The Principal Commissioner Of Income Tax -17,Mumbai v. Sushil Guptalegal Representative Of Late Shri. Mahabir Prasad Guptaa.y. 1988-99Pan : Aalpg1065E

R.M. AMBERKAR (Private Secretary) IN THE HIGH COURT OF JUDICATURE AT BOMBAYO.O.C.J. INCOME TAX APPEAL NO. 51 OF 2016 WITHNOTICE OF MOTION NO. 797 OF 2018INNOTICE OF MOTION NO. 1975 OF 2016ININCOME TAX APPEAL NO. 51 OF 2016 The Principal Commissioner of Income Tax -17,Mumbai...Appellant Versus Sushil GuptaLegal Representative of Late Shri. Mahabir Prasad GuptaA.Y. 1988-99PAN : AALPG1065E ..Respondent ................... Mr. Prakash Chandra Chhotaray for the Appellant Mr. Prakash Chandra Chhotaray for the Appellant Mr. Vikram Nankani, Senior Counsel with Mr. S.L. Shah i/by M/s.Shah Legal for the RespondentMr. Vikram Nankani, Senior Counsel with Mr. S.L. Shah i/by M/s.Shah Legal for the Respondent ................... CORAM : AKIL KURESHI & B.P. COLABAWALLA, JJ. RESERVED ON : FEBRUARY 13, 2019. PRONOUNCED ON : FEBRUARY 22, 2019 at 2.45 P.M. IN CHAMBER ORAL JUDGMENT(Per Akil Kureshi, J.) 1.This appeal was admitted for consideration of following substantial question of law:- " Whether on the facts and in the circumstances of the case and in law, the Tribunal was justified in holding that theredemption fine of Rs. 75,00,000/- is allowable as businessexpenditure under Section 37 of the Income Tax Act?" 2.The appeal arises in following background:- 2.1 Respondent assessee is an individual. For theassessment year 1988-89, the assessee had filed return ofincome declaring total income of Rs. 1,47,020/-. The returnwas accepted without scrutiny. Subsequently, informationwas received by the Assessing OfÏcer that the assessee hadmade payment of Rs. 75 lacs in two separate installmentstowards penalty for import of almonds which import was notpermissible. On the basis of such information, the AssessingOfÏcer reopened the assessment for the said assessmentyear 1988-89 by issuing the notice under Section 148 of theIncome Tax Act, 1961 ("the Act" for short). 2.2 During the course of such assessment proceedings, theassessee was called upon to provide various details by theAssessing OfÏcer. The representative of the assesseeremained present before the Assessing OfÏcer and conveyedthat the assessee was using import license of M/s. RajnikantBros. which is an export house. For using the license, the assessee would pay service charges equivalent to 25% of CIFvalue of the goods. It was further pointed that theconsignment of almond was imported by M/s. Rajnikant Bros.The assessee had merely acted as an agent in thetransaction. It was pointed out that upon confiscation of thegoods, redemption fine and penalty were imposed by theCollector of Customs, Madras on M/s. Rajnikant Bros.Tribunal in the appeal reduced the redemption fine to Rs. 75Lacs and deleted personal penalty. It was contended that inany case, the imports were made by M/s. Rajnikant Bros. andthe order was passed against M/s. Rajnikant Bros. and notagainst the assessee. It was also contended that the penaltywas paid by M/s. Rajnikant Bros. and not by the assessee.The assessee, however, could not produce the books ofaccounts to establish this averment. The Assessing OfÏcer,therefore, issued summons to M/s. Rajnikant Bros. asking fora copy of the agreement dated 14.10.1985 entered betweenthe assessee and M/s. Rajnikant Bros. for the use of importlicence and other details. In response to the summons, theaccountant of M/s. Rajnikant Bros. appeared before theAssessing OfÏcer. A copy of the said agreement dated 14.10.1985 was produced. The procedure attached to theagreement was also produced. The statement of theaccountant of M/s. Rajnikant Bros. was recorded. Relevantportion of which reads as under:- "Q. No. 4 : What is the modus operandi of the transactionmade by Shri. M.P. Gupta regarding the use oflicence?made by Shri. M.P. Gupta regarding the use oflicence? 14.10.1985 was produced. The procedure attached to theagreement was also produced. The statement of theaccountant of M/s. Rajnikant Bros. was recorded. Relevantportion of which reads as under:- "Q. No. 4 : What is the modus operandi of the transactionmade by Shri. M.P. Gupta regarding the use oflicence?made by Shri. M.P. Gupta regarding the use oflicence? Ans. : Mr. M.P. Gupta has imported almonds in MadrasPort on 20.12.195 by using the above said licence.The said material imported in the name of M/s.Rajnikant Bros. Total consideration of import materialalong with duty, fine, foreign payment and clearingcharges etc. are as under:-Port on 20.12.195 by using the above said licence.The said material imported in the name of M/s.Rajnikant Bros. Total consideration of import materialalong with duty, fine, foreign payment and clearingcharges etc. are as under:- Purchases Rs. i.Foreign payment55,65,487.23ii.Duty56,00,000.00iii.Redemption Fine (Penalty)75,00,000.00(As per Madras Customs Order dt.ii.Duty56,00,000.00iii.Redemption Fine (Penalty)75,00,000.00(As per Madras Customs Order dt. 27.10.86) iv.Clearing Charges & Expenses15,72,487.10v.Service Charges of M/s. Rajnikant Bros.12,50,000.00(As per Agreement dt. 14.10.85) -------------------------v.Service Charges of M/s. Rajnikant Bros.12,50,000.00(As per Agreement dt. 14.10.85) ------------------------- Total Rs. 2,14,87,974.33 ============== Q. No. 5: As stated by you redemption fine of Rs. 75,00,000/-paid to Madras Customs House. Please state whohas paid the sum:paid to Madras Customs House. Please state whohas paid the sum: Answer : Rs. 75,00,000/- paid as custom fine by Mr. M.P. Gupta through Rajnikant Bros. from BanoueIndosuez P. Box 685 A/c No. 11124 201 5301. Alltransactions were made by Shri. M.P. Gupta hence, heis responsible for the above fine. As per agreement,we are only related for our service charges." 