TMI Blog1975 (11) TMI 32X X X X Extracts X X X X X X X X Extracts X X X X ..... penditure? (4) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in allowing the carry forward of the development rebate of Rs. 3,81,492 in respect of the assessment year 1966-67, though reserve created for that purpose fell short of the required amount, but by treating the excess of the reserve created for the assessment year 1967-68 as setting off the shortfall in the required reserve for assessment year 1966-67 ? " The facts leading to this reference are as follows. We are concerned in the present case with the assessment year 1967-68. The assessee is a limited company and manufactures cotton textiles and sells the same. Before the Income-tax Officer it was urged, (1) that the expenditure incurred on payment of betterment charges to the Ahmedabad Municipal Corporation should be allowed as admissible expenditure in computing the assessable income of the assessee. It was also urged, (2) that the amount of Rs. 9,700 paid by way of penalty for infraction of customs laws should be allowed as business expenditure ; (3) that an amount of Rs. 4,100 paid by way of penalty for delay in making payment of provident fund contribution of Rs. 8 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reserve for the assessment year 1966-67. Thereafter, at the instance of the revenue the four questions set out hereinabove have been referred to us. As regards question No. (1), the point sought to be canvassed therein is now covered by a decision of this Bench delivered in Income-tax Reference No. 9 of 1974, decided by us on November 10, 1975. For the reasons stated by us in that judgment, it must be held that the payment of betterment charges to the Ahmedabad Municipal Corporation under the provisions of the Bombay Town Planning Act, 1954, is not allowable as a deduction under section 37 of the Income-tax Act, 1961 and hence question No. (1) referred to us in the present case must be answered in the negative and against the assessee, that is, in favour of the revenue. Similarly, we find that question No. (4) referred to us is now covered by a decision of this High Court in Additional Commissioner of Income-tax v. Shri Subhlaxmi Mills Ltd. It has been there held that by virtue of the Explanation to section 34(3)(a) of the Income-tax Act, 1961, with retrospective effect, the deduction is not to be denied by reason only that the amount debited to the profit and loss account o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of spare parts for powerlooms which had installed by the Ahmedabad Jaya Bharat Cotton Mills Ltd., Ahmedabad (that being the name in which the assessee-company was functioning at the relevant time), were not covered by the specific endorsement for the importation of those spare parts on the face of the general licences which had been issued in favour of the assessee. The licences which were produced before the customs authorities were general licences without specific endorsement to cover the import of loom spares and the spares imported were not as per list " B " of appendix 50 and according to the customs authorities these licences were not valid to cover the goods imported. The customs authorities held that as the importers were not in possession of a valid licence, the importation contravened the provisions of section 111(d) of the Customs Act, 1962, read with section 3 of the Imports and Exports (Control) Act, 1947, and after calling upon the assessee to show cause why penal action should not be taken against them under section 112 of the Customs Act, 1962, and the goods confiscated under section 111(d) of the Customs Act, ultimately it was ordered by the Deputy Collector of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in question that we have to consider is, whether in view of the decision of the Supreme Court in Haji Aziz and Abdul Shakoor Bros. v. Commissioner of Income-tax, the amount of Rs. 9,700 paid as fine in lieu of confiscation of the goods can be claimed as a business expenditure. It is true, as pointed out by the learned Advocate-General appealing for the assessee, that the main controversy before the Supreme Court in Haji Aziz and Abdul Shakoor Bros. v. Commissioner of Income-tax was regarding the allowability of such expenditure as a deduction under section 10(2)(xv) of the Indian Income-tax Act, 1922, corresponding to section 37(1) of the Income-tax Act, 1961. In that case also the item of expenditure which was under consideration before the Supreme Court was the amount paid to the customs authorities in lieu of confiscation. The facts of that case were that the assessee concerned carried on the business of importing dates from abroad and selling them in India. The assessee imported dates from Iraq partly by steamer and partly by country craft, at a time when import of dates by steamer was prohibited. The dates which were imported by steamer were confiscated by the customs authorit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ...... Can it be said that a penalty paid for an infraction of the law, even though it may involve no personal liability in the sense of a fine imposed for an offence committed, is wholly