Commissioner of Income Tax-I, Ludhiana V. Ambassador Industrial Corporation

ITA/199/2007

AI Insights

The case involves the Commissioner of Income Tax-I, Ludhiana as the appellant and Ambassador Industrial Corporation as the respondent. The core issue was whether the Income Tax Appellate Tribunal was justified in allowing a deduction for a loss claimed by the assessee due to the non-release of goods, which were confiscated under the Customs Act for being over-invoiced to claim excess export benefits. The Tribunal had previously upheld the CIT(A)'s decision allowing the deduction, which the revenue challenged in the High Court. The High Court, referencing the Explanation to Section 37(1) of the Income Tax Act and a Supreme Court judgment, concluded that expenditures incurred due to legal infractions cannot be claimed as business deductions.

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 692030 (HC-CHANDIGARH)
• Appeal Type: Others
• Pronouncement Date: 14-05-2012
• Assessment Year: misc
• Other Referred Cases: Maddi Venkataraman & Co. (P) Ltd. v. Commissioner of Income Tax
• Laws Referred To: Income Tax Act, 1961, Customs Act
• Result in Favour of: Revenue
• Court: HIGH COURT
• Assessee Lawyers: RAJESH KATOCH
• Keywords: Confiscation of Goods; Customs Act; DEPB; Expenditure deduction; Income Tax; Over invoicing; Penalty
• Section: 148; 143(1); 37(1); 260A