2.3The Assessing OfÏcer confronted the assesseewith the factum of payment of penalty of Rs. 75 Lacs. Theassessee in a written response dated 28.2.1997 contendedthat he had only made advances to M/s. Rajnikant Bros fromtime to time as per the requirements but had not paidpenalty of Rs. 75 Lacs. 2.4 The Assessing OfÏcer did not accept the saidexplanation particularly in view of the failure of the assesseeto produce books of accounts. He was also of the opinionthat the stand of the assessee was in conflict with theagreement dated 14.10.1985. He did not accept theassessee/s version of mere advances being made to M/s.Rajnikant Bros. He, therefore, held as under:- " All the above facts clearly established that the assessee viz.Shri. M.P. Gupta, user of the licence standing in the name of M/s.Rajnikant Bros., has made the custom penalty of Rs. 75,00,000/-. I,therefore, treat that this expenditure is covered u/S. 69C of the Actand has been incurred by the assessee from unexplained source ofwhich the assessee has no explanation about the source nor the assessee offered any satisfactory explanation. The penaltyproceedings u/S. 271(1)(c) is being initiated separately." 2.5 The assessee carried the matter in appeal andreiterated his stand. In the context of the addition underSection 69C of the Act, the Commissioner rejected theassessee's plea by making following observations:- " All the above facts clearly established that the assessee viz.Shri. M.P. Gupta, user of the licence standing in the name of M/s.Rajnikant Bros., has made the custom penalty of Rs. 75,00,000/-. I,therefore, treat that this expenditure is covered u/S. 69C of the Actand has been incurred by the assessee from unexplained source ofwhich the assessee has no explanation about the source nor the assessee offered any satisfactory explanation. The penaltyproceedings u/S. 271(1)(c) is being initiated separately." 2.5 The assessee carried the matter in appeal andreiterated his stand. In the context of the addition underSection 69C of the Act, the Commissioner rejected theassessee's plea by making following observations:- " As regards addition u/S. 69C, the appellant has claimed thatpayment was made through funds arranged by the assessee throughM/s. Mangla Bros and debited to M/s. Rajnikant & Bros accounts.The copy of the confirmation filed by M/s. Mangla Bros. as aCertificate dated 24.11.1997 it states that payments have been madeto Collector of Customs, M.P. Gupta account, M/s. Rajnikant & Bros.which gives DD No., date, amount and name of the party to whompayment was arranged. The Certificate does not carry any PAN/GIRNo. of M/s. Mangla Bros. and thus, itself of limited validity. In theabsence of books of account and a valid confirmation the source ofexpenditure is not satisfactorily explained and the payment is liable tobe treated as unexplained expenditure u/s 69C of the Act." 2.6The assessee had raised additional contention that when the expenditure was attributed to the assessee,the same should be considered as business expenditure. Inthis context, the question of such expenditure incurred forany purpose which is an offence or which is prohibited by lawcame up for consideration. The assessee had raisedadditional contention, though grounds of appeal were confined to questioning the additions made by the AssessingOfÏcer under Section 69C of the Act. The Commissioner ofIncome Tax (Appeals) ["the CIT(A) for short], therefore,considered whether the expenditure was in the nature ofcompensatory expenditure or towards fine in contraventionof law. The CIT(A) while rejecting this contention, observed asunder:- " The appellant's plea is that the expense is allowable as a cost u/S.37 in accordance with case laws cited. It is found that afterconsidering the judgments of the Bombay High Court in (a) CIT Vs.Pannalal Narottamdas & Co (supra) which laid down that redemptionfine is additional cost for the goods purchased and (b) the judgmentin Rohit Pulp & Paper Mills Vs. CIT (1995) 215 ITR 919/79 Taxman168 (Bom), where also there was confiscation of goods u/s. 111(d) ofthe Customs Act and a fine was paid u/s. 125 of the Customs Act,and the High Court held that payment was in the nature of penalty,the ITAT, Mumbai in Dimexon's case (supra) has held that where thepenalty / fine has to be incurred because of the fault of the assesseehimself, i.e, carrying on of business in an unlawful manner or incontravention of certain rules and regulations, the penalty / fine paidcannot be regarded as wholly laid out for the purpose of business.Thus, in the face of the specific findings of the Custom Tribunal andMadras High Court, the appellant's contention is without force." 2.7 The assessee carried the matter in further appealbefore the Tribunal. In such appeal, the assessee raised boththe contentions. In addition to questioning the very additionof Rs. 75 Lacs under Section 69C of the Act, he also challenged the decision of the CIT(A) not accepting thecontention that in any case, the expenditure was madewholly and exclusively for the the purpose of business andtherefore, allowable as business expenditure. 