By TIOL News Service

NEW DELHI, AUGUST 16, 2014 : “WHETHER the Income-tax Appellate Tribunal was justified in holding that the sum of Rs.45 lacs paid by the assessee to the Customs authorities on account of redemption fine, was an allowable expenditure?” is the substantial question of law involved in this Income Tax appeal.

The respondent-assessee was engaged in manufacture of organic chemicals and had purchased 630 metric tonnes Isobutanol on high sea basis. On account of litigation with the Customs authorities, the goods in question were sold in an auction on 14th March, 1989 pursuant to the direction of the Supreme Court. In adjudication proceedings under the Customs Act, 1962 a redemption fine of Rs.90,00,000/- was imposed along with a penalty of Rs.10,00,000/- on the respondent-assessee, which on appeal was reduced to Rs.45,00,000/- and Rs.2,00,000/-, respectively.

The question raised in the present appeal is whether redemption fine of Rs.45,00,000/- could be claimed as an expenditure under Section 37 of the Income Tax Act, 1961 or the same is hit by the Explanation to Section 37 or was not an expenditure, wholly and exclusively for purpose of business.

The counsel for the Revenue submitted that the expenditure in question would be barred under the Explanation to Section 37 as redemption fine was paid by way of penalty and as per Section 111(d) of the Customs Act the goods in question were prohibited goods.

In support, the respondent-assessee relied upon the decision in Usha Micro Process Controls Ltd. Vs. Commissioner of Income Tax wherein reference was made to the judgment of the Madras High Court in Commissioner of Income Tax Vs. N.M. Parthasarathy, [1995] 212 ITR 105 and decision of the Supreme Court in Prakash Cotton Mills Pvt. Ltd. Vs. Commissioner of Income Tax (Central), Bombay,  2002-TIOL-595-SC-IT .

The counsel for the Revenue submitted that the decision in Usha Micro Process Controls Ltd. (supra) requires reconsideration in view of decisions of other high courts as noticed in Commissioner of Income Tax Vs. Jayaram Metal Industries, 2006-TIOL-331-HC-KAR-IT and Maddi Venkataraman& Co. (P) Ltd. Vs. Commissioner of Income Tax, [1998] 229 ITR 534 (SC). It is also submitted that language of Explanation to Section 37 is quite clear and once it is held that the expenditure was incurred for any purpose, which was prohibited by law, the same is deemed not to be incurred for the purpose of business or profession; that the said Explanation incorporates a deeming fiction, which must be given full effect to.

The High Court observed -

++ The requirement of Explanation is that payment in form of expenditure should not be made for the purpose, which is prohibited by law. Finding of the Tribunal, as recorded in the impugned order, is that M/s India Craft had initially entered into a contract and had purchased Isobutanol under REP licence and the same was subsequently purchased by the respondent-assessee on high-sea basis. This was a commercial transaction between two unrelated parties. It is in these circumstances that the respondent-assessee had applied for clearance of goods in India.

++ The fault or defect in the REP licence was not attributable to the respondent-assessee as the licenses were issued to India Craft. The respondent-assessee was not to be blamed and had not indulged in any offence or incurred any expenditure for the purpose, which was prohibited by law.

++ The respondent-assessee had to pay redemption fine in order to save and protect themselves and in terms of the order passed by the Supreme Court they had received the balance consideration from the auction proceeds.

++ The finding recorded by the Tribunal is that the conduct and action of the respondent-assessee was not blameworthy or commanding censure. The respondent-assessee wanted to set-off the redemption fine from the consideration received by them. In fact, the respondent-assessee had only received the net amount after adjustment of the redemption fine. Of course, the penalty amount is not a subject matter of the present appeal and we express no opinion in that regard.

Holding that the substantial question of law has to be answered in favour of the respondent-assessee,the Revenue appeal was dismissed.

(See 2014-TIOL-1374-HC-DEL-IT)