KAPOOR SONS AND CO Vs. INCOME TAX OFFICER
INCOME TAX APPELLATE TRIBUNAL
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P.L. Kanojia, Accountant Member -
(1.) THIS appeal had been filed by the assessee and the first ground taken is that the Commissioner (Appeals) was not justified in upholding the disallowance of a sum of Rs. 2,23,650 being the penalty imposed by the Enforcement Directorate.
(2.) The assessee is a registered firm which was engaged in the exhibition of films in a cinema house known as 'Kamal Talkies'. On 2-10-1970 the assessee started a new venture under the name and style of International Ice Holiday. The said business was commenced after obtaining due approval of the concerned authorities and was set up in the plot owned by the LIC outside Connaught Circus, New Delhi. After running the show for a short period between 2-10-1970 to 9-11-1970, it had to be stopped under the orders of the Ministry of Home Affairs. The foreign artists employed by the assessee in running the venture were departed by the Government and proceedings under the Foreign Exchange Regulation Act, 1973 (FERA) were also initiated by the Directorate of Enforcement. The assessee entered into litigation with the Government for the closure of the business and had to incur large amount of litigation expenses. On 15-10-1973 the Special Additional Director, Enforcement Directorate, New Delhi, imposed a penalty of Rs. 2,23,650 on the assessee for violation of the FERA. The assessee claimed deduction of the said penalty during the assessment year 1974-75 as, according to it, the liability in respect of the penalty had accrued during the accounting period relevant for the assessment year 1974-75. Before the ITO, the assessee submitted that the penalty imposed by the Enforcement Directorate was expenditure incurred during the course of its business and, hence, was incidental to the carrying on of the business and should be allowed as a deduction. The ITO did not accept the assessee's contention and held that the penalty so imposed on the assessee could not be regarded as an expenditure wholly laid down for the purpose of the business. In taking the above view, he relied on the decision of the Gujarat High Court in CIT v. Mihir Textiles Ltd.  104 ITR 167 and did not place any reliance on the decision of the Bombay High Court in CIT v. Pannalal Narottamdas & Co.  67 ITR 667 cited by the assessee.
The assessee went in appeal and before the Commissioner (Appeals), a reference was made to the order of the Tribunal relating to the assessment year 1971-72 wherein the Tribunal allowed the assessee's claim of expenditure incurred on litigation by holding that the said expenditure was incurred by the assessee in trying to preserve its business and, hence, was incidental to the carrying on of the said business. The Tribunal also held that the business carried on by the assessee was a lawful business and continued to be so till it was closed by the Government. The assessee also referred to the decision of the Gujarat High Court in Mihir Textiles Ltd.'s case (supra) and also the decision of the Supreme Court in CIT v. Piara Singh  124 TTR 40 and submitted that even if there was an infraction of law, the expenditure incurred on payment of penalties was an allowable deduction. The Commissioner (Appeals) also did not accept the assessee's contention and relying on the decision of the Supreme Court in Haji Aziz & Abdul Shakoor Bros. v. CIT  41 ITR 350, came to the conclusion that the violation of the FERA was not and could not be regarded as an essential part of the business carried on by the assessee-firm and, hence, the expenditure incurred on payment of penalty imposed for the infraction of law could not be allowed as a deduction. Aggrieved by the findings of the Commissioner (Appeals), the assessee has come up in the present appeal.
(3.) BEFORE us, the learned counsel of the assessee submitted that if the business carried on by the assessee was treated as a lawful business by the Tribunal, any expenditure arising out of the said business was also allowable as a deduction. It. was pleaded that there was no infraction of law and the assessee has challenged the order of the Enforcement Directorate before the Delhi High Court and the matter is still pending. It was submitted that even if there was an infraction of law the business was done lawfully and, hence, the amount of penalty imposed is an admissible deduction. In pressing home his point of view, he relied on the decision of the Supreme Court in Piara Singh's case (supra) and some other decisions, namely, Pannalal Narottamdas & Co.'s case (supra), CIT v. Ahmedabad Controlled Iron & Steels Reg. Stockholders Association (P.) Ltd.  99 ITR 567 (Guj.), Nanhoomal Jyoti Prasad v. CIT  123 ITR 269 (All.) and CWT v. S.C. Kothari  82 ITR 794 (SC). The learned representative of the department, on the other hand, has relied on the decision of the Commissioner (Appeals).;
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