2.7 The assessee carried the matter in further appealbefore the Tribunal. In such appeal, the assessee raised boththe contentions. In addition to questioning the very additionof Rs. 75 Lacs under Section 69C of the Act, he also challenged the decision of the CIT(A) not accepting thecontention that in any case, the expenditure was madewholly and exclusively for the the purpose of business andtherefore, allowable as business expenditure. 2.8The Tribunal, in the impugned judgment, referredto the documents under which the import of almond washeld to be unlawful. The Tribunal noted that the Collector ofCustoms, Madras had confiscated the goods, imposedredemption fine 1.20 crore and penalty of Rs. 20 lacs on M/s.Rajnikant Bros. Ms/. Rajnikant Bros. had filed appeal beforethe Customs Tribunal, Madras which had reduced redemptionfine to Rs. 75 Lacs and deleted the penalty. The Tribunal,while allowing the appeal of the assessee and recognizingthe expenditure as business expenditure came to followingconclusions:- (i). The assessee and the Export House were under bonafidebelief that the almond in shell was one of the items allowed forimport against additional licence granted;belief that the almond in shell was one of the items allowed forimport against additional licence granted; (ii).That the Customs Tribunal had held that there was no malafideon the part of the assessee as there was certain amount ofvagueness in the import policy and therefore, redemption finewas reduced and penalty was deleted;on the part of the assessee as there was certain amount ofvagueness in the import policy and therefore, redemption finewas reduced and penalty was deleted; (iii).The Tribunal noted the decision of the Supreme Court in the case of CIT V/s. Ahmedabad Cotton Mfg. Co Ltd.[1] and was ofthe opinion that the facts of the present case were similar.The Tribunal noted that in the said case, it was found that thefault or defect in the REP licence was not attributable to theassessee. The assessee was not to be blamed,had notindulged in any offence or incurred any expenditure for thepurpose which is prohibited by law and the assessee had topay redemption fine in order to save and protect themselves." 2.9Against this judgment, the Revenue has filed this appeal. 3.Mr. Chhotaray, learned counsel appearing for theRevenue submitted that the amount of Rs. 75 Lacs paid bythe assessee was towards redemption fine. In terms ofExplanation 1 to Section 37(1) of the Act, such expenditurewas not an allowable deduction. The Tribunal, therefore,committed serious error in allowing the assessee's appeal.He took us extensively through the orders and statements on record and submitted that the Assessing OfÏcer and CIT(A)came to the specific conclusion that it was the assessee whohad made the imports and had, therefore, paid theredemption fine. The Tribunal without any basis came to theconclusion that the assessee was not connected with theimport of almond which led to imposition of redemption fine.1[1994] 205 ITR 163 (SC) He submitted that the judgment of the Supreme Court incase of Ahmedabad Cotton Mfg. Co. Ltd. (supra) wastherefore, wrongly applied by the Tribunal. Learned counselheavily relied on the decision of the Supreme Court in thecase of Haji Aziz & Abdul Shakoor Bros. Vs. CIT[2].Learned counsel for the Revenue has also relied on certaindecisions reference to which would be made at proper stage. record and submitted that the Assessing OfÏcer and CIT(A)came to the specific conclusion that it was the assessee whohad made the imports and had, therefore, paid theredemption fine. The Tribunal without any basis came to theconclusion that the assessee was not connected with theimport of almond which led to imposition of redemption fine.1[1994] 205 ITR 163 (SC) He submitted that the judgment of the Supreme Court incase of Ahmedabad Cotton Mfg. Co. Ltd. (supra) wastherefore, wrongly applied by the Tribunal. Learned counselheavily relied on the decision of the Supreme Court in thecase of Haji Aziz & Abdul Shakoor Bros. Vs. CIT[2].Learned counsel for the Revenue has also relied on certaindecisions reference to which would be made at proper stage. 4.On the other hand, Mr. Nankani opposed the appealcontending that the assessee was not an importer. Theimports were made by M/s. Rajnikant Bros. The assesseehad merely entered into an agreement with M/s. RajnikantBros. for purchase of imported almond which in turn wouldbe sold by the assessee to local consumers / manufacturersfor commission. The sum of Rs. 75 Lacs was thus paid toprevent the imported consignment being forfeited. Theexpenditure was thus made on business considerations.Sum of Rs. 75 Lacs thus, was an additional cost of purchasein the hands of the assessee. In the hands of the assessee, itwould not partake the character of penalty. He placedreliance on the decision of this Court in the case of CIT,241 ITR 350 (SC) Bombay Vs. Pannalal Narottamdas & Co[3]. He alsoreferred to several other judgments reference to which wouldbe made at proper stage. 