court, appellant's contention is without force." 2.7 assessee carried matter in further appeal before Tribunal. In such appeal, assessee raised both contentions. In addition to questioning very addition of Rs. 75 Lacs under Section 69C of Act, he also 7 of 36 ::: Uploaded on - 22/02/2019 ::: Downloaded on - 26/02/2019 11:44:30 ::: OS ITXA 51 16.doc challenged decision of CIT(A) not accepting contention that in any case, expenditure was made wholly and exclusively for the purpose of business and therefore, allowable as business expenditure. 2.8 Tribunal, in impugned judgment, referred to documents under which import of almond was held to be unlawful. Tribunal noted that Collector of Customs, Madras had confiscated goods, imposed redemption fine 1.20 crore and penalty of Rs. 20 lacs on M/s. Rajnikant Bros. Ms/. Rajnikant Bros. had filed appeal before Customs Tribunal, Madras which had reduced redemption fine to Rs. 75 Lacs and deleted penalty. Tribunal, while allowing appeal of assessee and recognizing expenditure as business expenditure came to following conclusions:- (i). assessee and Export House were under bonafide belief that almond in shell was one of items allowed for import against additional licence granted; (ii). That Customs Tribunal had held that there was no malafide on part of assessee as there was certain amount of vagueness in import policy and therefore, redemption fine was reduced and penalty was deleted; (iii). Tribunal noted decision of Supreme Court in 8 of 36 ::: Uploaded on - 22/02/2019 ::: Downloaded on - 26/02/2019 11:44:30 ::: OS ITXA 51 16.doc case of CIT V/s. Ahmedabad Cotton Mfg. Co Ltd. 1 and was of opinion that facts of present case were similar. Tribunal noted that in said case, it was found that fault or defect in REP licence was not attributable to assessee. assessee was not to be blamed,had not indulged in any offence or incurred any expenditure for purpose which is prohibited by law and assessee had to pay redemption fine in order to save and protect themselves." 2.9 Against this judgment, Revenue has filed this appeal. 3. Mr. Chhotaray, learned counsel appearing for Revenue submitted that amount of Rs. 75 Lacs paid by assessee was towards redemption fine. In terms of Explanation 1 to Section 37(1) of Act, such expenditure was not allowable deduction. Tribunal, therefore, committed serious error in allowing assessee's appeal. He took us extensively through orders and statements on record and submitted that Assessing Officer and CIT(A) came to specific conclusion that it was assessee who had made imports and had, therefore, paid redemption fine. Tribunal without any basis came to conclusion that assessee was not connected with import of almond which led to imposition of redemption fine. 1 [1994] 205 ITR 163 (SC) 9 of 36 ::: Uploaded on - 22/02/2019 ::: Downloaded on - 26/02/2019 11:44:30 ::: OS ITXA 51 16.doc He submitted that judgment of Supreme Court in case of Ahmedabad Cotton Mfg. Co. Ltd. (supra) was therefore, wrongly applied by Tribunal. Learned counsel heavily relied on decision of Supreme Court in case of Haji Aziz & Abdul Shakoor Bros. Vs. CIT 2. Learned counsel for Revenue has also relied on certain decisions reference to which would be made at proper stage. 4. On other hand, Mr. Nankani opposed appeal contending that assessee was not importer. imports were made by M/s. Rajnikant Bros. assessee had merely entered into agreement with M/s. Rajnikant Bros. for purchase of imported almond which in turn would be sold by assessee to local consumers / manufacturers for commission. sum of Rs. 75 Lacs was thus paid to prevent imported consignment being forfeited. expenditure was thus made on business considerations. Sum of Rs. 75 Lacs thus, was additional cost of purchase in hands of assessee. In hands of assessee, it would not partake character of penalty. He placed reliance on decision of this Court in case of CIT, 2 41 ITR 350 (SC) 10 of 36 ::: Uploaded on - 22/02/2019 ::: Downloaded on - 26/02/2019 11:44:30 ::: OS ITXA 51 16.doc Bombay Vs. Pannalal Narottamdas & Co3. He also referred to several other judgments reference to which would be made at proper stage. 5. Before dealing with rival contentions, we may record genesis of present dispute. M/s. Rajnikant Bros. and another who were diamond exporters had applied for grant of Export House Certificates under Import Policy 1978-79 which was denied to them on ground that they had not diversified their exports. They had, therefore, filed writ petition before Bombay High Court claiming that they were entitled to Export House Certificates. Such declaration was granted by Bombay High Court. Special Leave Petition filed by Union of India against judgment of Bombay High Court was dismissed directing Government of India to issue necessary Export House Certificates for year 1978-79 and further providing that : "Save and except items which are specifically banned under prevalent Import Policy at time of import, respondents shall be entitled to import all other items whether canalized