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Issues Involved:
1. Whether the penalty imposed under the Sea Customs Act was an allowable deduction under section 10(1) or section 10(2)(xv) of the Indian Income-tax Act, 1922. Issue-wise Detailed Analysis: 1. Allowability of Penalty as Deduction under Section 10(1) or Section 10(2)(xv) of the Indian Income-tax Act, 1922: The primary question referred to the court was whether the penalty of Rs. 11,86,700 imposed under the Sea Customs Act, resulting in a loss of Rs. 9,49,287-3-0, was fit to be taken into account under section 10(1) or was a deduction allowable under section 10(2)(xv) of the Indian Income-tax Act, 1922. The assessee, a registered firm dealing in cotton textiles, yarn, and petrol, faced penalties under the Sea Customs Act for importing goods based on a forged licence. The Income-tax Officer disallowed the penalty amounts as business expenses, and this decision was upheld by the Appellate Assistant Commissioner and the Income-tax Appellate Tribunal. The Tribunal concluded that the imports were not made in good faith and were not part of the regular business activity of the assessee. The court examined whether the penalty could be considered a legitimate business expense under section 10(1) or section 10(2)(xv). The scheme of section 10 requires profits and gains to be computed subject to certain express allowances and prohibitions. A deduction must be allowed if it is a proper debit item against the incoming trade, provided it is not expressly or impliedly prohibited by the Act. The court referred to various precedents, including the Supreme Court's decision in Haji Aziz and Abdul Shakoor Bros. v. Commissioner of Income-tax, which held that penalties imposed for breach of law during the course of trade cannot be described as commercial losses and are not deductible expenses. The court emphasized that such penalties are not incidental to the business and are not incurred for the purpose of earning profits. The court also considered the principles laid down in other cases, such as Poona Electric Supply Co. Ltd. v. Commissioner of Income-tax, which stressed that business profits must be computed on business principles and should not include amounts returned under statutory compulsion. In conclusion, the court held that the penalty imposed for the infraction of the Sea Customs Act was not an allowable deduction under section 10(1) or section 10(2)(xv) of the Indian Income-tax Act, 1922. The expenditure was not incidental to the business and was incurred due to the assessee's action in contravention of the law, which was not a normal incident of business. Judgment: The court answered the reframed question in the negative, deciding in favor of the revenue and against the assessee. The penalty of Rs. 11,86,700 was not fit to be taken into account under section 10(1) nor a permissible deduction under section 10(2)(xv) of the Indian Income-tax Act, 1922. The assessee was ordered to pay the costs of the reference, with a hearing fee of Rs. 100.
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