5. Before dealing with the rival contentions, we mayrecord the genesis of the present dispute. M/s. RajnikantBros. and another who were diamond exporters had appliedfor grant of Export House Certificates under the Import Policy1978-79 which was denied to them on the ground that theyhad not diversified their exports. They had, therefore, filedwrit petition before the Bombay High Court claiming thatthey were entitled to Export House Certificates. Suchdeclaration was granted by the Bombay High Court. SpecialLeave Petition filed by the Union of India against thejudgment of the Bombay High Court was dismissed directingthe Government of India to issue necessary Export HouseCertificates for the year 1978-79 and further providing that :"Save and except items which are specifically banned underthe prevalent Import Policy at the time of import, therespondents shall be entitled to import all other itemswhether canalized or otherwise in accordance with the3(1968) 67 ITR 667 (Bom) relevant rules". Pursuant to such directions, M/s. RajnikantBros. were granted additional licence. It started importinggoods. At that stage, Indo Afghan Chambers of Commercewho was the association of dealers engaged in the businessof selling dry fruits in North India filed a petition before theSupreme Court under Article 32 of the Constitutioncontending that the goods sought to be imported on theadditional licences included those which were prohibited bythe prevalent import policy. The Supreme Court held thatunder the import policy of 1985-88 when the dry fruits weresought to be imported, they were no longer open to importunder the Open General Licence. Relevant observations of the Supreme Court read thus:- relevant rules". Pursuant to such directions, M/s. RajnikantBros. were granted additional licence. It started importinggoods. At that stage, Indo Afghan Chambers of Commercewho was the association of dealers engaged in the businessof selling dry fruits in North India filed a petition before theSupreme Court under Article 32 of the Constitutioncontending that the goods sought to be imported on theadditional licences included those which were prohibited bythe prevalent import policy. The Supreme Court held thatunder the import policy of 1985-88 when the dry fruits weresought to be imported, they were no longer open to importunder the Open General Licence. Relevant observations of the Supreme Court read thus:- "7.We may assume for the purpose of this case that a diamondexporter is legitimately entitled to obtain an Additional Licence underthe Import Policy 1978-79 for an item which is different from the itemhe may have intended to import had the Additional Licences beenrightly granted to him originally. In that event, the diamond exportercan succeed only if the item could have been imported under theImport Policy 1978-79 and also under the Import Policy 1985-88 inaccordance with the terms of the order of this Court dated April 18,1985 as construed by this Court by its judgment dated March 5,1986.exporter is legitimately entitled to obtain an Additional Licence underthe Import Policy 1978-79 for an item which is different from the itemhe may have intended to import had the Additional Licences beenrightly granted to him originally. In that event, the diamond exportercan succeed only if the item could have been imported under theImport Policy 1978-79 and also under the Import Policy 1985-88 inaccordance with the terms of the order of this Court dated April 18,1985 as construed by this Court by its judgment dated March 5,1986. 12.In our opinion the respondents diamond exporters are notentitled to import dry fruits under the Import Policy 1985-88 under the Additional Licences possessed by them. They are also not entitled tothe benefit extended by the judgment of this Court dated March 5,1986 to those diamond exporters who had imported items underirrevocable Letters of Credit opened and established before October18, 1985. It appears from the record before us that the respondentsdiamond exporters opened and established the irrevocable Letters ofCredit after that date. 14. The writ petition is allowed and the respondents Nos. 10 and11, M/s. Rajnikant Brothers and M/s. Everest Gems are restrainedfrom importing dry fruits during the period 1985-88 under theAdditional Licences granted to them under the Import Policy 1978-79.In the circumstances there is no order as to costs." With this background, we may refer to the facts onhand. As noted, the Assessing OfÏcer in the order ofassessment after giving ample opportunities to the assesseecame to the conclusion that the assessee M.P. Gupta was theuser of the licence in the name of M/s. Rajnikant Bros. and alltransactions including the payment of penalty had beencarried out by him. He did not accept the version of theassessee that the assessee had merely advanced the moneyto M/s. Rajnikant Bros. in time of its need. It was held thatthe assessee had paid the customs fine of Rs. 75 Lacs.Since, it could not shown the legitimate source of thisamount, the Assessing OfÏcer treated the same as assessee's unexplained expenditure. Before the CIT(A) also,the assessee failed to persuade the Appellate Authority thatthe addition under Section 69C of the Act was wronglymade by the Assessing OfÏcer. At which time, the petitionerraised additional contention claiming deduction of the sameamount by way of business expenditure. In response to this,the CIT(A) held that the penalty or fine had to be incurredbecause of the fault of the assessee himself of carrying onbusiness in unlawful manner or in contravention of the rulesand regulations. assessee's unexplained expenditure. Before the CIT(A) also,the assessee failed to persuade the Appellate Authority thatthe addition under Section 69C of the Act was wronglymade by the Assessing OfÏcer. At which time, the petitionerraised additional contention claiming deduction of the sameamount by way of business expenditure. In response to this,the CIT(A) held that the penalty or fine had to be incurredbecause of the fault of the assessee himself of carrying onbusiness in unlawful manner or in contravention of the rulesand regulations. 