or otherwise in accordance with 3 (1968) 67 ITR 667 (Bom) 11 of 36 ::: Uploaded on - 22/02/2019 ::: Downloaded on - 26/02/2019 11:44:30 ::: OS ITXA 51 16.doc relevant rules". Pursuant to such directions, M/s. Rajnikant Bros. were granted additional licence. It started importing goods. At that stage, Indo Afghan Chambers of Commerce who was association of dealers engaged in business of selling dry fruits in North India filed petition before Supreme Court under Article 32 of Constitution contending that goods sought to be imported on additional licences included those which were prohibited by prevalent import policy. Supreme Court held that under import policy of 1985-88 when dry fruits were sought to be imported, they were no longer open to import under Open General Licence. Relevant observations of Supreme Court read thus:- "7. We may assume for purpose of this case that diamond exporter is legitimately entitled to obtain Additional Licence under Import Policy 1978-79 for item which is different from item he may have intended to import had Additional Licences been rightly granted to him originally. In that event, diamond exporter can succeed only if item could have been imported under Import Policy 1978-79 and also under Import Policy 1985-88 in accordance with terms of order of this Court dated April 18, 1985 as construed by this Court by its judgment dated March 5, 1986. 12. In our opinion respondents diamond exporters are not entitled to import dry fruits under Import Policy 1985-88 under 12 of 36 ::: Uploaded on - 22/02/2019 ::: Downloaded on - 26/02/2019 11:44:30 ::: OS ITXA 51 16.doc Additional Licences possessed by them. They are also not entitled to benefit extended by judgment of this Court dated March 5, 1986 to those diamond exporters who had imported items under irrevocable Letters of Credit opened and established before October 18, 1985. It appears from record before us that respondents diamond exporters opened and established irrevocable Letters of Credit after that date. 14. writ petition is allowed and respondents Nos. 10 and 11, M/s. Rajnikant Brothers and M/s. Everest Gems are restrained from importing dry fruits during period 1985-88 under Additional Licences granted to them under Import Policy 1978-79. In circumstances there is no order as to costs." With this background, we may refer to facts on hand. As noted, Assessing Officer in order of assessment after giving ample opportunities to assessee came to conclusion that assessee M.P. Gupta was user of licence in name of M/s. Rajnikant Bros. and all transactions including payment of penalty had been carried out by him. He did not accept version of assessee that assessee had merely advanced money to M/s. Rajnikant Bros. in time of its need. It was held that assessee had paid customs fine of Rs. 75 Lacs. Since, it could not shown legitimate source of this amount, Assessing Officer treated same as 13 of 36 ::: Uploaded on - 22/02/2019 ::: Downloaded on - 26/02/2019 11:44:30 ::: OS ITXA 51 16.doc assessee's unexplained expenditure. Before CIT(A) also, assessee failed to persuade Appellate Authority that addition under Section 69C of Act was wrongly made by Assessing Officer. At which time, petitioner raised additional contention claiming deduction of same amount by way of business expenditure. In response to this, CIT(A) held that penalty or fine had to be incurred because of fault of assessee himself of carrying on business in unlawful manner or in contravention of rules and regulations. 6. In our opinion, Tribunal without adverting to relevant facts and materials on record granted benefit to assessee on lines followed by this Court in case of Pannalal (supra). Tribunal without discussing relevant materials compared case of assessee with facts arising in judgment of Supreme Court in case of Ahmedabad Cotton Mfg Co Ltd (supra) in which it was recorded that fault or defect in REP licence was not attributable to assessee and therefore, assessee was not to be blamed for indulging in any offence or having 14 of 36 ::: Uploaded on - 22/02/2019 ::: Downloaded on - 26/02/2019 11:44:30 ::: OS ITXA 51 16.doc incurred any expenditure for purpose which was prohibited by law. In present case, Assessing Officer had held that it was assessee who had imported goods. CIT(A) also largely concurred with this finding. Tribunal did not advert to materials on record to give different conclusion. Tribunal totally ignored statement of representative of M/s. Rajnikant Bros., relevant portion of which is reproduced earlier in which he attributed entire transaction of import and payment or fine to assessee. Tribunal merely referred to terms of agreement overlooking ground realities. entire consideration of Tribunal, therefore, has been vitiated on account of this vital error. Even otherwise, facts on record would suggest that it was assessee who had imported goods by utilizing advance licence of said M/s. Rajnikant Bros. M/s. Rajnikant Bros. merely received payment computed in terms of percentage of CIF value of imports. For