and exclusively laid for the business in the sense as those words are used in the cases that have been discussed above ? In our opinion, no expense which is paid by way of penalty for a breach of the law can be said to be an amount wholly and exclusively laid for the purpose of the business. The distinction sought to be drawn between a personal liability and a liability of the kind now before us is not sustainable because anything done which is an infraction of the law and is visited with a penalty cannot on grounds of public policy be said to be a commercial expense for the purpose of a business or a disbursement made for the purposes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erndale M.R. has observed at page 238 : " It is perhaps a little difficult to put the distinction into very exact language, but there seems to me to be a difference between a commercial loss in trading and a penalty imposed upon a person or a company for a breach of the law which they have committed in that trading. " Rowlatt J., against whose decision the matter was taken in appeal before the Court of Appeal, had followed his own earlier decision in Commissioners of Inland Revenue v. E. C. Warnes Co. Ltd. and it was held by Lord Sterndale M.R. that the decision in Commissioners of Inland Revenue v. E. C. Warnes Co. Ltd. was correct. In E. C. Warnes case, the assessee-company carried on the business of oil merchants and was sued for a penalty on an information by the Attorney-General under section 5(1) of the Customs (War Powers) Act, 1915, for breach of certain orders and proclamations relating to the requirements of the Board of Customs and Estate with respect to a consignment of oil shipped by the company to Norway. The action was settled by consent on the agreement of the company to pay a mitigated penalty of pounds 2,000, such sum to cover the costs of the Crown, and o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ustoms authorities can be claimed as a deduction under section 28(i) of the Act of 1961 corresponding to section 10(1) of the Act of 1922. The reason is that this is not a commercial loss at all and cannot be said to be expenses for the purpose of enabling the assessee to carry on and earn profit in that business. Though such expenditure may be connected with the business, it is not really incidental to the business itself or as Rowlatt J. has said in E. C. Warnes Co. Ltd. cases " not a loss connected with or arising out of the trade ". Even if the wider category or the more general category covered by section 28(i) as explained by the Supreme Court in Badridas Daga v. Commissioner of Income-tax , is to be considered, it must be an expenditure connected with or arising out of trade and it must be something in the nature of a loss which is contemplable and in the nature of a commercial loss. Since the Supreme Court has said that the penalty paid to the customs authorities is not a commercial loss, it cannot be claimed as a deductible expenditure under section 28(i) of the Income-tax Act, 1961. This is the position which emerges from an examination of the decision of the Supreme Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Indian Income-tax Act, tax is made payable in respect of the profits or gains of business. Profits or gains of business would be the excess of the sale price over the cost price and in determining the profits or gains, therefore, the cost has to be deducted from the proceeds realised on sale of the goods. On the facts and circumstances of the present case, the actual cost of the goods to the assessee was not only what it had paid to the importers, but in addition thereto what it had to pay by way of penalty, in order to save the goods from being confiscated and lost to it. The penalty paid by it could, therefore, be regarded as part of the cost of the goods to it. It can also be regarded 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. It may be pointed out that, in cases where the penalty has to be incurred because of 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 regulations, the penalty paid by the assessee for such con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... He has urged before us that the assessee here is not a smuggler, but is an actual consumer of imported goods and all that has happened was that a technical breach came to be committed when spares for consumption were imported under general licences not specifically endorsed for importation of those particular spare parts for looms. He contented before us that looking to the nature of the infraction of law, we should treat it as cost falling under section 28(i) of the Act. However, in view of the language used by the Supreme Court in connection with these penalties payable for infraction of the law, we are unable to accept the contention of the learned Advocate-General. We find that in J. S. Parkar v. V. B. Palekar, Tulzapurkar J., to whom the matter was referred on difference between Deshpande and Mukhi JJ., has taken a view similar to the view that we are taking in the instant case. He held that before any loss can be claimed as a deductible loss, it must be a trading loss or commercial loss arising out of