TMI Blog2006 (7) TMI 135X X X X Extracts X X X X X X X X Extracts X X X X ..... t of the court was delivered by R. Gururajan J.- The Revenue is before us seeking an order to set aside the orders of the Income-tax Appellate Tribunal dated October 21, 1999 in I.T.A. No. 276/Bang/92 and the order of the Commissioner of Income-tax (Appeals)-I for the assessment year 1970-71, and to set aside the order of the Income-tax Appellate Tribunal dated October 21, 1999, bearing I.T.A. No. 150/Bang/92, by confirming the assessment orders passed by the Assessing Officer in respect of both the assessment years. The following questions of law arise for our consideration: "(1) Whether the redemption fine of Rs. 2,00,000 paid by the assessee in respect of the assessment year 1977-78 to the excise authorities for the infraction of law to release the seized goods, can be treated as business expenditure? (2) Whether the Tribunal even before deciding the issue is correct in holding that in respect of penalty paid for the infraction of law two views are possible and therefore the one favourable to the assessee should be taken? (3) Whether the Tribunal was correct in affirming the deletion made by the Appellate Commissioner in respect of unexplained investment made by the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of purchase to the extent of Rs. 2,00,000 paid as redemption fine. The Central excise authority raided the business premises of the assessee and confiscated finished goods valued at 18,200 kgs of copper, etc., Penalty of Rs. 1,00,000 was levied under section 173Q(1) of the Central excise Rules, 1944. Penalty was not paid. He was given option to pay fine to redeem the finished goods confiscated. He paid a sum of Rs. 2,00,000 as redemption fine. In the trading and profit and loss account drawn by the assessee, a sum of Rs. 6,73,571.55 was debited as purchases, which included redemption fine of Rs. 2 lakhs. The assessee debited a sum of Rs. 15,698.75 as excise duty. The same was not revealed to the Department. According to the Department, the expenditure incurred by the assessee is not for commercial expediency and is only for infraction of law and is in the nature of personal liability. A sum of Rs. 2 lakhs was brought to tax by the Department. Aggrieved as against the orders of assessment in respect of the assessment years 1970-71 and 1977-78, the assessee preferred appeals to the Commissioner of Income-tax. The appeal for the assessment year 1970-71 in respect of addition of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ority has chosen to dismiss the appeal. An appeal was filed before the Tribunal. The Tribunal has accepted as business expenditure a sum of Rs. 2 lakhs in the case on hand. Courts have considered the cases with regard to violation of the provisions of law for the purpose of payment of tax under the Income-tax Act. The Supreme Court in Maddi Venkataraman and Co. P. Ltd. v. CIT [1998] 229 ITR 534, has chosen to consider the case in the matter of violation of the provisions of the Foreign Exchange (Regulation) Act, and the consideration of the same as business expenditure. The Supreme Court at page 545 of its judgment noticed the violation of the provisions of the FERA. The Supreme Court also noticed the pleas that unless it entered into such a transaction, it would have been unable to dispose of the unsold stock of inferior quality of tobacco. After noticing the same, the Supreme Court held that: "Spur of loss cannot be a justification for contravention of law. The assessee was engaged in tobacco business. The assessee was expected to carry on the business in accordance with law. If the assessee contravenes the provisions of the FERA to cut down its losses or to make larger profi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e claimed as a deductible expense. It must be a commercial loss and in its nature must be contemplable as such. Such penalties which are incurred by an assessee in proceedings launched against him for an infraction of the law cannot be called commercial losses incurred by an assessee in carrying on his business. Infraction of the law is not a normal 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. It was argued that unless the penalty is of a nature which is personal to the assessee and if it is merely ordered against the goods imported it is an allowable deduction. That, in our opinion, is an erroneous distinction because disbursemen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urt. The Tribunal cannot give a finding on the basis of a judgment which is not available in terms of the material placed before us. We express our displeasure in the matter. The assessee has placed before us two judgments for our consideration. The first judgment is reported in CIT v. Pannalal Narottamdas and Co. [1968] 67 ITR 667 (Bom). It is no doubt true that in the said judgment it is stated that the penalty paid be regarded as part of the cost of the goods; and that it could be regarded as an amount expended wholly and exclusively for the purpose of the business. This finding in the light of a Bench decision of this court in CIT v. Mamta Enterprises [2004] 266 ITR 356, is not acceptable to us. With respect, we differ from the findings of the Bombay High Court. The next judgment is CIT v. N.M. Parthasarathy [1995] 212 ITR 105 (Mad). In the said judgment we see that the Madras High Court has considered "business expenditure" in paragraphs 4 to 6 in the said judgment. The court while considering the issue of business expenditure has noticed various facts, and ultimately at page 117 the Madras High Court has chosen to say that: "On the face of the decision in the cases of P ..... X X X X Extracts X X X X X X X X Extracts X X X X
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