purpose of making declarations and filing bill of entries, M/s. Rajnikant Bros. may be correct entity and therefore, Customs Authorities might have offered redemption fine and imposed penalty on M/s. 15 of 36 ::: Uploaded on - 22/02/2019 ::: Downloaded on - 26/02/2019 11:44:30 ::: OS ITXA 51 16.doc Rajnikant Bros and Tribunal in appeal may have reduced redemption fine and deleted penalty in hands of M/s. Rajnikant Bros, but in context of income tax liability, we cannot ignore hard facts that imports were made by assessee himself. M/s. Rajnikant Bros. had merely allowed licence to be used for such purpose. In essence,therefore, whatever fault, defect or error of law in such import, would attach to assessee. In context of considering whether expenditure incurred in process of importing goods could be claimed by way of expenditure regard being had to first explanation to sub- section (1) of Section 37, would therefore have to be decided on anvil of this conclusion. 7. Once this much is clear, everything else would fall in line. There is clear line of distinction between two lines of authorities, one led by judgment of Supreme Court in case of Hazi Aziz (supra) and other adopted by this Court in case of Pannalal (supra) as pointed out by learned counsel for assessee. 16 of 36 ::: Uploaded on - 22/02/2019 ::: Downloaded on - 26/02/2019 11:44:30 ::: OS ITXA 51 16.doc 8. In case of Hazi Aziz (supra), facts were that assessee was firm doing business of importing dates from abroad and selling them in India. During accounting year under consideration, assessee had imported dates from Iraq. At relevant time, import of dates by steamer was prohibited but permitted to be brought by country craft. goods ordered by assessee were received partly by steamer and partly by country craft. Consignments imported by steamer were confiscated by Customs Authorities and assessee was given option to pay fine for redemption of goods, upon payment of which dates were released. assessee claimed redemption fine amount by way of deduction while computing profit arising out of sale of goods. In this background, issue reached Supreme Court. Supreme Court held that expenditure was in nature of penalty for infraction of law and therefore, not deductible expenditure. It was observed as under:- " review of these cases shows that expenses which are permitted as deductions are such as are made for purpose of carrying on business, i.e., to enable person to carry on and earn profit in that business. It is not enough that disbursements are made in course of or arise out of or are concerned with or made out of profits of business but they must also be for purpose of earning profits of business. As was pointed out in Von 17 of 36 ::: Uploaded on - 22/02/2019 ::: Downloaded on - 26/02/2019 11:44:30 ::: OS ITXA 51 16.doc Glehn's case [1920] 2 K.B. 553 expenditure is not deductible unless it is commercial loss in trade and penalty imposed for breach of law during course of trade cannot be described as such. If sum is paid by assessee conducting his business, because in conducting it he has acted in manner, which has rendered him liable to penalty, it cannot be claimed as deductible expense. It must be commercial loss and in its nature must be contemplable as such. Such penalties which are incurred by assessee in proceedings launched against him for infraction of law cannot be called commercial losses incurred by assessee in carrying on his business. Infraction of law is not normal incident of business and, therefore, only such disbursements can be deducted as are really incidental to business itself. They cannot be deducted if they fall on assessee in some character other than that of trader. Therefore where penalty is incurred for contravention of any specific statutory provision, it cannot be said to be commercial loss falling on assessee as trader test being that expenses which are for purpose of enabling person to carry on trade for making profits in business are permitted but not if they are merely connected with business. It was argued that unless penalty is of nature which is personal to assessee and if it is merely ordered against goods imported it is allowable deduction. That, in our opinion, is erroneous distinction because disbursement is deductible only if it falls within 10(2)(iv) of Income-tax Act and no such deduction can be made unless it falls within test laid down in cases discussed above and it can be said to be expenditure wholly and exclusively laid for purpose of business. Can it be said that penalty paid for infraction of law, even though it may involve no personal liability in sense of fine imposed for offence committed, is wholly and exclusively laid for business in sense as those words are used in cases that have been discussed above. In our opinion, no expense which is paid by way of 18 of 36 ::: Uploaded on - 22/02/2019 ::: Downloaded on - 26/02/2019 11:44:30 ::: OS ITXA 51 16.doc penalty for breach of law can be said to be amount wholly and exclusively laid for purpose of business. distinction sought to be drawn between personal liability and liability of kind now before us is not sustainable because anything done which is infraction of law and is visited with penalty cannot on grounds of public policy be said to be commercial expense for purpose of business or disbursement made for purposes of earning profits of such business. In our opinion High Court rightly held that amount claimed was not deductible and we therefore dismiss this appeal with costs." 