6.In our opinion, the Tribunal without adverting to therelevant facts and materials on record granted benefit to theassessee on the lines followed by this Court in the case ofPannalal (supra). The Tribunal without discussing therelevant materials compared the case of the assessee withthe facts arising in the judgment of the Supreme Court in thecase of Ahmedabad Cotton Mfg Co Ltd (supra) in which it wasrecorded that the fault or defect in the REP licence was notattributable to the assessee and therefore, the assessee wasnot to be blamed for indulging in any offence or having incurred any expenditure for the purpose which wasprohibited by the law. In the present case, the AssessingOfÏcer had held that it was the assessee who had importedthe goods. The CIT(A) also largely concurred with thisfinding. The Tribunal did not advert to the materials onrecord to give a different conclusion. The Tribunal totallyignored the statement of the representative of M/s. RajnikantBros., relevant portion of which is reproduced earlier in whichhe attributed the entire transaction of import and payment orfine to the assessee. The Tribunal merely referred to theterms of the agreement overlooking the ground realities.The entire consideration of the Tribunal, therefore, has beenvitiated on account of this vital error. Even otherwise, thefacts on record would suggest that it was the assessee whohad imported the goods by utilizing the advance licence ofsaid M/s. Rajnikant Bros. M/s. Rajnikant Bros. merelyreceived payment computed in terms of percentage of CIFvalue of the imports. For the purpose of making declarationsand filing bill of entries, M/s. Rajnikant Bros. may be thecorrect entity and therefore, the Customs Authorities mighthave offered redemption fine and imposed penalty on M/s. Rajnikant Bros and the Tribunal in the appeal may havereduced the redemption fine and deleted the penalty in thehands of M/s. Rajnikant Bros, but in the context of income taxliability, we cannot ignore the hard facts that the importswere made by the assessee himself. M/s. Rajnikant Bros. hadmerely allowed the licence to be used for such purpose. Inessence,therefore, whatever the fault, defect or error of lawin such import, would attach to the assessee. In the contextof considering whether the expenditure incurred in theprocess of importing the goods could be claimed by way ofexpenditure regard being had to the first explanation to sub-section (1) of Section 37, would therefore have to be decidedon the anvil of this conclusion. 7.Once this much is clear, everything else would fall inline. There is a clear line of distinction between two lines ofauthorities, one led by the judgment of the Supreme Court inthe case of Hazi Aziz (supra) and the other adopted by thisCourt in the case of Pannalal (supra) as pointed out bylearned counsel for the assessee. 7.Once this much is clear, everything else would fall inline. There is a clear line of distinction between two lines ofauthorities, one led by the judgment of the Supreme Court inthe case of Hazi Aziz (supra) and the other adopted by thisCourt in the case of Pannalal (supra) as pointed out bylearned counsel for the assessee. 8.In case of Hazi Aziz (supra), the facts were that theassessee was a firm doing the business of importing datesfrom abroad and selling them in India. During the accountingyear under consideration, the assessee had imported datesfrom Iraq. At the relevant time, import of dates by steamerwas prohibited but permitted to be brought by country craft.The goods ordered by the assessee were received partly bysteamer and partly by country craft. Consignments importedby steamer were confiscated by the Customs Authorities andthe assessee was given an option to pay fine for redemptionof goods, upon payment of which the dates were released.The assessee claimed the redemption fine amount by way ofdeduction while computing profit arising out of sale of thegoods. In this background, the issue reached the SupremeCourt. The Supreme Court held that the expenditure was inthe nature of penalty for infraction of law and therefore, not a deductible expenditure. It was observed as under:- " A review of these cases shows that expenses which are permittedas deductions are such as are made for the purpose of carrying onthe business, i.e., to enable a person to carry on and earn profit inthat business. It is not enough that the disbursements are made inthe course of or arise out of or are concerned with or made out of theprofits of the business but they must also be for the purpose ofearning the profits of the business. As was pointed out in Vonas deductions are such as are made for the purpose of carrying onthe business, i.e., to enable a person to carry on and earn profit inthat business. It is not enough that the disbursements are made inthe course of or arise out of or are concerned with or made out of theprofits of the business but they must also be for the purpose ofearning the profits of the business. As was pointed out in Von Glehn's case [1920] 2 K.B. 553 an expenditure is not deductibleunless it is a commercial loss in trade and a penalty imposed forbreach of the law during the course of trade cannot be described assuch. If a sum is paid by an assessee conducting his business,because in conducting it he has acted in a manner, which hasrendered him liable to penalty, it cannot be claimed as a deductibleexpense. It must be a commercial loss and in its nature must becontemplable as such. Such penalties