TMI Blog1962 (8) TMI 120X X X X Extracts X X X X X X X X Extracts X X X X ..... s also as to the total quantity of the commodity which should be permitted to be exported from the country. The established exporters in the line are granted certain export allotments. During the relevant time, there was a public notice issued through the Joint Chief Controller of Exports on the 16th December, 1952, informing all established exporters that a total quantity of 40,000 tons of groundnut oil would be permitted to be exported for the half-year January to June, 1953. This was followed by a further notice which announced that established exporters would be granted export allotments for the period, January to June, that is to say, an established exporter would be permitted to export a certain quantity of groundnut oil during that period against the overall quota of export of 40,000 tons. The assessee, which is an established exporter, was thus allotted an export quota of 1335 tons for that half year. It is common ground that the period during which this quantity could be exported was later extended up to the end of August, 1953. Early in June, 1953, however, a notice was issued by the appropriate authority calling upon the established exporters who had entered into commitm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... time, the assessee took legal opinion upon the sustainability of the grounds of his attack upon the award. The assessee's counsel was emphatically of the opinion that there was no prospect of persuading the court to reverse the Appeal Board's decision and that the assessee would be well-advised to abandon further proceedings. The assessee acted upon this advice and decided not to pursue the matter further but to pay the damages and costs awarded against it. These sums amounted to the figures mentioned in the question. In its assessment for the assessment year 1956-57, the assessee claimed that it was entitled to deduct the above sums being the damages and the legal expenses incurred in connection with its business. It may be mentioned that the accounting year of the assessee relevant to the assessment year in question ended on the 31st October, 1955, and the relevant entries in the account books of the assessee were made on the last date of the year. In fact, the decision to abandon the appeal was taken only on 7th November, 1955. The Income-tax Officer rejected the claim of the assessee taking the view that the assessee had entered into unlawful contracts and that an ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... incident of the assessee's business, any loss flowing therefrom could not also be regarded as a loss incidental to the business. It, however, expressed its view that the damages was not a penalty paid for the infraction of any specific statutory prohibition. On the application of the assessee under section 66(1) of the Act, the question set out earlier was referred for the decision of this court. Our decision of the question must necessarily depend upon a construction of the notifications issued by the Government in the exercise of the powers conferred upon them under the Imports and Exports Control Act, 1947, and of any notifications issued under the Import Control Order, 1955, which itself was promulgated under the Imports and Exports Control Act, 1947. It has been contended by the learned counsel for the assessee that the entering into the contracts in the present case was the normal and lawful means of furthering the trade of the assessee ; that at the time the contracts were entered into there was no prohibition against the export of groundnut oil; that the policy with regard to the export was being announced from time to time and at no point of time could anyone ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fications and we shall now proceed to consider them. An export trade control circular issued on the 18th November, 1952, related to the period, July to December, 1952, and the trade was informed that the quota of that period was valid for shipment till December 31, 1952. This notification does not impinge upon the matters now in question but is only referred to as the starting point. In another circular dated December 16, 1952, the export policy in respect of the vegetable oil and oil seeds for the half-year January to June, 1953, was published for the information of the trade. It stated that a quota of 40,000 tons had been fixed for export and that allotments against this quota would be made to established shippers and newcomers. It was further notified that the period of shipment of the unshipped balance of the quota of the previous half-year July to December, 1952, which would have ended with 31st December, 1952, was extended up to the 31st of March, 1953. In a further circular dated 21st December, 1952, the method of allotment of quotas to established shippers of groundnut oil was indicated. It was also laid down that the allotted quota should be so dealt with that not more ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r could have obtained a licence for export of groundnut oil on the basis of any sales effected during that half-year. It is principally this feature, taken along with the circumstance that even in respect of the quota for the first half-year the exporters were prohibited from entering into any further commitments on and after June, 1953, and the further fact that any unutilised part of that quota had lapsed, that has been relied upon by the department in inferring that there was a prohibition against the export in the second half-year of 1953. Though not strictly relevant to exports of the second half-year, the subsequent developments with regard to the export of groundnut oil give a clue to the manner in which these exports are sanctioned and quotas are allotted. It appears that a press note was issued on the 29th July, I954 notifying all established shippers to apply for export allotments subject tc a maximum allotment of 400 tons to any one shipper. Exports against such allotments were permitted till the end of October, 1954. The press note itself indicated that the reason for allowing exports in the second half-year of 1954 was due to the steady downward trend of the price ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... niable