(This Income Tax Appeal is filed under Section 260A of the Income Tax Act, 1961 seeking to set aside the orders of the Income Tax Appellate Tribunal bearing ITA No.276/Bang/92 dated 21.10.1999 and the order of the Commissioner of Income Tax (Appeals)-I for the assessment year 1970-71, and to set aside the order of Income Tax Appellate Tribunal bearing ITA No.150/Bang/92 dated 21.10.1999, by confirming the assessment orders passed by the Assessing Officer in respect of both the assessment years.)
R. Gururajan, J.
Revenue is before us seeking an order to set aside the orders of the Income Tax Appellate Tribunal dated 21.10.1999 in ITA No.276/Bang/92 and the order of the Commissioner of Income Tax (Appeals)-I for the assessment year 1970-71, and to set aside the order of Income Tax Appellate Tribunal dated 21.10.1999 bearing ITA No.150/Bang/92, by confirming the assessment orders passed by the Assessing Officer in respect of both the assessment years.
2. Following questions of law arise for out consideration:
(1) Whether the redemption fine of Rs.2,00,000/- paid by the assessee in respect of Assessment Year 1977-78 to the excise authorities for the infraction of law to release the seized goods, can be treated as business expenditure?
(2) Whether the tribunal even before deciding the issue is correct in holding that in respect of penalty paid for the infraction of law two views are possible and therefore the one favourable to the assessee should be taken?
(3) Whether the Tribunal was correct in affirming the deletion made by the Appellate Commissioner in respect of unexplained investment made by the assessee and estimated by the assessing officer in respect of Assessment Year 1970-71?
3. The assessee is a manufacturer of brass. He purchases copper, zinc, etc. for converting them into brass at its factory. Return of income was filed declaring total income at Rs.15,800/- for the assessment year 1970-71. Income was determined by the Department. Thereafter, the Department received information that the assessee has suppressed its real income and that the income chargeable to tax has escaped the assessment. Proceedings were reopened. Reopened assessment was concluded on 23.8.1978. Reopened assessment was pursued in appeal before the Commissioner and thereafter before the Income Tax Appellate Tribunal. Thereafter, when the matter was taken up in reference before this Court, the assessment order was set aside and the mater was remitted to the Income Tax Officer for making fresh assessment in accordance with law.
4. Assessee?s factory was searched by the Central Excise Authority of the Karnataka Collectorate on 12.2.1974. They checked the accounts and stock of copper and copper alloy both fully manufactured and unfinished as also the stock of raw materials with reference to RG-1 registers maintained by the assessee. It was seen that the production to the extent of 79260 Kgs had been suppressed by the assessee. Assessee has not offered its profits in respect of the suppressed production. He had also not explained the source of funds for investment in the suppressed production. According to the Department, the value suppressed production, which amounts to suppressed turnover, worked out to Rs.8,71,860/-. This was added to the total income declared. The Central Excise Authority has worked out the net quantity of production to be accounted for in RG-1 account at 414967 Kgs. The quantum of goods actually produced during the period 1968-69 to 1973-74 relevant to assessment years 1969-70 to 1974-75 is worked out. On this basis, the cost of the suppressed turnover works out to Rs.7,92,600/-. The assessee was to explain from the angle of availability of sources for funds. In respect of the assessment year 1977-78, assessment was originally computed on 6.3.1978. It was subsequently reopened under Section 147(a) of the Act. Notice was issued. Return was submitted. Written objections were filed with regard to inflation of purchase to the extent of Rs.2,00,000/- paid as redemption fine.
5. The Central Excise Authority raided the business premises of the assessee and confiscated finished goods valued at 18,200 KGs of copper, etc. Penalty of Rs.1,00,000/- was levied under Section 173Q(1) of the Central Excise Rules, 1944. Penalty was not paid. He was given option to pay fine to redeem the finished goods confiscated. He paid a sum of Rs.2,00,000/- as redemption fine. In the trading and profit and loss account drawn by the assessee, a sum of Rs.6,73,571.55 was debited as purchases, which included redemption fine of Rs.2 lakhs. Assessee debited a sum of Rs.15,698.75 as excise duty. Same was not revealed to the Department. According to the Department, the expenditure incurred by the assessee is not for commercial expediency and is only for infraction of law and is in the nature of personal liability. A sum of Rs.2 lakhs was brought to tax by the Department.
