TMI Blog1981 (7) TMI 4X X X X Extracts X X X X X X X X Extracts X X X X ..... roceedings were initiated against the assessee under S.111(d) of the Customs Act, 1962, for confiscation of the improperly imported goods and levy of penalty under s. 112 of the said Act. It, however, appears that the goods imported on the forged licence were already utilised by the assessee in manufacturing cloth. In other words, the goods were not available for confiscation, though they were liable to be confiscated under s. 111(d) of the Customs Act read with s. 3(2) of the Imports and Exports (Control) Act, 1947. The Collector of Customs, Bombay, on appreciation of evidence and material on record, held that the licence entitling the assessee to import goods worth Rs. 12,708 was unauthorisedly altered or forged to make it appear that it was for goods worth Rs. 1,12,708. The assessee and one of its partners, Suresh A. Shah, were held guilty of forging licence and importing goods worth Rs. 1,11,844 on such forged licence. The Collector of Customs, however, did not pass order confiscating the improperly imported goods because, as stated above, they were not available. He, however, levied penalty of Rs. 3,43,000 and Rs. 75,000 on the assessee and Suresh A. Shah, respectively, under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee's own case for an earlier year, held that the assessee was not entitled to a set-off of the business loss and unabsorbed depreciation of the earlier years. The assessee has challenged the view taken by the Tribunal rejecting both the above claims made by it and it is at its instance the following questions are referred to us for our opinion under s. 256(1) of the I.T. Act, 1961 (hereinafter referred to as " the Act"): " (1) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the claim of customs penalty of Rs. 4,18,000 was not allowable ? (2) Whether, the Tribunal was justified in law in holding that the assessee-firm was not entitled to set off of, (a) unabsorbed depreciation and (b) business loss of earlier years against the income of the year under consideration ?" The first question which we are called upon to consider is whether the assessee is entitled to a deduction of Rs. 4,18,000 paid by way of penalty to the customs authorities for contravention of the provisions of the Customs Act in the computation of his total income of the year under reference. This question is covered by a decision of the Supreme Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... test being that the expenses which are for the purpose of enabling person to carry on trade for making profits in the business are permitted but not if they are merely connected with the business. " The Supreme Court held that no expense which was paid by way of penalty for a breach of the law, even though it might involve no personal liability, could be said to be an amount wholly and exclusively laid for the purpose of the business of the assessee within the meaning of s. 10(2)(xv) of the I.T. Act and the fine paid by the assessee was not an allowable deduction under that section. In our opinion, the claim made by the assessee squarely falls within the ratio of the above decision of the Supreme Court. The amount of penalty of Rs. 4,18,000 was paid by the assessee for an infraction of law. It tampered with the licence issued in its favour for importing goods and imported yarn or goods worth more than rupees one lakh, which it had no authority to do. In other words, it improperly imported goods worth more than rupees one lakh. The goods imported by it were liable to confiscation under s. 111(d) of the Customs Act and it also exposed the assessee to pay penalty under s. 112 of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... loss occasioned in pursuing the business of smuggling: it was a loss in much the same way as if the currency notes had been stolen or dropped on the way while carrying on the business. It was a loss which sprang indirectly from the carrying on of the business and was incidental to it and its deduction had to be allowed under s. 10. The Supreme Court did not overrule its earlier decision in Haji Aziz and Abdul Shakoor Bros. case [1961] 41 ITR 350 (SC), but explained it by observing that in that case, penalty was paid for breach of law and as infraction of law was not a normal incident of business carried on by the assessee, penalty was rightly held to fall on the assessee in some character other than that of a trader. The Supreme Court observed that there was a distinction between an infraction of the law committed in the carrying on of a lawful business and an infraction of law committed in a business inherently unlawful and constituting a normal incident of it. As observed above, the instant case would be directly covered by the decision of the Supreme Court in Haji Aziz and Abdul Shakoor Bros. case [1961] 41 ITR 350 (SC). In the instant case also, the assessee was carrying on a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was penalty for infraction of law. Deduction of such penalty, as held above, cannot be allowed. The decision of the Supreme Court in S. C. Kothari's case will be applicable only to a case where the assessee suffered loss in a business which is not legal. While computing profit from the illegal business, loss suffered in such business has to be set off : but there is nothing in this decision which says that the assessee who had committed breach or infraction of law is entitled to deduction of penalty paid for such infraction in computing profits from his business. Therefore, the decision of the Supreme Court in S. C. Kothari's case [1971] 82 ITR 794, is of no assistance to the assessee. In the result, we hold that the Tribunal was right in rejecting the assessee's claim for deduction of Rs. 4,18,000 in the computation of its total income for the assessment year 1968-69, and answer question No. (1) referred to us for our opinion in the affirmative and against the assessee. So far as question No. (2) is concerned, it is directly covered by the decision of this court in the assessee's case for an earlier year, i.e., CIT v. Garden Silk Wvg. Factory [1975] 101 ITR 658. Following the sa ..... X X X X Extracts X X X X X X X X Extracts X X X X
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