9. In case of Maddi Venkataraman & Co P Ltd Vs. CIT 4 , facts were that assessee company had remitted to party in Singapore certain amounts in violation of law. proceedings were undertaken against assessee for infringement of relevant provisions of Foreign Exchange Regulation Act which ultimately resulted into penalty being imposed against assessee. Supreme Court held and observed as under:- "20. case of Haji Aziz Abdul Shakoor Bros. (supra) is important for another reason. It was categorically held in this case that no distinction can be made in this regard between personal liability and liability of any other kind. So long as payment has to made for infraction of law, it cannot be said that it was made in course of carrying out of trade. 4 (1998) 2 SCC 95 19 of 36 ::: Uploaded on - 22/02/2019 ::: Downloaded on - 26/02/2019 11:44:30 ::: OS ITXA 51 16.doc 23. In instant case, assessee had indulged in transactions in violation of provision of Foreign Exchange (Regulation) Act. assessee's plea is that unless it entered into such transaction, it would have been unable to dispose of unsold stock of inferior quality of tobacco. Another words, assessee would have incurred loss. Spur of loss cannot be justification for contravention of law. assessee was engaged in tobacco business. assessee was expected to carry on business in accordance with law. If assessee contravenes provision of FERA to cut down its losses or to make larger profits while carrying on business, it was only to be expected that proceedings will be taken against assessee for violation of Act. expenditure incurred for evading provisions of Act and also penalty levied for such evasion cannot be allowed as deduction. As was laid down by Lord Sterndale in case of Alexander Von Glehn (supra) that it was not enough that disbursement was made in course of trade. It must be for purpose of trade. purpose must be lawful purpose. 24. Moreover, it will be against public policy to allow benefit of deduction under one statute of any expenditure incurred in violation of provisions another stature or any penalty imposed under another statute. In instant case, if deductions claimed are allowed, penal provisions of FERA will become meaningless. It has also to be borne in mind that evasion of law cannot be trade pursuit. expenditure in this case cannot, in any way, be allowed as wholly in this case cannot, in any, way be allowed as wholly and exclusively laid out for purpose of assessee's business." 10. In case of Rohit Pulp and Paper Mills Ltd Vs. C.I.T. 5, assessee had imported goods which were found by Customs Authorities not covered by valid licence. 5 [1995] 215 ITR 919 (Bom) 20 of 36 ::: Uploaded on - 22/02/2019 ::: Downloaded on - 26/02/2019 11:44:30 ::: OS ITXA 51 16.doc Deputy Collector of Customs ordered confiscation of goods and offered redemption on payment of fine. This amount was claimed by assessee as deduction. Rejecting such claim, High Court observed as under:- " We do not find that above amount paid by assessee is anything else than penalty. It is, therefore, not allowable as deduction under Income Tax Act. Income Tax Officer and other authorities were justified in not allowing any deduction under Section 37 of Income Tax Act on account of same. third question is, therefore, answered in negative and in favour of Revenue." 11. In case of M.S.P. Senthikumara Nadar & Sons Vs C.I.T. Madras6, Division Bench of Madras High Court considered case where assessee firm which was carrying on business in coffee had entered into contract with India Coffee Board and purchased coffee at rate far below price of coffee to be sold within India with contractual obligation to export whole of coffee so purchased to places outside India. assessee, however, exported part of it and sold rest within India. Coffee Board, in terms of agreement levied damages from assessee for breach of contract. This amount 6 [1957] 32 ITR 138 (Madras) 21 of 36 ::: Uploaded on - 22/02/2019 ::: Downloaded on - 26/02/2019 11:44:30 ::: OS ITXA 51 16.doc was paid by assessee and and claimed by way of expenditure. High Court referred to various judgments on issue and observed as under:- "From what we have said above it should be clear that it was not case of payment of damages for mere breach of contract with nothing more. It was not of course case of penalty paid under terms of statute for contravention of any specific statutory provision. In circumstances of this case, liquidated damages claimed and paid was, however, more akin to penalty than damages suffered for breach