which are incurred by anassessee in proceedings launched against him for an infraction of thelaw cannot be called commercial losses incurred by an assessee incarrying on his business. Infraction of the law is not a normal incidentof business and, therefore, only such disbursements can bededucted as are really incidental to the business itself. They cannotbe deducted if they fall on the assessee in some character other thanthat of a trader. Therefore where a penalty is incurred for thecontravention of any specific statutory provision, it cannot be said tobe a commercial loss falling on the assessee as a trader the testbeing that the expenses which are for the purpose of enabling aperson to carry on trade for making profits in the business arepermitted but not if they are merely connected with the business. It was argued that unless the penalty is of a nature which ispersonal to the assessee and if it is merely ordered against thegoods imported it is an allowable deduction. That, in our opinion, isan erroneous distinction because disbursement is deductible only if itfalls within 10(2)(iv) of the Income-tax Act and no such deduction canbe made unless it falls within the test laid down in the casesdiscussed above and it can be said to be expenditure wholly andexclusively laid for the purpose of the business. Can it be said that apenalty paid for an infraction of the law, even though it may involveno personal liability in the sense of a fine imposed for an offencecommitted, is wholly and exclusively laid for the business in thesense as those words are used in the cases that have beendiscussed 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 whollyand exclusively laid for the purpose of the business. The distinctionsought to be drawn between a personal liability and a liability of thekind now before us is not sustainable because anything done whichis an infraction of the law and is visited with a penalty cannot ongrounds of public policy be said to be a commercial expense for thepurpose of a business or a disbursement made for the purposes ofearning the profits of such business. In our opinion the High Court rightly held that the amountclaimed was not deductible and we therefore dismiss this appeal withcosts." 9.In case of Maddi Venkataraman & Co P Ltd Vs. CIT[4] , the facts were that the assessee company had remitted to aparty in Singapore certain amounts in violation of law. Theproceedings were undertaken against the assessee forinfringement of the relevant provisions of Foreign ExchangeRegulation Act which ultimately resulted into penalty being imposed against the assessee. The Supreme Court held andobserved as under:- "20. The case of Haji Aziz Abdul Shakoor Bros. (supra) is importantfor another reason. It was categorically held in this case that nodistinction can be made in this regard between a personal liabilityand a liability of any other kind. So long as the payment has to madefor infraction of law, it cannot be said that it was made in course ofcarrying out of the trade.for another reason. It was categorically held in this case that nodistinction can be made in this regard between a personal liabilityand a liability of any other kind. So long as the payment has to madefor infraction of law, it cannot be said that it was made in course ofcarrying out of the trade. 23.In the instant case, the assessee had indulged in transactionsin violation of the provision of Foreign Exchange (Regulation) Act. Theassessee's plea is that unless it entered into such a transaction, itwould have been unable to dispose of the unsold stock of inferiorquality of tobacco. Another words, the assessee would have incurreda loss. Spur of loss cannot be a justification for contravention of law.The assessee was engaged in tobacco business. The assessee wasexpected to carry on the business in accordance with law. If theassessee contravenes the provision of FERA to cut down its lossesor to make larger profits while carrying on the business, it was only tobe expected that proceedings will be taken against the assessee forviolation of the Act. The expenditure incurred for evading theprovisions of the Act and also the penalty levied for such evasioncannot be allowed as deduction. As was laid down by Lord Sterndalein the case of Alexander Von Glehn (supra) that it was not enoughthat the disbursement was made in the course of trade. It must be forthe purpose of the trade. The purpose must be a lawful purpose. 24.Moreover, it will be against public policy to allow the benefit ofdeduction under one statute of any expenditure incurred in violationof the provisions another stature or any penalty imposed underanother statute. In the instant case, if the deductions claimed areallowed, the penal provisions of FERA will become meaningless. Ithas also to be borne in mind that evasion of law cannot be a tradepursuit. The expenditure in this case cannot, in any way, be allowedas wholly in this case cannot, in any, way be allowed as wholly andexclusively laid out for the purpose of assessee's business." 10. In case of Rohit Pulp and Paper Mills Ltd Vs. C.I.T.[5], the assessee had imported goods which were found byCustoms Authorities not covered by a valid licence. The 5[1995] 215 ITR 919 (Bom) Deputy Collector of Customs ordered confiscation of thegoods and offered redemption on payment of fine. Thisamount was claimed by the assessee as a deduction.Rejecting such a claim, the High Court observed as under:- "We do not find that the above amount paid by theassessee is anything else than a penalty. It is, therefore, notallowable as a deduction under the Income Tax Act. TheIncome Tax Officer and other authorities were justified in notallowing any deduction under Section 37 of the Income TaxAct on account of the same. The third question is, therefore,answered in the negative and in favour of the Revenue." 