6. Aggrieved as against the orders of assessment in respect of assessment years 1970-71 and 1977-78, assessee preferred an appeal to the Commissioner of Income Tax. The appeal for the assessment year 1970-71 in respect of addition of Rs.37,482/- was allowed. The issue in respect of assessment year 1977-78 as to reopening of the assessment and bringing to tax a sum of Rs.2 lakhs incurred by the assessee for infraction of law was dismissed by the Commissioner. Revenue took up the matter in appeal to the Income Tax Appellate Tribunal. Appellate Tribunal dismissed the appeal filed by the Revenue in respect of the assessment year 1970-71 and allowed the appeal filed by the assessee in respect of assessment year 1977-78. It is in these circumstances, the Revenue is before us seeking an order with regard to the validity of the orders in addition to consideration of the questions of law arising out of this appeal, as set out above.
7. Sri Seshachala, learned counsel for the Revenue invites our attention to the material facts to say that the Tribunal is wrong in holding that the redemption fine of Rs.2 lakhs is business expenditure for the purpose of tax liability in the case on hand. He would also argue that the deletion made by the Appellate Commissioner in respect of the unexplained investment was accepted by the Tribunal without proper appreciation the facts in the case on hand. He would say that the orders of the appellate authority confirmed in appeal runs counter to the well-accepted principles of law in the matter of acceptance of this amount as business expenditure.
8. Per contra, learned counsel appearing for the assessee would argue that the Appellate Commissioner as well as the Appellate Tribunal was justified in accepting the case of the assessee.
9. After hearing, we have carefully perused the material placed before us. From the material on record, it is seen that the return of income was filed by the assessee for the assessment year 1970-71. Thereafter, on receipt of information regarding suppression of the real income of the assessee, proceedings were reopened and the proceedings were concluded in terms of the order passed under Section 143(3) of the Act. Same was challenged before the Commissioner and also before the Tribunal unsuccessfully by the Department. Reference was made to this court. Matter was remitted for fresh assessment. After remand, the assessing authority ruled that a sum of Rs.2 lakhs paid as redemption fine is not an expenditure in terms of the Income Tax law. That was challenged before the appellate authority. Appellate Authority has chosen to dismiss the appeal. An appeal was filed before the Tribunal. Tribunal has accepted as business expenditure a sum of Rs.2 lakhs in the case on hand. Courts have considered the cases with regard to violation of provisions of law for the purpose of payment of tax under the Income Tax Act.
10. The Supreme Court in The Supreme Court in Maddi Venkataraman And Co. (P) Ltd. v. Commissioner of Income Tax, (1998) 229 ITR 535, has chosen to consider the case in the matter of violation of the provisions of the Foreign Exchange (Regulation) Act, and the consideration of the same as business expenditure. The Supreme Court at page 545 of its judgment noticed the violation of the provisions of FERA. The Supreme Court also noticed the plea that unless it entered into such a transaction, it would have been unable to dispose of the unsold stock of inferior quality of tobacco. After noticing the same, the Supreme Court held that ?
?Spur of loss cannot be a justification for contravention of law. The assessee was engaged in tobacco business. The assessee was expected to carry on the business in accordance with law. If the assessee contravenes the provisions of the FERA to cut down its losses or to make larger profits while carrying on the business, it was only to be expected that proceedings will be taken against the assessee for violation of the Act. The expenditure incurred for evading the provisions of the Act and also the penalty levied for such evasion cannot be allowed as deduction. As was laid down by Lord Sterndale in the case of Alexander von Glehn and Co.Ltd. (1920) 12 TC 232 (CA), it was not enough that the disbursement was made in the course of trade. It must be for the purpose of the trade. The purpose must be lawful purpose.? (Underlining is supplied by us)
Similarly, a Division Bench of this Court in the case of Commissioner of Income Tax v. Mamta Enterprises, (2004) 266 ITR 356, after noticing the judgment of the Supreme Court, has chosen to hold as under:
?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 out 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 purpose of earning the profits of such business?.
