T KHEMCHAND TEJOOMAL Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THIS is a reference under S. 256(1) of the IT Act, 1961, made at the instance of the assessee. The question referred to us for our determination in the reference is as follows:

(2.) THE relevant facts lie within a narrow compass. The relevant assessment year is 1962 63, for which the relevant previous year is the accounting year March 25, 1961, to March 31, 1962. The assessee is a registered firm doing business mainly in cloth. The assessee secured a licence for importing automobile spare parts. The assessee then entered into a contract to import and sell to Bipin Automobiles 3,100 capacitors at a profit of 50 per cent on C.I.F. value. There was a further condition in the contract that the purchaser was to bear all the expenses, including customs duty, etc. Pursuant to this agreement, the assessee placed an order for capacitors with a foreign exporter and the goods, namely, capacitors, were eventually imported. But it was found that the goods did not conform to some of the specifications in the licence and the customs authorities confiscated the goods but gave an option to the assessee to pay a penalty of Rs. 4,400 and clear the goods. The assessee exercised that option and cleared the goods by paying the penalty. The assessee debited the amount of the penalty to the trading account. In valuing the closing stock, the penalty was included. It was in the next year that the sale of the goods to Bipin Automobiles took place. The penalty was paid in the accounting year relevant to the assessment year. The ITO concerned disallowed the claim of the assessee for deduction of the amount of penalty and added back the amount of penalty. The ITO found, on verification, that the penalty as such had not been recovered by the assessee from Bipin Automobiles but the amount of penalty, it appears, was taken into account in determining the price at which the said goods were sold to Bipin Automobiles. On an appeal by the assessee to the AAC, he held that the penalty was levied on the appellant and the mere fact that the appellant had billed the vendee in such a manner that the penalty was recovered from the vendee did not change the character of a disallowable item into an allowable one. The AAC further pointed out that the bill sent to Bipin Automobiles did not specifically mention the basis on which it was prepared. The AAC agreed with the view of the ITO that the assessee's claim in respect of penalty was not one which could be allowed under S. 28 of the IT Act, 1961. The assessee then preferred a second appeal to the Tribunal. The Tribunal came to the conclusion that the assessee had contravened some of the conditions or specifications of the licence and the penalty was levied upon the assessee and not the purchaser. The assessee had rightly debited the penalty to the trading account and the assessee was not right in contending that the debit in respect of the penalty in the trading account was wrongfully made by the assessee. What the purchasers, Bipin Automobiles, had paid to the assessee was not the penalty but the sale price of the goods purchased by them which had been fixed by taking into account the amount of penalty. In view of these findings, the Tribunal agreed with the conclusion of the AAC that the amount of penalty could not be allowed as a deduction and upheld the order passed by the ITO. The question set out above has been referred to us from the decision of the Tribunal.

(3.) COMING to the case of Pannalal Narottamdas and Co. (supra) cited by Mrs. Jagtiani, the facts in that case were altogether different. In that case, in the course of its business, the assessee had purchased bills of lading and other shipping documents from certain parties in respect of some consignments of goods imported by them from a foreign country. When the goods arrived in India and were sought to be cleared through the customs by the assessee on the basis of the documents purchased by it, it was found that the imports were unauthorised and the goods were liable to be confiscated and a penalty was liable to be imposed under S. 167(8) of the Sea Customs Act, 1878. The assessee paid the penalty for saving the goods from being confiscated. The Tribunal took the view that the assessee was entitled to plead that it had purchased the documents of title in good faith and had paid consideration thereon, and, thereafter, it had to pay the penalties in order not to lose the goods which had become its property and, in these circumstances, the penalty could be legitimately regarded as part of the cost of the goods. It was held by the Division Bench that, on the facts and circumstances, the actual cost of the goods to the assessee was not only what it had paid to the importers but in addition thereto what it had to pay by way of penalty in order to save the goods from being confiscated and lost to it. It is significant that the observations of the Division Bench set out at p. 672 of the aforesaid report show that the Division Bench clearly took the view that in cases where penalty had to be incurred because of the fault of the assessee himself, as for instance, by reason of his having carried on his business in an unlawful manner or in contravention of certain rules and regulations, the penalty paid by the assessee for such conduct thereof could not be regarded as wholly laid out for the purpose of the business, and, in support of this conclusion, the decision of the Supreme Court in Haji Aziz & Abdul Shakoor Bros. vs. CIT(1961) 41 ITR 350, was cited. This decision, in our view, does not advance the argument of Mrs. Jagtiani, and, in fact, the aforesaid observations pointed out by us lend considerable support to the view which we have taken.