Judgement Text

"ITA No. 199 of 2007 -1- IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH ITA No. 199 of 2007 Date of Decision: 14.5.2012 Commissioner of Income Tax-I, Ludhiana ....Appellant. Versus Ambassador Industrial Corporation ...Respondent. CORAM:- HON'BLE MR. JUSTICE AJAY KUMAR MITTAL. HON'BLE MR. JUSTICE G.S. SANDHAWALIA. PRESENT: Mr. Rajesh Katoch, Advocate for the appellant. None for the respondent. AJAY KUMAR MITTAL, J. 1. This appeal has been preferred by the revenue under Section 260A of the Income Tax Act, 1961 (in short “the Act”) against the order dated 31.8.2006 passed in ITA No. 968/CHANDI/2004 by the Income Tax Appellate Tribunal, Chandigarh Bench “B”, Chandigarh (hereinafter referred to as “the Tribunal”) for the assessment year 2000-01. 2. On May 25, 2007, the appeal was admitted for determination of the following substantial question of law:- “Whether on the facts and law, the Hon'ble Income Tax Appellate Tribunal was justified in holding that loss of ` 8,00,760/- claimed in respect of non- ITA No. 199 of 2007 -2- released goods was allowable, without taking note of Explanation to section 37(1) of I.T. Act and the fact that goods confiscated were over invoiced to claim excess export benefit/DEPB and for such offence & unlawful action penalty was imposed on firm as well as its partners under Customs Act?” 3. Briefly stated the facts for adjudication of the present appeal are that the assessee firm filed its return of income for the assessment year 2000-01 on 31.10.2000 declaring an income of ` 3,33,900/- which was accepted under Section 143(1) of the Act. In response to the notice under Section 148 of the Act, return declaring income of Rs.3,33,900/- was filed on 7.1.2003. The assessment in this case was completed on 24.3.2004 at an income of Rs.11,34,660/-. While completing the assessment, the Assessing Officer made addition of Rs.8,00,760/- by disallowing claim for deduction of aforesaid amount in respect of stock written off in the books of account. The assessee had valued the closing stock at Rs.68,07,132/- in the Manufacturing and Trading Account as on 31.3.200 but sought to reduce the closing stock by 8,00,760/- on the ground that the goods for export of such value were confiscated at Bombay Port and not released by the Customs Department. It was held that deduction of such expenditure/loss was not allowable in view of Explanation to Section 37(1) of the Act. The assessee filed an appeal before the Commissioner of Income Tax (Appeals) [in short “the CIT(A)”] who vide order dated 10.6.2004 allowed the claim of the assessee by relying upon the findings of the Customs and Excise Tribunal in the case of the assessee which had ITA No. 199 of 2007 -3- held that non-release of goods for such a long period served no purpose except to cause loss to the appellant. Against the order of the CIT(A), the revenue approached the Tribunal by way of appeal. The Tribunal vide order dated 31.8.2006 upheld the view of the CIT(A) and dismissed the appeal. Hence, the present appeal by the revenue. 4. Learned counsel for the revenue submitted that the amount of ` 8,00,760/- which was claimed as expenditure was on account of confiscation of goods as the assessee had mis-declared the same under the Customs Act. According to the learned counsel, in such a situation in view of Explanation to Section 37(1) of the Act, the same was inadmissible expenditure. Further, reliance was also placed upon the judgment of the Apex Court in Maddi Venkataraman & Co. (P) Ltd. v. Commissioner of Income Tax, (1998) 229 ITR 534 (SC) in support of his submission. 5. We have heard learned counsel for the revenue as no one has appeared on behalf of the assessee to contest the appeal despite service. 6. The issue in this case relates to whether the assessee who claims deduction on account of expenditure which had been incurred in respect of either penalty or similar nature, could be held to have wholly and exclusively expended the same for the purposes of its business. 7. The Finance (No.2) Act, 1998 inserted retrospectively w.e.f. 1.4.1962 Explanation to Section 37(1) of the Act which reads thus:- “Explanation.- For the removal of doubts, it is hereby declared that any expenditure incurred by an assessee for any purpose which is an offence or ITA No. 199 of 2007 -4- which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure.” 8. A reading of the aforesaid Explanation clearly spells out that the assessee is not entitled to claim any expenditure which had been incurred on account of any infraction of law. Admittedly, in the present case, the assessee had incurred an expenditure of ` 7,95,760/- on purchase of steel balls and besides this, an estimated expenditure of ` 5000/- was claimed to have been incurred for transporting the goods to Bombay Port for the purpose of export. The assessee had over invoiced the FOB value in the shipping documents and had made excess claim of DEPB which was 20% of the FOB. The assessee tried to defraud the Government by misdeclaring the goods to the Customs Department which were confiscated and the order of confiscation was upheld by the Custom, Excise and Service Tax Appellate Tribunal, New Delhi vide order dated 10.6.2003. The redemption fine of ` 3 lacs imposed on the assessee was, however, finally reduced to ` 1 lac . The assessee did not get the goods released. The goods having been confiscated on account of violation of provisions of the Customs Act, the claim of the assessee in reduction of value of closing stock, would fall as an expenditure incurred for the purpose which is an offence or which is prohibited by law. The same would not be admissible in view of the Explanation to Section 37(1) of the Act. 9. Further, the Apex Court in Maddi Venkataraman & Co. (P) Ltd's case (supra), delving into the issue whether the benefit of ITA No. 199 of 2007 -5- deduction under one statute where any expenditure is stated to have been incurred in violations of another statute was admissible had held that the expenditure could not be said to be wholly and exclusively laid out for the purpose of assessee's business and was inadmissible. The relevant observations read thus:- “In the instant case the assessee had indulged in transactions in violation of the provisions of FERA. The assessee's plea is that unless it entered into such a transaction, it would have been unable to dispose of the unsold stock of inferior quality of tobacco. In other words, the assessee would have incurred a loss. 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 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 T.C. 232 (A), it was not enough that the disbursement was made in the course of trade. It ITA No. 199 of 2007 -6- must be for the purpose of the trade. The purpose must be a lawful purpose. Moreover, it will be against public policy to allow the benefit of deduction under one statute, of any expenditure incurred in violation of the provisions of another statute or any penalty imposed under another statute. In the instant case, if the deductions claimed are allowed, the penal provisions of FERA will become meaningless. It has also to be borne in mind that evasion of law cannot be a trade pursuit. The expenditure in this case cannot, in any way, be allowed as wholly and exclusively laid out for the purpose of assessee's business.” 10. In view of the above, the substantial question of law is answered in favour of the revenue. The appeal stands allowed. (AJAY KUMAR MITTAL) JUDGE May 14, 2012 (G.S. SANDHAWALIA) gbs JUDGE "