carrying on of business or it must be incidental to the busines and such loss must also fall on the assessee in his character as a trader. He held that where the property obt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or infraction of the Sea Customs Act and claimed to deduct it as business expenditure. The assessee's action which resulted in the penalty was an isolated act and the Tribunal found that the action was not done in good faith. The Patna High Court on these facts held that, on the facts and circumstances of the case, the loss was not fit to be taken into account under section 10(1) of the Indian Income-tax Act. 1922, nor was it a permissible deduction by way of expenditure or disbursement under section 10(2)(xv) of the Act. We find that the conclusion which we have arrived at independently on an examination of the authorities on the point is also the conclusion which has been reached by Tulzapurkar J. in J. S. Parker v. V. B. Palekar and by the Andhra Pradesh High Court and by the Patna High Court. We are thus fortified in the conclusion that we have arrived at. We regret that we cannot agree with the conclusion on the law point reached by the Bombay High Court in Commissioner of Income-tax v. Pannalal Narottamdas Co. In view of this conclusion we answer question No. (2) in the negative, that is, against the assessee and in favour of the revenue. Turning now to question No. ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ees employed by him, he incurs double liability. He becomes liable to be tried and shall be punishable with imprisonment which may extend to six months or with fine which may extend to one thousand rupees, or with both. He also becomes liable under section 14-B to make payment of what are known as damages in addition to the contribution amount but the damages are not to exceed the amount of the arrears and the damages are being worked out in accordance with the particular scale notified by the Central Government. The question that we have to consider in the present case is as to what is the nature of the payment which the employer has to make when an order under section 14-B to pay the damages for making a default in the payment of contribution is passed. In this connection there is a decision of the Patna High Court in R.B.H.M. Jute Mills (Private) Ltd. v. Regional Provident Fund Commissioner, Bihar . The question before the Patna High Court in that particular case was whether the levying of these damages under section 14-B of the Provident Funds Act, 1952, amounted to double jeopardy and whether the guarantee of article 20, clause (2) of the Constitution, could be availed of. At ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ay be pointed out that the contention on behalf of the petitioner was rejected on the ground that there was no double jeopardy in view of the decision of the Supreme Court in Maqbool Hussain v. State of Bombay, but regarding the nature of the payment made under section 14-B, the Patna High Court was very clear that this is in the nature of a penalty. With respect, we agree with the reasoning of the learned judges of the Patna High Court because when payment is made, it is not in lieu of any penalty. Payment of damages does not exonerate the person from being tried in a criminal court. It is well-settled law that for one and the same action, different penalties under different provisions of the law may be incurred by one and the same individual, for example, when some person is knocked down and fatally injured as a result of rash and negligent driving, an offence punishable under section 304-A for causing death by rash and negligent act may be said to have been committed. At the same time an offence punishable under section 279 for the rash and negligent driving itself can be said to have been committed. In the same manner two different penalties have to be paid by the individual wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The same was the question before the Delhi High Court in Commissioner of Income-tax v. Upper Doab Sugar Mills Ltd. In Deoria Sugar Mills Ltd. v. Commissioner of Income-tax it was a question of penalty for non-payment of arrears of sugarcane cess and in Mahabir Sugar Mills P. Ltd. v. Commissioner of Income-tax, the question was also a question of penalty paid in respect of non-payment of arrears of sugarcane cess. Since we have come to our own independent conclusion in the light of the nature of the amount paid as damages, it is not necessary for us to refer to these different decisions which touch on the question before us only incidentally. Under these circumstances we hold that the amount of damages paid for delay in the payment of provident fund contribution was not allowable as business expenditure and the Tribunal was, therefore, not justified in law in arriving at its conclusion on this aspect of the assessee's case. Question No. (3) must, therefore, be answered in the negative and against the assessee and in favour of the revenue. In the light of the above discussion, we answer the questions referred to us as under : Question No. (1). In the negative, against the ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
