TMI Blog1960 (11) TMI 15X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by two notifications dated December 12, 1946, and June 4, 1947, but they were permitted to be brought by country craft. Goods which had been ordered by the appellant were received partly by steamer and partly by country craft. Consignments which were imported by steamer and were valued at Rs. 5 lakhs were confiscated by the customs authorities under section 167, item 8, of the Sea Customs Act, but under section 183 of that Act the appellant was given an option to pay fines aggregating Rs. 1,63,950 which sum on appeal was reduced to Rs. 82,250. This sum was paid and the dates were released. On the sale of the goods certain profits accrued out of which it sought to deduct Rs. 82,250 paid as penalty on ordinary principles of commercial accounting. The Income-tax Officer disallowed this claim which was also disallowed by the Appellate Assistant Commissioner. On appeal to the Income-tax Appellate Tribunal, this sum was held to be allowable by a majority of two to one. At the instance of the respondent the Tribunal referred the following question to the High Court for its opinion : "Whether on the facts and in the circumstances of the case, the payment of Rs. 82,250 is an allowable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xpenditure but if it is for the purpose of saving the person of the assessee then it is not. Therefore, as the order passed was against the stock-in-trade and not against the person of the appellant firm it was an item expended for the release of the stock-in-trade of the appellant firm and it would be an allowable expenditure. The action taken against the appellants was one under section 167, item 8, which is in Chapter XVI dealing with offences and penalties and provides : " 167. The offences mentioned in the first column of the following schedule shall be punishable to the extent mentioned in the third column of the same with reference to such offences respectively : Section of this Act Offences to which offence has Penalties reference 8. If any goods, the importation such goods shall be liable to or exportation of which confiscation ; and any person is for the time being prohibited concerned in any such offence or restricted by or under 18 19 shall be liable to a penalty Chapter IV of this Act, be not exceeding three times imported into or exported the value of the goods or not from (India) contrary to such exceeding one thousand prohibition or restriction ; or ru ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... where it was said that a distinction must be drawn between an action in rem and proceeding in personam and that confiscation of the goods is a proceeding in rem and the penalties are enforced against the goods whether the offender is known or not. The view taken by this court in the other two cases cited by counsel for the appellants, i.e., Leo Roy Frey v. Superitendent, District Jail, Amritsar, and Thomas Dana v. State of Punjab, is the same, In Dana's case Subba Rao, J., said at page 298 : "If the authority concerned makes an order of confiscation it is only a proceeding in rem and the penalty is enforced against the goods. On the other hand, if it imposes a penalty against the person concerned, it is a proceeding against the person and he is punished for committing the offence. It follows that in the case of confiscation there is no prosecution against the person or imposition of a penalty on him." In Maqbool Hussain's case the question for decision was whether after proceedings had been taken under the Sea Customs Act an accused person could be prosecuted and could or could not rely upon the plea of double jeopardy, it was held that he could not. In Shewpujanrai's case t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e and in the nature of a commercial loss. I do not intend that to be an exhaustive definition, but I do not think it is possible to say that when a fine--which is what the penalty in the present case amounted to--has been inflicted upon a trading body, it can be said that that is a loss connected with or arising out of' the trade within the meaning of this rule." This statement of the law was approved in Commissioners of Inland Revenue v. Alexander von Glehn Co. Ltd. where also in similar circumstances by consent of the assessee penalty of pound 3,000 was paid and the penalty plus the costs were claimed as deduction in arriving at the profits. The Special Commissioners had found that the penalty and costs were incurred by the assessee in the course of carrying on their trade and so incidental thereto and were admissible deductions. Rowlatt, J., on a reference held it to be a non-deductible item. This judgment was affirmed on appeal by the Court of Appeal. Lord Sterndale, M. R., was of the opinion that it was immaterial whether technically the proceedings were criminal or not. The money that was paid was paid as a penalty and it did not matter if in the information it was calle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e law : "During the course of the trading this company committed a breach of the law. As I say, it has been agreed that they did not intend to do anything wrong in the sense that they were willingly and knowingly sending these goods to an enemy destination; but they committed a breach of the law, and for that breach of the law, they were fined. That, as it seems to me, was not a loss connected with the business, but was a fine imposed upon the company personally, so far as a company can be considered to be a person, for a breach of the law which it had committed. It is perhaps a little difficult to put the distinction into very exact language, but there seems to me to be a difference between a commercial loss in trading and a penalty imposed upon a person or a company for a breach of the law which they have committed in that trading. For that reason I think that both the decision of Rowlatt, J., in this case, and his former decision in Inland Revenue Commissioners v. Warnes Co. which he followed, were right, and that this appeal should be dismissed with costs." In Spofforth and Prince v. Golder the assessee was a firm of chartered accountants, who claimed a deduction for ce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m for damages for breach of contract which he claimed as an allowable deduction. It was held that as the assessee had disregarded the undertaking given and his conduct was palpably dishonest it did not constitute an allowable expenditure, Sir Lionel Leach, C. J., after referring to Warnes' case and von Glehn's case held that the amount did not constitute an expenditure falling within section 10(2)(xii). The Madras High Court in Senthikumara Nadar Sons v. Commissioner of Income-tax held that payments of penalty for an infraction of the law fell outside the scope of permissible deductions under section 10(2)(xv). In that case the assessee had to pay liquidated damages which was akin to penalty incurred for an act opposed to public policy, a policy underlying the Coffee Market Expansion Act, 1942, and which was left to the Coffee Board to enforce. Reference was also made during the course of arguments to Commissioner of Income-tax v. Hirjee. In that case the assessee was prosecuted under the Hoarding and Profiteering Ordinance but was finally acquitted and claimed the amount spent in defending himself under section 10(2)(xv) in his assessment. It was held that the distinction bet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (xv) of the Income-tax Act and no such deduction can be made unless it falls within the test laid down in the cases discussed above and it can be said to be expenditure wholly and exclusively laid for the purpose of the business. Can it be said that a penalty paid for an infraction of the law, even though it may involve no personal liability in the sense of a fine imposed for an offence committed, is wholly and exclusively laid for the business in the sense as those words are used in the cases that have been discussed above. In our opinion, no expense which is paid by way of penalty for a breach of the law can be said to be an amount wholly and exclusively laid for the purpose of the business. The distinction sought to be drawn between a personal liability and a liability of the kind now before us is not sustainable because anything done which is an infraction of the law and is visited with a penalty cannot on grounds of public policy be said to be a commercial expense for the purpose of a business or a disbursement made for the purposes of earning the profits of such business. In our opinion, the High Court rightly held that the amount claimed was not deductible and we, therefo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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