of contract in course of normal trading activities, whether or not that breach of contract was also dishonest. That is why we said that it may not be necessary to rest our decision in this case on rule laid down in Masks case [1943] 11 ITR 454. In our opinion it is principle laid down in Von Glehns case [1920] 12 Tas Cas. 232 that should be extended and applied to negative claim of assessee in this case. To adopt words of Sterndale, M. R., in Von Glehns case (supra) assessee's business could perfectly well be carried on without any infraction of obligations laid on assessee by India Coffee Board, entrusted with statutory duty of controlling and regulating sales of coffee. penalty was imposed because of infraction of these obligations and money was not expended or laid out for purposes of trade which assessee carried on. Or in words of Scrutton, L.J : "Were these fines made or paid for purpose of earning profit ? answer seems to me obvious, that they were not, they were unfortunate incidents which followed after profits had been earned." 22 of 36 ::: Uploaded on - 22/02/2019 ::: Downloaded on - 26/02/2019 11:44:30 ::: OS ITXA 51 16.doc 12. In case of Agra Leatheries Ltd Vs. CIT7, Division Bench of Allahabad High Court considered case where assessee had obtained licence for import under which assessee had imported plastic sponges. Customs Authorities held that under licence, assessee could have imported only natural sponges and not plastic sponges and import of plastic sponges was thus illegal. assessee claimed penalty for infraction of law by way of expenditure. Allahabad High Court relied on decision of Supreme Court in case of Hazi Aziz (supra), ruled against assessee by making following observations:- " question whether penalty levied for infraction of law is permissible deduction is not res integra. In Haji Aziz and Abdul Shakoor Bros. v. CIT [1961] 41 ITR 350, Supreme Court held that in case where penalty has to be incurred because of fault of assessee himself, as for instance for reason of his having carried on his business in unlawful manner or in contravention of certain rules and regulations, penalty paid by assessee for such conduct could not be regarded as wholly laid out for purpose of business, because incurring of said expenses has not been necessitated by business but by conduct of assessee in trying to carry on business in unlawful manner. We, therefore, do not see any legal infirmity in view taken by Tribunal." 7 [1993] 200 ITR 792 (Allahabad) 23 of 36 ::: Uploaded on - 22/02/2019 ::: Downloaded on - 26/02/2019 11:44:30 ::: OS ITXA 51 16.doc decision of this Court in case of Pannalal (supra) was cited before Court which was distinguished. 13. This Court in decision in case of T. Khemchand Tejoomal Vs. CIT8 considered case where assessee was registered firm doing business mainly in cloth. assessee had acquired licence for importing automobile spare parts. assessee then entered into contract for import and sale of capacitors to one Bipin Automobiles. purchaser would bear all expenses including customs duty. Pursuant to agreement, assessee placed order of capacitors and goods were imported. However, it was found that goods did not conform to some of specifications in licence and Customs Authorities confiscated goods and offered option to pay penalty for clearance of goods. assessee paid penalty and claimed it as business expenditure. Before High Court, it was argued that assessee was mere nominal licence holder and penalty was really levied on Bipin Automobiles to whom goods have been sold and therefore, assessee should be allowed to claim 8 161 ITR 492 (Bom) 24 of 36 ::: Uploaded on - 22/02/2019 ::: Downloaded on - 26/02/2019 11:44:30 ::: OS ITXA 51 16.doc expenditure as business expenditure. Court held and observed as under: " submission of Mrs. Jagtiani, learned counsel for assessee, is that in this case, on facts found, assessee must be regarded as mere nominal licence-holder and penalty was really levied on M/s. Bipin Automobiles to whom goods had been sold as aforesaid. It was argued by her that, in these circumstances, assessee should be allowed to claim amount of penalty paid by assessee as deduction in computation of profits under section 28 of Income Tax Act, 1961. She placed strong reliance on decision of Division Bench of this court in CIT v. Pannalal Narottamdas & Co. : [1968] 67 ITR 667(Bom) . We shall deal with this case after setting out our own views. In present case, facts found by Tribunal clearly show that it was assessee who had got import licence. It was assessee who imported goods in question, and it was fault of assessee if goods in question imported did not conform to specifications of licence. In these circumstances, there is no escaping conclusion that penalty was levied on assessee for default of assessee itself and not on ground of any other person's default. Nor is this case in which assessee can be regarded in any sense as nominal licence-holder. It is not as if assessee gave its licence to M/s. Bipin Automobiles for importing goods in question and M/s. Bipin Automobiles imported goods. licence was utilized by assesses-firm itself and that fact cannot be altered by circumstance that they had agreed to sell goods to be imported by them to M/s. Bipin Automobiles. It is well settled that if assessee has to pay penalty to customs authorities in respect of goods imported by assessee on account of its own default, amount of that penalty cannot be deducted in computation of taxable profits of assessee. 