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1962 (8) TMI 120

..... n, J. The question that stands referred to us for determination is: "Whether the aforesaid sums of ₹ 2,35,758 and ₹ 10,303 respectively, paid by way of damages and legal expenses, are allowable in computing the profits and gains of the assessee's business under section 10 of the Act?" The facts giving rise to this reference are these : The assessee is a public limited company carrying on business in the export of groundnut oil. Export of groundnut oil is governed by notifications issued by the Joint Chief Controller of Exports, Bombay, from time to time. Broadly stated, the policy of the Government in permitting exports of this commodity varies from period to period, and it is generally indicated for every half-year. The Government of India, through the appropriate department, decides upon such policy, and decides 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 export .....

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..... eason for such failure appears to be the changed policy of the Government with regard to export of groundnut oil as a result of which no quotas for export were at all allotted in the second half-year of 1953. The consequence of the breach of the contract was a demand for damages by the Belgian firm and the matter was referred to arbitration. The arbitrators failing to agree, an umpire, to whom the matter was referred, held that the assessee was liable in damages to the extent of £ 17,100 There was an appeal to the committee of the London Oil and Tallow Trades Association in accordance with the rules of arbitration and appeal. As provided by these rules, the Board of Appeal submitted a copy of the award made by it, stated in the form of a special case for the decision of the High Court of Justice, Queen's Bench Division. In the meantime, 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 assesse .....

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..... said that the assessee incurred an expense connected with the lawful conduct of the assessee's business. Though the reason is not precisely stated, that seems to be the substance of the Tribunal's rather generalised observations in its appellate order. The Tribunal posed the question thus : "Can you say as a matter of business common sense that in giving the guarantee in question notwithstanding the legal impediments, the assessee acted as a straight and honest businessman would do in the carrying on of his business in a lawful manner ?", that is to say, the Tribunal was of the opinion that it was improper on the part of the assessee to have given a guarantee to the other contracting party about its ability to fulfil the contractual obligations and that since the giving of such guarantee cannot be said to be the normal 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 .....

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..... conditions are favourable to him and obtain custody of the goods in sufficient time to enable the export of the commodity. Nor can it be said that the furnishing of a guarantee which is an invariable feature of contracts of this kind is in itself an imprudent act. The Tribunal in coming to the conclusion that it was, while at the same time conceding that the assessee did not infringe any law, relied more upon its inferences about what the future policy of the Government with regard to exports might be upon any fact on the basis of which one could say that the course pursued by the assessee was not the normal trade practice. Since the learned counsel for the department also claimed that a prohibition against exports could be spelt out of the notifications issued by the Government, we called upon him to furnish us with those notifications 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 .....

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..... the quota should be entered into. This was reiterated in a trade control circular dated July 2, 1953. It emphasised the position thus : "As already announced in the press note of the 2nd June, 1953, no fresh sales should be made by the trade against the groundnut quotas. The balance quotas against which no sales have been made will be treated as lapsed." The resultant position was that, even if a trader had been allotted a certain quota for export for the period, January to June, 1953, his sales registered with the trade control authorities up to the 2nd of June, 1953, were accepted as coming within the quota and any balance of allotment remaining was treated as lapsed or cancelled. For the second half-year July to December, 1953, there were no allotments of quotas to established exporters, so that no exporter 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 .....

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..... at it could fulfil its commitments under the contracts. No material was placed before us by the department or has been suggested as available to indicate that in entering into contracts in September and October, 1953, which contracts called for fulfilment within the following four months, the assessee was entering into any speculative venture or that that mode of doing business was contrary to the usual trade practice. On the other hand, we have already stated that in transactions involving exports to foreign countries, the dealer is of necessity compelled to enter into engagements well in advance of the time stipulated for the fulfilment of the contract, and that, we believe, is the usual practice. But for the fact that there were restrictions upon or prohibitions against the export of this commodity, it would be undeniable 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, .....

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..... ned judges held that payments of penalty for infraction of a law fall outside the scope of permissible deductions. A penalty in any such case is imposed as punishment on the offender as a responsible person owing obedience to the law. Its nature severs it from the expense of trade. It is not incurred by him in his character as a trader. A large number of English and Indian cases were considered by the learned judges and they expressed their conclusion thus: "It is not enough if the loss sustained or expenditure incurred is in some sense connected with the trade, for it may be only remotely connected with the trade or it may be connected with something else quite as much or even more than with the trade. Only such losses can be deducted as are connected in the sense that they are really incidental to the trade itself. 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 a .....

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..... ess itself..." Raj Woollen Industries v. Commissioner of Income-tax [1961] 43 ITR 36 deals with certain involved aspects of an export transaction. There, the assessee had contracted to sell wool to a party in England at a time when the export of wool to foreign countries could be done only under a licence issued by the Government. Having exhausted its quota under the export licence issued to it, the assessee entered into an arrangement with another company which had the requisite export licence, whereby the assessee sold the wool to that company, and after that company had exported the bales, the assessee repurchased the wool in the course of the transit. The wool so exported ultimately reached England, that is, the party with whom the assessee had contracted. In the sale and the purchase, the assessee had to pay a 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 .....

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..... red to at some length deal with the first and second half-years of 1953 and the later periods and clearly indicate that the policy of the Government was not one of a total ban upon the exports but that any export should be made only under cover of a licence issued by a lawfully constituted authority, and in the light of an export trade and the incidents of that trade and the manner of carrying on that trade, viewed against the background of the policy of the Government being declared from time to time and amended from time to time, it has to be decided whether in entering into contracts in September and October, 1953, the assessee was contravening any express or implied prohibition, or whether its act was opposed to any policy which had been declared. Giving the matter our careful consideration, we are satisfied that 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 .....

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..... xpected that, even if there was a prohibition, it would be only of a temporary duration, so that an extension of the time of shipment by two months would perhaps be sufficient to enable him to export after the prohibition was withdrawn. The Tribunal appears to have been induced to believe that the assessee should not have given such a guarantee and that the giving of such a guarantee was somewhat out of the ordinary. We are unable to accept this interpretation. The assessee was perfectly justified to our minds in believing that there would not be an absolute prohibition against the export of groundnut oil and that, as had been happening in the past, it would be allotted some quantity for export though perhaps less than the quantity which was allotted to it in the first half-year of 1953. Its anticipation was a reasonable 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 .....

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