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 the redemption fine of Rs. 75,00,000/- is allowable as business expenditure under Section 37 of the Income Tax Act?"
(2.) The appeal arises in following background:- 2.1 Respondent assessee is an individual. For the assessment year 1988-89, the assessee had filed return of income declaring total income of Rs. 1,47,020/-. The return was accepted without scrutiny. Subsequently, information was received by the Assessing Officer that the assessee had made payment of Rs. 75 lacs in two separate installments towards penalty for import of almonds which import was not permissible. On the basis of such information, the Assessing Officer reopened the assessment for the said assessment year 1988-89 by issuing the notice under Section 148 of the Income Tax Act, 1961 ("the Act" for short). 2.2 During the course of such assessment proceedings, the assessee was called upon to provide various details by the Assessing Officer. The representative of the assessee remained present before the Assessing Officer and conveyed that the assessee was using import license of M/s. Rajnikant Bros. which is an export house. For using the license, the assessee would pay service charges equivalent to 25% of CIF value of the goods. It was further pointed that the consignment of almond was imported by M/s. Rajnikant Bros. The assessee had merely acted as an agent in the transaction. It was pointed out that upon confiscation of the goods, redemption fine and penalty were imposed by the Collector of Customs, Madras on M/s. Rajnikant Bros. Tribunal in the appeal reduced the redemption fine to Rs. 75 Lacs and deleted personal penalty. It was contended that in any case, the imports were made by M/s. Rajnikant Bros. and the order was passed against M/s. Rajnikant Bros. and not against the assessee. It was also contended that the penalty was paid by M/s. Rajnikant Bros. and not by the assessee. The assessee, however, could not produce the books of accounts to establish this averment. The Assessing Officer, therefore, issued summons to M/s. Rajnikant Bros. asking for a copy of the agreement dated 14.10.1985 entered between the assessee and M/s. Rajnikant Bros. for the use of import licence and other details. In response to the summons, the accountant of M/s. Rajnikant Bros. appeared before the Assessing Officer. A copy of the said agreement dated 14.10.1985 was produced. The procedure attached to the agreement was also produced. The statement of the accountant of M/s. Rajnikant Bros. was recorded. Relevant portion of which reads as under:- "Q. No. 4 : What is the modus operandi of the transaction made by Shri. M.P. Gupta regarding the use of licence? Ans. : Mr. M.P. Gupta has imported almonds in Madras 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 material along with duty, fine, foreign payment and clearing charges etc. are as under:- JUDGEMENT_63_LAWS(BOM)2_2019_1.html Q. No. 5 : As stated by you redemption fine of Rs. 75,00,000/- paid to Madras Customs House. Please state who has paid the sum: Answer: Rs. 75,00,000/- paid as custom fine by Mr. M.P. Gupta through Rajnikant Bros. from Banoue Indosuez P. Box 685 A/c No. 11124 201 5301. All transactions were made by Shri. M.P. Gupta hence, he is responsible for the above fine. As per agreement, we are only related for our service charges." 2.3 The Assessing Officer confronted the assessee with the factum of payment of penalty of Rs. 75 Lacs. The assessee in a written response dated 28.2.1997 contended that he had only made advances to M/s. Rajnikant Bros from time to time as per the requirements but had not paid penalty of Rs. 75 Lacs. 2.4 The Assessing Officer did not accept the said explanation particularly in view of the failure of the assessee to produce books of accounts. He was also of the opinion that the stand of the assessee was in conflict with the agreement dated 14.10.1985. He did not accept the assessee/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 Act and has been incurred by the assessee from unexplained source of which the assessee has no explanation about the source nor the assessee offered any satisfactory explanation. The penalty proceedings u/S. 271(1)(c) is being initiated separately." 