The Supreme Court in Haji Aziz and Abdul Shakoor Brothers V. Commissioner of Income Tax, Bombay City-II, (1961) XLI ITR 350, has considered the principle of business expenditure, confiscation by customs authority and subsequent fine to realize goods. The Supreme Court after noticing has chosen to say as under:
?A review of these cases shows that expenses which are permitted as deductions are such as are made for the purpose of carrying on the business, i.e., to enable a person to carry on and earn profit in that business. It is not enough that the disbursements are made in the course of or arise out of or are concerned with or made out of the profits of the business but they must also be for the purpose of earning the profits of the business. As was pointed out in von Glehn?s case [(1920) 2 K.B.553) an expenditure is not deductible unless it is a commercial loss in trade and a penalty imposed for breach of the law during the course of trade cannot be described as such. If a sum is paid by an assessee conducting his business, because in conducting it he has acted in a manner which has rendered him liable to penalty, it cannot be claimed as a deductible expense. It must be a commercial loss and in its nature must be contemplable as such. Such penalties which are incurred by an assessee in proceedings launched against him for an infraction of the law cannot be called commercial losses incurred by an assessee in carrying on his business. Infraction of the law is not a normal incident of business and, therefore, only such disbursements can be deducted as are really incidental to the business itself. They cannot be deducted if they fall on the assessee in some character other than that of a trader. Therefore, where a penalty is incurred for the contravention of any specific statutory provision, it cannot be said to be a commercial loss falling on the assessee as a trader the test being that the 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 was argued that unless the penalty is of a nature which is personal to the assessee and if it is merely ordered against the goods imported it is an allowable deduction. That, in our opinion, is an erroneous distinction because disbursement is deductible only if it falls within Section 10(2)(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 conclusively 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 a 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 purpose of earning the profits of such business.?
11. All these judgments would show that violation of a provision of law cannot be taken advantage of by an assessee for the purpose of claiming deduction by way of business expenditure. Principle of law is that those who violate a provision of law has to suffer, and that violation cannot be made use of in any other proceedings and make gain out of it. If deduction is permissible, then there are chances of people taking advantage of the violation of a statute at least for the purpose of getting some benefit in the matter of payment of tax. We are not prepared to provide any such opportunity to the assesses. In the circumstances, we are satisfied that both the appellate authority and the Tribunal have committed a legal error in coming to a conclusion that the amount in question is deductible on the facts of the case on hand.
12. At this stage, we must also notice the factual errors committed by the Tribunal. The Tribunal has chosen to refer to a Bombay High Court Judgment. To our repeated queries, both the learned counsel are not in a position to give details of the said judgment. We deem it proper to say that a statutory Tribunal having a Judicial Member ought to be careful in giving a finding on the basis of a judgment of a High Court. Tribunal cannot give a finding on the basis of a judgment which is not available in terms of the material placed before us. We express our displeasure in the matter.
13. The assessee has placed before us two judgments for our consideration. F
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irst judgment is reported in (1968) 67 ITC 667- Commissioner of Income Tax, Bombay V. Pannalal Narottamdas and Company. It is no doubt true that in the said judgment it is stated that the penalty paid be regarded as part of the cost of the goods; and that it could be regarded as an amount expended wholly and exclusively for the purpose of the business. This finding in the light of a Bench decision of this court in Commissioner of Income Tax v. Mamta Enterprises, (2004) 266 ITR 356, is not acceptable to us. With respect, we differ from the findings of the Bombay High Court. 14. The next judgment is Commissioner of Income Tax v. N.M. Parthasarathy, reported in (1995) 125 CTR Reports 174. In the said judgment we see that the Madras High Court has considered ?business expenditure? in paragraphs 4 to 6 in the said judgment. The Court while considering the issue of business expenditure has noticed as noticed various facts, and ultimately at page 183 the Madras High Court has chosen to say that- ?On the face of the decision in the cases of Prakash Cotton Mills P. Ltd. Vs. CIT (supra) and CIT Vs. Ahmedabad Cotton Mfg. Co. Ltd. (supra) cannot at all be stated to have laid down an inflexible rule of law to be followed in all eventualities and situations.? The present facts stand on a different footing. 15. Before concluding, we deem it proper to say that violation of a statute has to be curbed as otherwise violation would be a premium for violators for the purpose of tax benefits. 16. In the circumstances, we accept this appeal. Questions of law raised in this appeal are answered in favour of the Revenue. No costs.