TMI Blog1963 (11) TMI 94X X X X Extracts X X X X X X X X Extracts X X X X ..... nt, 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come-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, theref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or in a different set of circumstances and that the answer must be given on the basis of the facts and the circumstances as stated in the agreed statements of the cases. 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 assessees 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ler 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 molasse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stan 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 Commissioners of Inland Revenue v. Warnes Co. Ltd. [1919] 2 K.B. 444; 12 Tax Cas. 227, 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 assessment of income-tax. Rowlatt J. said that a penal liability of this kind cannot be regarded as a loss connected with or arising out of a trade and that a loss connec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mal 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 Ea ..... X X X X Extracts X X X X X X X X Extracts X X X X
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