11. In case of M.S.P. Senthikumara Nadar & Sons VsC.I.T. Madras[6], Division Bench of Madras High Courtconsidered a case where the assessee firm which wascarrying on the business in coffee had entered into contractwith India Coffee Board and purchased coffee at a rate farbelow the price of coffee to be sold within India with thecontractual obligation to export the whole of the coffee sopurchased to the places outside India. The assessee,however, exported part of it and sold the rest within India.The Coffee Board, in terms of the agreement levied damagesfrom the assessee for breach of the contract. This amount6[1957] 32 ITR 138 (Madras) was paid by the assessee and and claimed by way ofexpenditure. The High Court referred to various judgmentson the issue and observed as under:- "From what we have said above it should be clear that it was not acase of a payment of damages for a mere breach of contract withnothing more. It was not of course a case of penalty paid under theterms of a statute for contravention of any specific statutory provision.In the circumstances of this case, the liquidated damages claimedand paid was, however, more akin to a penalty than the damagessuffered for breach of contract in the course of normal tradingactivities, whether or not that breach of a contract was alsodishonest. That is why we said that it may not be necessary to restour decision in this case on the rule laid down in Masks case [1943]11 ITR 454. In our opinion it is the principle laid down in Von Glehnscase [1920] 12 Tas Cas. 232 that should be extended and applied tonegative the claim of the assessee in this case. To adopt the wordsof Sterndale, M. R., in Von Glehns case (supra) the assessee'sbusiness could perfectly well be carried on without any infraction ofthe obligations laid on the assessee by the India Coffee Board,entrusted with the statutory duty of controlling and regulating sales ofcoffee. A penalty was imposed because of an infraction of theseobligations and the money was not expended or laid out for purposesof the trade which the assessee carried on. Or in the words ofScrutton, L.J : "Were these fines made or paid for the purpose of earning theprofit ? The answer seems to me obvious, that they were not, theywere unfortunate incidents which followed after the profits had beenearned." "Were these fines made or paid for the purpose of earning theprofit ? The answer seems to me obvious, that they were not, theywere unfortunate incidents which followed after the profits had beenearned." 12. In case of Agra Leatheries Ltd Vs. CIT[7], the DivisionBench of Allahabad High Court considered the case wherethe assessee had obtained licence for import under whichthe assessee had imported plastic sponges. The CustomsAuthorities held that under the licence, the assessee couldhave imported only natural sponges and not plastic spongesand the import of plastic sponges was thus illegal. Theassessee claimed penalty for infraction of law by way ofexpenditure. The Allahabad High Court relied on the decisionof the Supreme Court in the case of Hazi Aziz (supra), ruled against the assessee by making following observations:- " The question whether penalty levied for infraction of law is apermissible deduction is not res integra. In Haji Aziz and AbdulShakoor Bros. v. CIT [1961] 41 ITR 350, the Supreme Court held thatin a case where the penalty has to be incurred because of the fault ofthe assessee himself, as for instance for the reason of his havingcarried on his business in an unlawful manner or in contravention ofcertain rules and regulations, the penalty paid by the assessee forsuch conduct could not be regarded as wholly laid out for thepurpose of the business, because the incurring of the said expenseshas not been necessitated by the business but by the conduct of theassessee in trying to carry on the business in unlawful manner. We,therefore, do not see any legal infirmity in the view taken by theTribunal." 7[1993] 200 ITR 792 (Allahabad) The decision of this Court in the case of Pannalal(supra) was cited before the Court which was distinguished. 13. This Court in a decision in the case of T. KhemchandTejoomal Vs. CIT[8] considered a case where the assesseewas a registered firm doing business mainly in cloth. Theassessee had acquired a licence for importing automobilespare parts. The assessee then entered into a contract forimport and sale of capacitors to one Bipin Automobiles. Thepurchaser would bear all expenses including customs duty.Pursuant to the agreement, the assessee placed an order ofcapacitors and the goods were imported. However, it wasfound that the goods did not conform to some of thespecifications in the licence and the Customs Authoritiesconfiscated the goods and offered the option to pay penaltyfor clearance of goods. The assessee paid the penalty andclaimed it as business expenditure. Before the High Court, itwas argued that the assessee was a mere nominal licenceholder and the penalty was really levied on BipinAutomobiles to whom the goods have been sold andtherefore, the assessee should be allowed to claim the8161 ITR 492 (Bom) expenditure as business expenditure. The Court held andobserved as