25 of 36 ::: Uploaded on - 22/02/2019 ::: Downloaded on - 26/02/2019 11:44:30 ::: OS ITXA 51 16.doc Coming to case of Pannalal Narottamdas & Co. (supra) cited by Mrs. Jagtiani, facts in that case were altogether different. In that case, in course of its business, assessee had purchased bills of lading and other shipping documents from certain parties in respect of some consignments of goods imported by them from foreign country. When goods arrived in India and were sought to be cleared through customs by assessee on basis of documents purchased by it, it was found that imports were unauthorized and goods were liable to be confiscated and penalty was liable to be imposed under section 167(8) of Sea Customs Act, 1878. assessee paid penalty for saving goods from being confiscated. Tribunal took view that assessee was entitled to plead that it had purchased documents of title in good faith and had paid consideration thereon, and, thereafter, it had to pay penalties in order not to lose goods which had become its property and, in these circumstances, penalty could be legitimately regarded as part of cost of goods. It was held by Division Bench that, on facts and circumstances, actual cost of goods to assessee was not only what it had paid to importers but in addition thereto what it had to pay by way of penalty in order to save goods from being confiscated and lost to it. It is significant that observations of Division Bench set out at page 672 of aforesaid report show that Division Bench clearly took view that in cases where penalty had to be incurred because of fault of assessee himself, as for instance, by reason of his having carried on his business in unlawful manner or in contravention of certain rules and regulations, penalty paid by assessee for such conduct thereof could not be regarded as wholly laid out for purpose of business, and, in support of this conclusion, decision of Supreme Court in Haji Aziz & Abdul Shakoor Bros. v. CIT : [1961] 41 ITR 350 was cited. This decision, in our view, does not advance argument of Mrs. Jagtiani, and, in fact, aforesaid observations pointed out by us lend considerable support to view which we have taken." 26 of 36 ::: Uploaded on - 22/02/2019 ::: Downloaded on - 26/02/2019 11:44:30 ::: OS ITXA 51 16.doc It can, thus, be seen that consistently various High Courts following decision of Supreme Court in case of Hazi Aziz (supra) have held that fine or penalty for redemption of goods ordered to be confiscated for breach of import conditions is not allowable deduction. case of assessee squarely falls in this category. 14. We may now refer to decisions cited by Mr. Nankani, learned counsel for respondent. decision in case of Pannalal (supra) would require close examination. It was case in which assessee, registered firm was dealing inter alia in gum. In course of its business, assessee purchased bills of lading and other shipping documents from certain parties in respect of some consignments of gum imported by them from Africa. When goods arrived in India, assessee sought to clear them on basis of documents purchased by it. It was found that imports were unauthorized and goods were liable to be confiscated and penalty liable to be imposed. assessee paid amount of Rs. 31,302/- by way of penalty for saving goods being confiscated. This 27 of 36 ::: Uploaded on - 22/02/2019 ::: Downloaded on - 26/02/2019 11:44:30 ::: OS ITXA 51 16.doc amount assessee claimed by way of allowable deduction. assessee had argued that amount must be regarded as part of purchase price of gum. It was argued that assessee had purchased consignments of gum in good faith and was not aware of any faults committed by importers in such importation. It was only when goods arrived in India that assessee found that imports were unauthorized. parties from whom assessee had purchased goods declined to pay penalties. It was further argued that in circumstances, penalty amount which assessee had to bear was in nature of additional cost of goods in hands of assessee. Revenue Authorities rejected such contention. Income Tax Appellate Tribunal, however, had taken view that assessee was correct in contending that it had purchased documents of title in good faith and therefore, it had to pay additional cost not to loose goods which had become its property. In this context, reference was made to High Court on following substantial question of law:- "Whether penalties totaling Rs. 31,302/- paid in breach of Sea Customs Act in respect of imports of stock-in-trade, but 28 of 36 ::: Uploaded on - 22/02/2019 ::: Downloaded on - 26/02/2019 11:44:30 ::: OS ITXA 51 16.doc on bills of lading, purchased in good faith, is proper deduction under Section 10(1) of Income Tax Act?" Department objected to framing of question and insisted that following question be re- framed by High Court:- "Whether, on facts and in circumstance of case, penalty of Rs. 31,302 paid by assessee to customs authorities for infringement of Import Control Regulations constitutes allowable deduction under Section 10 of Income-tax Act?" High Court first rejected any modification to question as desired by Revenue observing that Tribunal had concluded that what was paid as penalties by assessee was to be regarded as cost of goods, which was based on its acceptance of contention of assessee. In other words, conclusion of Tribunal was based on its acceptance of assessee's case that its purchase of bills of lading was in good faith. Having thus accepted Tribunal's conclusion on facts, Court proceeded to answer question referred in favour of assessee by making following observations:- "7. Coming now to question as framed, we think that it must be answered in affirmative and in favour of assessee. Under section 10(1) of Indian Income Tax Act, tax is made payable in respect of profits or gains of business. Profits or gains of 29 of 36 ::: Uploaded on - 22/02/2019 ::: Downloaded on - 26/02/2019 11:44:30 ::: OS ITXA 51 16.doc business would be excess of sale price over cost price and in determining profits or gains, therefore, cost has to be deducted from proceeds realized on sale of goods. On facts and circumstances of present case, actual cost of goods to assessee was not only what it had paid to importers, but in addition thereto what it had to pay by way of penalty, in order to save goods from being confiscated and lost to it. penalty paid by it could, therefore, be regarded as part of cost of goods to it. It can also be regarded as amount expended by it wholly and exclusively for purposes of business, because unless said amount was expended, goods could not have been saved from confiscation. It may be pointed out that, in cases where penalty has to be incurred be incurred because of fault of assessee himself, as for instance, for reason of his having carried on his business in unlawful manner or in contravention of certain rules and regulation, penalty paid by assessee for such conduct thereof, could not be regarded as wholly laid out for purpose of business, because incurring of said expenses has not been necessitated by business,but but by conduct of assessee in trying to carry out business in unlawful manner (see Haji Aziz and Abdul Shakoor Bros. v. Commissioner of Income- tax [supra]). In present case, however, on finding of Tribunal penalty has been imposed not for fault of assessee but he had to bear same for purpose of getting his goods released from customs authorities. In present case, therefore, expenses incurred by assessee could be regarded as wholly and exclusively incurred for purpose of his business. In our opinion, therefore, conclusion arrived at by Tribunal that sum of Rs. 31,302 was allowable to assessee as proper deduction is correct and deduction is capable of being allowed under section 10(1) of Income Tax Act as held by Tribunal or even under section 10(2)(xv) of Act." 30 of 36 ::: Uploaded on - 22/02/2019 ::: Downloaded on - 26/02/2019 11:44:30 ::: OS ITXA 51 16.doc This case, thus, is clearly distinguishable. On facts, Tribunal had held that assessee was not responsible for breach of law, finding on basis of which High Court proceeded. It was in this background that Court upheld Tribunal's decision allowing deduction of amount in question as expenditure emphasizing that such amount in hands of assessee was not penalty but additional cost for purchase of goods. 15. In case of CIT, Gujarat V/s. Ahmedabad Cotton Mfg. Co Ltd & Ors.9, assessee company had to pay to Textile Commissioner amount in view of non production and non packing of minimum quantity of specified types of cloth. It was, in this background, that payment was held to be allowable expenditure. Court held that decision in case of Hazi Aziz (supra) would not apply. 16. Supreme Court in case of Prakash Cotton Mills Pvt Ltd. Vs. CIT 10 had emphasized on nature of 9 (1994) 1 SCC 632 10 (1993) 201 ITR 684 31 of 36 ::: Uploaded on - 22/02/2019 ::: Downloaded on - 26/02/2019 11:44:30 ::: OS ITXA 51 16.doc statutory imposts paid by assessee, be it in nature of damages or penalty or interest in context of assessee's claim of expenditure under Section 37(1) of Act. test laid down was whether such payment was compensatory or penal in nature. 