that had the assessee sustained any loss on account of its engagements, such loss would have been incidental and indeed intimately connected with the course of its business and that such a loss would have been allowable as a deductible item. But what is contended for by the learned counsel for the department is that the notifications that have been referred to, read in the light of the Import and Export Control Act, must lead to the conclusion that there was a prohibition upon export and that if that were so, the assessee, in entering into the sale contracts at a time when the prohibition was in force, was engaging itself upon an unlawful activity, or, at any rate, on an activity which was opposed to public policy, in which event it cannot be heard to say that the loss is one sustained in the course of business. Before we take up the question whether the contracts entered into by the assessee were either illegal or were opposed to public policy, we may refer to a few cases upon which the department relies, in order to appreciate the circumstances in which an illegality can be spelt out. In Senthi-kumara Nadar Sons v. Commissioner of Income-tax [1957] 32 ITR 138 , it was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . It is not enough that the disbursement is made in the course of, or arises out of, or is connected with, the trade or is made out of the profits of the trade. It must be made for the purposes of earning the profits. They then proceeded to consider whether there had been any transgression of the law, and came to the conclusion that since the business of the assessee was subject to statutory control and it could carry on the business only within the limits of such control, a violation of the undertaking it had given to export the coffee took the activity outside the normal course of business and the damages incurred by it became for that reason unconnected with and not incidental to the business that it carried on. This decision of the Madras High Court was approved in Haji Aziz and A.S. Bros. v. Commissioner of Income-tax [1961] 41 ITR 350 (SC). That case was one of import. The assessee therein in contravention of certain notifications imported dates from Iraq. The commodity was confiscated by the customs authorities and under section 167(8) of the Sea Customs Act, the assessee had to pay a penalty for getting the goods released. This penalty was claimed by the assessee as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sum of ₹ 6,800 to the other company and claimed this amount as a deduction under section 10(2)(xv) of the Act. The question arose whether it was an allowable item of expenditure. The learned judges of the Punjab High Court held that the transaction was so arranged as to evade a lawful prohibition, viz., export of wool without the requisite export licence, that it represented an amount which the assessee spent to enable it to carry on its business unlawfully and it was not therefore entitled to the deduction. Can it be said in the present case that the assessee entered into an unlawful contract, unlawful in the sense that it was against the declared export policy of the Government, or was against any specific restriction or prohibition lawfully notified ? This question takes us to a construction of the Imports and Exports Control Act. Under section 3 of that Act, the Central Government is empowered by an order to be published in the official gazette to make provisions for prohibiting, restricting or otherwise controlling in all cases or in specified classes of cases and subject to such exceptions, if any, as may be made by or under the order, the import, export, ... of good ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the assessee did not contravene any express or implied prohibition. Nor was the policy relating to exports such an inflexible one that the assessee should have known that he could not obtain any licence for the export of the commodity either in the second half of the year 1953 or in the first half of the year 1954. We have already expressed our view that the manner in which the assessee entered into these contracts or the stipulations that figured in the terms of the contract were the normal features of the conduct of an export trade in a commodity of this kind. When so much has been found in favour of the assessee, it must necessarily follow that the loss incurred in the course of the business was incidental to and intimately connected with the conduct of the business and for the purpose of earning profits for the business. It should follow in the light of the decided cases to which brief reference has been made that the expenditure is an allowable item. Mr. Ranganathan, learned counsel for the department, did not attempt to support the view taken by the Tribunal that the particular contractual obligations undertaken by the assessee were of such a kind that a straight and ho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sonable one and its entering into contracts in advance of the declaration of the policy of the Government with regard to the export was not so opposed to trade practice that it can be labelled as not in the course of business. In the light of the above discussion, we are of the view that the Tribunal had no material before it to warrant the conclusion that there was either an infraction of the law or a business activity which ran outside the sphere of a lawful activity. We accordingly answer the question in the affirmative and in favour of the assessee. We indicated earlier that the account year of the assessee, the previous year relevant to the assessment year, ended on the 31st October, 1955. We stated also-records show it to be so-that the assessee abandoned the appeal in the English High Court only on 7th November, 1955. Mr. Ranga-nathan, for the department, argued that in any event the allowance could not be claimed for the assessment year 1956-57, as the liability could not arise so long as the matter was pending adjudication in a court of law. We notice however that this aspect of the question was not put in issue before the Tribunal, nor did the Tribunal deal with it. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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