2.5 The assessee carried the matter in appeal and reiterated his stand. In the context of the addition under Section 69C of the Act, the Commissioner rejected the assessee's plea by making following observations:- " As regards addition u/S. 69C, the appellant has claimed that payment was made through funds arranged by the assessee through M/s. Mangla Bros and debited to M/s. Rajnikant & Bros accounts. The copy of the confirmation filed by M/s. Mangla Bros. as a Certificate dated 24.11.1997 it states that payments have been made to Collector of Customs, M.P. Gupta account, M/s. Rajnikant & Bros. which gives DD No., date, amount and name of the party to whom payment was arranged. The Certificate does not carry any PAN/GIR No. of M/s. Mangla Bros. and thus, itself of limited validity. In the absence of books of account and a valid confirmation the source of expenditure is not satisfactorily explained and the payment is liable to be treated as unexplained expenditure u/s 69C of the Act." 2.6 The assessee had raised additional contention that when the expenditure was attributed to the assessee, the same should be considered as business expenditure. In this context, the question of such expenditure incurred for any purpose which is an offence or which is prohibited by law came up for consideration. The assessee had raised additional contention, though grounds of appeal were confined to questioning the additions made by the Assessing Officer under Section 69C of the Act. The Commissioner of Income Tax (Appeals) ["the CIT(A) for short], therefore, considered whether the expenditure was in the nature of compensatory expenditure or towards fine in contravention of law. The CIT(A) while rejecting this contention, observed as under:- " 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 after considering the judgments of the Bombay High Court in (a) CIT Vs. Pannalal Narottamdas & Co (supra) which laid down that redemption fine is additional cost for the goods purchased and (b) the judgment in Rohit Pulp & Paper Mills Vs. CIT, 1995 215 ITR 919/79 Taxman 168 (Bom), where also there was confiscation of goods u/s. 111(d) of the 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 the penalty / fine has to be incurred because of the fault of the assessee himself, i.e, carrying on of business in an unlawful manner or in contravention of certain rules and regulations, the penalty / fine paid cannot be regarded as wholly laid out for the purpose of business. Thus, in the face of the specific findings of the Custom Tribunal and Madras High Court, the appellant's contention is without force." 2.7 The assessee carried the matter in further appeal before the Tribunal. In such appeal, the assessee raised both the contentions. In addition to questioning the very addition of Rs. 75 Lacs under Section 69C of the Act, he also challenged the decision of the CIT(A) not accepting the contention that in any case, the expenditure was made wholly and exclusively for the the purpose of business and therefore, allowable as business expenditure. 2.8 The Tribunal, in the impugned judgment, referred to the documents under which the import of almond was held to be unlawful. The Tribunal noted that the Collector of Customs, Madras had confiscated the goods, imposed redemption fine 1.20 crore and penalty of Rs. 20 lacs on M/s. Rajnikant Bros. Ms/. Rajnikant Bros. had filed appeal before the Customs Tribunal, Madras which had reduced redemption fine to Rs. 75 Lacs and deleted the penalty. The Tribunal, while allowing the appeal of the assessee and recognizing the expenditure as business expenditure came to following conclusions:- (i). The assessee and the Export House were under bonafide belief that the almond in shell was one of the items allowed for import against additional licence granted; (ii). That the Customs Tribunal had held that there was no malafide on the part of the assessee as there was certain amount of vagueness in the import policy and therefore, redemption fine was 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., 1994 205 ITR 163 (SC) and was of the opinion that the facts of the present case were similar. The Tribunal noted that in the said case, it was found that the fault or defect in the REP licence was not attributable to the assessee. The assessee was not to be blamed,had not indulged in any offence or incurred any expenditure for the purpose which is prohibited by law and the assessee had to pay redemption fine in order to save and protect themselves." 2.9 Against this judgment, the Revenue has filed this appeal.
(3.) Mr. Chhotaray, learned counsel appearing for the Revenue submitted that the amount of Rs. 75 Lacs paid by the assessee was towards redemption fine. In terms of Explanation 1 to Section 37(1) of the Act, such expenditure was 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 Officer and CIT(A) came to the specific conclusion that it was the assessee who had made the imports and had, therefore, paid the redemption fine. The Tribunal without any basis came to the conclusion that the assessee was not connected with the import of almond which led to imposition of redemption fine. He submitted that the judgment of the Supreme Court in case of Ahmedabad Cotton Mfg. Co. Ltd. (supra) was therefore, wrongly applied by the Tribunal. Learned counsel heavily relied on the decision of the Supreme Court in the case of Haji Aziz & Abdul Shakoor Bros. Vs. CIT, 1961 41 ITR 350(SC). Learned counsel for the Revenue has also relied on certain decisions reference to which would be made at proper stage.;