17. In case of CIT Vs. N.M. Parthasarathy11 , Madras High Court considered case where assessee, individual running small scale industry was granted licence for importing permissible spare parts for construction machinery and spare of machine tools. On basis of such licence, assessee imported 400 drums of sodium cyanide from Hungary. When goods arrived, Customs Authorities noticed that there was no valid licence covering consignment and that provisions of Customs Act, 1962 were violated. This resulted into confiscation of goods and imposition of redemption fine in lieu of confiscation. assessee claimed amount of redemption fine of Rs. 1,84,000/- by way of business expenditure which was disallowed by Revenue Authorities. High Court noticed decision of 11 (1995) 212 ITR 105 (Mad) 32 of 36 ::: Uploaded on - 22/02/2019 ::: Downloaded on - 26/02/2019 11:44:30 ::: OS ITXA 51 16.doc Supreme Court in case of Hazi Aziz (supra) and ratio laid down therein but observed that in view of later decisions in case of Prakash Cottom Mills (supra) and Ahmedabad Cotton Mfg Co Ltd (supra), ratio laid down in case of Hazi Aziz (supra) cannot be stated to have laid down inflexible rule of law to be followed in all eventualities and situations. 18. In our opinion, ratio laid down by Supreme Court in case of Hazi Aziz (supra) continues to hold field even post decisions in case of Prakah Cotton Mills (supra) and Ahmedabad Cotton Mfg Co Ltd (supra). In neither of these two decisions, ratio laid down in decision in case of Hazi Aziz (supra) which was decision of Bench of three Judges can be seen to have been diluted. In other words, what facts of case are materially similar as facts before Supreme Court in case of Hazi Aziz, ratio laid down therein would squarely apply. later decision cited by learned counsel for assessee emphasizes that not nomenclature of fine or penalty, but true character of payment must be taken into 33 of 36 ::: Uploaded on - 22/02/2019 ::: Downloaded on - 26/02/2019 11:44:30 ::: OS ITXA 51 16.doc consideration. If payment is compensatory in nature, it would be allowable deduction. Judgment of this Court in Pannalal (supra) proceeded on basis that infraction of law for which penalty was imposed, was by importer and not assessee who had purchased goods, though fine was borne by assessee. It was in this background, Court had held that payment in question was in nature of additional cost of goods for assessee. 19. Reliance was also placed on decision of Punjab & Haryana High Court dated 9.12.2008 in case of Commissioner of Income Tax Vs. Hero Cycles Ltd. However, this decision does not lay down any ratio which can be applied in present case. observations in judgment that: "there is no doubt that payments made in nature of penalty or fine for any wrongful act cannot be allowed as permissible deductions but mere label of payment is not conclusive. Certain payments may be incidental to business and have to be allowed on test of 'commercial expediency', if no violation of law or public policy is involved. Where penalty is not for deliberate 34 of 36 ::: Uploaded on - 22/02/2019 ::: Downloaded on - 26/02/2019 11:44:30 ::: OS ITXA 51 16.doc violation of law." can at best be seen as passing remarks, obiter dicta but not ratio. 20. In present case, Tribunal, without proper justification or detailed examination of material on record, followed line of logic adopted by this Court in case of Pannalal (supra) whereas facts as we have noticed squarely fall within parameters of decision of Supreme Court in case of Hazi Aziz (supra). Assessing Officer had summoned import licence holder M/s. Rajnikant Brothers whose representative had stated before Assessing Officer that M.P. Gupta, present assessee had imported almond by using licence and that redemption fine of Rs. 75 lacs paid to Madras Custom House was done by M.P. Gupta. All transactions were made by him and he was responsible for fine. He stated clearly that as per agreement, M/s. Rajnikant Brothers were only entitled to service charges. Thus, there was ample evidence on record suggesting that assessee had made imports through his direct involvement by using import licence of M/s. Rajnikant Brothers and that M/s. Rajnikant 35 of 36 ::: Uploaded on - 22/02/2019 ::: Downloaded on - 26/02/2019 11:44:30 ::: OS ITXA 51 16.doc Brothers merely received agreed commission. assessee cannot disassociate or divest himself from irregularities or illegalities committed in process of importing goods. Thus, penalty was for infraction of law committed by assessee. Under these circumstances, question is answered in negative i.e in favour of Revenue and against assessee. impugned judgment of Tribunal is set aside. Accordingly, appeal is disposed of. 21. In view of Revenue's appeal being allowed, question of releasing sum of Rs. 1,90,50,000/- in favour of respondent assessee would not arise. However, very dispute with respect to source of this amount is pending in Suit No. 445 of 2002 before learned Single Judge. It will be open for Revenue to file appropriate Motion before appropriate forum as may be advised for withdrawal of amount. 22. In view of disposal of appeal, nothing survives in Notice of Motion. same is disposed of accordingly. [ B.P. COLABAWALLA, J. ] [ AKIL KURESHI, J ] 36 of 36 ::: Uploaded on - 22/02/2019 ::: Downloaded on - 26/02/2019 11:44:30 ::: Principal Commissioner of Income-tax -17, Mumbai v. Sushil Gupta