TMI Blog1974 (8) TMI 39X X X X Extracts X X X X X X X X Extracts X X X X ..... er established importers or new-comers. The assessee obtained the provisional licence on the 2nd of March, 1952 (wrongly printed as the 2nd of May, 1952, in the statement of the case). This provisional licence was, under the existing rules, obtained by the assessee from the Joint Chief Controller of Imports and Exports, Calcutta, to import artificial silk yarn from the soft currency area and had Rs. 1,00,00,000 as limiting factor for value. Under the free licensing scheme, January/June, 1952, mentioned above, the provisional licence had to be confirmed within two months from the date of the issue, failing which it was to be treated as cancelled, and, according to a further provision in the licensing order, no clearance of goods was permissible against any provisional licence which had not been confirmed. The assessee then applied for confirmation of the aforesaid provisional licence dated the 2nd of March, 1952. The Joint Chief Controller of Imports and Exports, Calcutta, refused to confirm the licence. On the 26th of July, 1952, the assessee appealed before the Joint Chief Controller of Imports and Exports for a reconsideration of the matter. While the matter was still pending, it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to as " the Act "). The assessee having gone up in a second appeal to the Income-tax Appellate Tribunal, it was contended there that the aforesaid entire claim was an allowable expenditure under section 10(2)(xv) of the, Act or, in the alternative, it should be allowed under section 10(1). Both the contentions put forward on behalf of the assessee were rejected by the Tribunal. The Tribunal held on an appraisal of all the materials on record that the cumulative effect of all the circumstances led to the irresistible conclusion that the imports made by the assessee were not so made in good faith. It was further held that the subsequent conduct of the assessee like concealing all the outstanding overseas orders and co-operating with the customs authorities in all their investigations was a virtue of necessity which might have, perhaps, been a mitigating circumstance while assessing the assessee's guilt but certainly the act of the assessee in importing the materials in question was not bona fide. Having thus dismissed the appeal of the assessee, at its instance the aforementioned question of law has been referred to this court. Mr. Tarkeshwar Prasad, learned counsel for the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the learned Chief Justice, after quoting from the decision of the judicial Committee of the Privy Council in the case of Income-tax Commissioner v. Chitnavis, that what are chargeable to income-tax in respect of a business are the profits and gains of a year and in assessing the amount of the profits and gains of a year account must necessarily be taken of all losses incurred, otherwise a true picture of the profits and gains will not emerge, went on further to observe : " It is true that if there is a specific prohibition in the Act, the court will not permit an allowance in face of that prohibition. It is equally true that if there is an allowance permissible under the Act and the allowance deals with the whole subject-matter, the court will not permit that subject-matter to be expanded. " This has all along been understood to be the true meaning and purpose of the provision of section 10(1). Although the English income-tax statute is different in some respects, the true representation of the balance of profits or gains has always been quoted with approval from high authorities in England by the Supreme Court. Two such apt observations have always to be borne in mind while ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der section 10(1) or as an allowable expenditure or disbursement under section 10(2)(xv) must be granted. Judging in the light of these well-settled principles of law and applying these tests, it has to be seen in the present case as to whether the expenditure or disbursement claimed as a permissible deduction under section 10(2)(xv) by the assessee was laid out wholly and exclusively for the purpose of the assessee's business ; alternatively, whether this item or expenditure could be said to be justifiable when entered on the debit side of the trading account of the balance-sheet of the assessee resulting in a true computation of its business loss entitling it to a relief under section 10(1) although it may not be covered by the permissible deductions under any of the provisions of section 10(2) of the Act. Judging from either point of view, in my opinion, the assessee in the present case will not be entitled to relief either under section 10(1) or section 10(2)(xv) of the Act. The facts and the principles involved in the present case, in my view, are fully covered by a decision of the Supreme Court in the case of Haji Aziz and Abdul Shakoor Bros. v. Commissioner of Income-tax. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 will be seen from the paragraph quoted above that such an expense over the penalty imposed for an infraction of law has been viewed by the Supreme Court as not being a commercial loss falling on the assessee as a trader, applying the test that the expenses which are for the purpose of enabling a person to carry on trade for making profits in the business were not permissible if they were merely connected with the business. And, such a payment of a sum by way of penalty has been held to be, if at all, merely remotely connected with the business. As a matter of fact, the Supreme Court has approved and relied upon a decision of the Court of Appeal in Commissioner of Inland Revenue v. Alaxander von Glehn Company. In that case also the Court of Appeal was seized with a question of the present nature, and, while dealing with that question, Lord Justice Warrington, at page 568, observed as follows : " In the case of a trade loss is not always, or perhaps one may even say is not in general, measured ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the case of Prafulla Kumar Malik v. Commissioner of Income-tax, Poona Electric Supply Co. Ltd. v. Commissioner of Income-tax, Dalmia Jain and Co. Ltd. v. Commissioner of Income-tax and Commissioner of Income-tax v. Birla Cotton Spinning and Weaving Mills Ltd., two decisions of the Orissa High Court in Commissioner of Income-tax v. Prafulla Kumar Mallick and Govind Chowdhury and Sons v. Commissioner of Income-tax and two decisions of the Bombay High Court in Commissioner of Income-tax v. Pranlal Kesurdas and Commissioner of Income-tax v. Pannalal Narottamdas Co. So far as the case of Prafulla Kumar Mallick is concerned, the assessee, who had agreed to supply paddy and rice of " fair average quality " to the Government, had incurred a penalty imposed by the Collector under a clause of the agreement, which sum under another term of the agreement was deducted from the bills of the assessee. The Income-tax Appellate Tribunal having held that it would not be taxed in the hands of the assessee in view of section 10(1) of the Act, the High Court, on a reference made to it as to whether it could be taxed in view of section 10(1), answered a different question altogether that it was no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; but different results follow from the different types of loss. Before referring to the case of Poona Electric Supply Co. Ltd., I proceed to discuss the other cases relied upon by the learned counsel for the assessee. The decisions of the Supreme Court in Dalmia Jain and Co. Ltd. v. Commissioner of Income-tax and Commissioner of Income-tax v. Birla Cotton Spinning and Weaving Mills Ltd. related to the deductions on account of law charges and litigation expenses ; and it is already too well settled that expenses over litigation--whether the litigation ultimately succeeds or fails--have to be allowed as permissible deductions provided the purpose of the litigation is germane to, and is necessary for, the purpose of carrying on the trade. The decision of the Bombay High Court in Commissioner of Income-tax v. Pranlal Kesurdas, in one sense, instead of supporting the contention of the learned counsel for the assessee, goes against his contention. The assessee in that case was pursuing a business of adatia and speculation and one of the assessee's constituents incurred a loss of a certain amount which ultimately became irrecoverable and was written off by the assessee as bad debt. B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he same reasoning, in my view, must apply to the instant case also in these words : " It would be clear from this order that the conclusion of the Tribunal that what was paid as penalties by the assessee was to be regarded as cost of the goods imported was based on its acceptence of the contention of the assessee, which the Tribunal held he was entitled to contend. In other words, the conclusion of the Tribunal was based on its acceptance of the assessee's case that his purchase of the bills of lading was in good faith. It is urged by Mr. Joshi, the learned counsel for the department, that there is no evidence on record to justify a finding of good faith because, as pointed out by the Appellate Assistant Commissioner, the assessee had failed to prove that the penalty was levied for the faults of the five parties and not for his own fault. Now, whether there is evidence to support the said finding is, in our opinion, quite different from whether there is such a finding recorded by the Tribunal or not. If the grievance of the department was that the finding was in the absence of any evidence, it should have asked for a proper question in that connection either in the applica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eturned by him by way of rebate to the consumers under statutory compulsion. It is as if he received only from the consumers the original amount minus the amount he returned to them. " It would thus be seen that none of the decisions relied upon by the learned counsel for the assessee in any way detracts from the force of the legal principles laid down by the Supreme Court in the case of Haji Aziz and no other case referred to above can be said in any way to militate against any of the principles upon which the decision of the Supreme Court in that case is based. On the contrary, two decisions of the Delhi High Court may be referred to in support of the conclusion that I have reached. They are Commissioner of Income-tax v. Mahalaxmi Sugar Mills Ltd. and Commissioner of Income-tax v. Upper Doab Sugar Mills Ltd. The latter case has, in its turn, referred to, and relied upon, the decision of the Supreme Court in the case of Haji Aziz ; but in both these cases two Bench decisions of the Delhi High Court have held that penal interest paid by the assessee-sugar mills, as penalty for omission on its part to deposit cess in time, was not a legitimate business expense either under sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X
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