under: expenditure as business expenditure. The Court held andobserved as under: " The submission of Mrs. Jagtiani, learned counsel for theassessee, is that in this case, on the facts found, the assessee mustbe regarded as a mere nominal licence-holder and the penalty wasreally levied on M/s. Bipin Automobiles to whom the goods had beensold as aforesaid. It was argued by her that, in these circumstances,the assessee should be allowed to claim the amount of penalty paidby the assessee as a deduction in the computation of profits undersection 28 of the Income Tax Act, 1961. She placed strong relianceon the decision of a Division Bench of this court in CIT v. PannalalNarottamdas & Co. : [1968] 67 ITR 667(Bom) . We shall deal with thiscase after setting out our own views. In the present case, the factsfound by the Tribunal clearly show that it was the assessee who hadgot the import licence. It was the assessee who imported the goodsin question, and it was the fault of the assessee if the goods inquestion imported did not conform to the specifications of the licence.In these circumstances, there is no escaping the conclusion that thepenalty was levied on the assessee for the default of the assesseeitself and not on the ground of any other person's default. Nor is thisa case in which the assessee can be regarded in any sense as anominal licence-holder. It is not as if the assessee gave its licence toM/s. Bipin Automobiles for importing the goods in question and M/s.Bipin Automobiles imported the goods. The licence was utilized bythe assesses-firm itself and that fact cannot be altered by thecircumstance that they had agreed to sell the goods to be importedby them to M/s. Bipin Automobiles. It is well settled that if anassessee has to pay a penalty to the customs authorities in respectof goods imported by the assessee on account of its own default, theamount of that penalty cannot be deducted in the computation oftaxable profits of the assessee. Coming to the case of Pannalal Narottamdas & 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 hadpurchased bills of lading and other shipping documents from certainparties in respect of some consignments of goods imported by themfrom a foreign country. When the goods arrived in India and weresought to be cleared through the customs by the assessee on thebasis of the documents purchased by it, it was found that the importswere unauthorized and the goods were liable to be confiscated and apenalty was liable to be imposed under section 167(8) of the SeaCustoms Act, 1878. The assessee paid the penalty for saving thegoods from being confiscated. The Tribunal took the view that theassessee was entitled to plead that it had purchased the documentsof title in good faith and had paid consideration thereon, and,thereafter, it had to pay the penalties in order not to lose the goodswhich had become its property and, in these circumstances, thepenalty could be legitimately regarded as part of the cost of thegoods. It was held by the Division Bench that, on the facts andcircumstances, the actual cost of the goods to the assessee was notonly what it had paid to the importers but in addition thereto what ithad to pay by way of penalty in order to save the goods from beingconfiscated and lost to it. It is significant that the observations of theDivision Bench set out at page 672 of the aforesaid report show thatthe Division Bench clearly took the view that in cases where penaltyhad to be incurred because of the fault of the assessee himself, asfor instance, by reason of his having carried on his business in anunlawful manner or in contravention of certain rules and regulations,the penalty paid by the assessee for such conduct thereof could notbe regarded as wholly laid out for the purpose of the business, and,in support of this conclusion, the decision of the Supreme Court inHaji Aziz & Abdul Shakoor Bros. v. 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 uslend considerable support to the view which we have taken." It can, thus, be seen that consistently various HighCourts following the decision of the Supreme Court in thecase of Hazi Aziz (supra) have held that fine or penalty forredemption of goods ordered to be confiscated for breach ofimport conditions is not an allowable deduction. The case ofthe assessee squarely falls in this category. 14. We may now refer to the decisions cited by Mr. Nankani,the learned counsel for the respondent. The decision in thecase of Pannalal (supra) would require close examination. Itwas the case in which the assessee, a registered firm wasdealing inter alia in gum. In the course of its business, theassessee purchased bills of lading and other shippingdocuments from certain parties in respect of someconsignments of gum imported by them from Africa. Whenthe goods arrived in India, the assessee sought to clear themon the basis of the documents purchased by it. It was foundthat the imports were unauthorized and the goods wereliable to be confiscated and penalty liable to be imposed.The assessee paid an amount of Rs. 31,302/- by way ofpenalty for saving the goods being confiscated. This amount the assessee claimed by way of allowablededuction. The assessee had argued that the amount mustbe regarded as a part of purchase price of the gum. It wasargued that the assessee had purchased the consignmentsof gum in good faith and was not aware of any faultscommitted by the importers in such importation. It was onlywhen the goods arrived in India that the assessee found tha