Delhi High Court
Commissioner Of Income Tax Delhi vs M/S Vikas Chemicals on 7 August, 2014
$~R-38
*IN THE HIGH COURT OF DELHI AT NEW DELHI
Date of decision: 7th August, 2014
+ ITA 11/2002
COMMISSIONER OF INCOME TAX DELHI ..... Appellant
Through Mr. Balbir Singh, Sr. Standing
Counsel with Mr. Rupender Singhmar and
Mr. Abhishekh Singh Baghel, Advocates.
versus
M/S VIKAS CHEMICALS ..... Respondent
Through Mr. S.Krishnan, Advocate.
CORAM:
HON'BLE MR. JUSTICE SANJIV KHANNA
HON'BLE MR. JUSTICE V. KAMESWAR RAO
SANJIV KHANNA, J. (ORAL)
In this appeal by the Revenue relating to assessment year 1992-
93, by order dated 7th August, 2002, the following substantial question
of law was admitted for hearing:-
"Whether the Income-tax Appellate Tribunal was
justified in holding that the sum of Rs.45 lacs,
paid by the assessee to the Customs authorities on
account of redemption fine, was an allowable
expenditure?"
2. The respondent-assessee, a partnership firm, was engaged at the
relevant time in manufacture of organic chemicals. Under an
agreement dated 9th June, 1987 with M/s India Craft, the respondent-
assessee purchased 630 metric tonnes Isobutanol by sale on high-sea
basis. The said India Craft had procured the consignment of
Isobutanol from Netherlands against REP license issued in their
favour. The respondent-assessee upon import applied for clearance of
goods under REP licence, but the goods were detained. This resulted
in litigation between the respondent-assessee and Customs authorities.
The goods in question were sold in an auction on 14th March, 1989
pursuant to the direction of the Supreme Court. In the meanwhile and
as directed, adjudication proceedings under the Indian Customs Act,
1962, (Customs Act, for short) were held whereby, redemption fine of
Rs.90,00,000/- and penalty of Rs.10,00,000/- was imposed on the
respondent-assessee, which on appeal was reduced to Rs.45,00,000/-
and Rs.2,00,000/-, respectively.
3. The question raised in the present appeal is whether redemption
fine of Rs.45,00,000/- could be claimed as an expenditure under
Section 37 of the Income Tax Act, 1961 (Act, for short) or the same is
hit by the Explanation to Section 37 or was not an expenditure, wholly
and exclusively for purpose of business. Learned counsel for the
Revenue has submitted that the expenditure in question would be
barred under the Explanation to Section 37 as redemption fine was paid
by way of penalty and as per Section 111(d) of the Customs Act, the
goods in question were prohibited goods.
4. Learned counsel for the respondent-assessee has, however, relied
upon decision of this Court in Usha Micro Process Controls Ltd. Vs.
Commissioner of Income Tax, (2013) 204 DLT 664. The said case
also related to payment of redemption fine and reference therein was
made to the judgment of the Madras High Court in Commissioner of
Income Tax Vs. N.M. Parthasarathy, [1995] 212 ITR 105 and
decision of the Supreme Court in Prakash Cotton Mills Pvt. Ltd. Vs.
Commissioner of Income Tax (Central), Bombay, [1993] 201 ITR
684.
5. Learned counsel for the Revenue, however, submits that the
decision in Usha Micro Process Controls Ltd. (supra) requires
reconsideration in view of decisions of other high courts as noticed in
Commissioner of Income Tax Vs. Jayaram Metal Industries, [2006]
286 ITR 403 (Kar) and Maddi Venkataraman & Co. (P) Ltd. Vs.
Commissioner of Income Tax, [1998] 229 ITR 534 (SC). He submits
that language of Explanation to Section 37 is quite clear and once it is
held that the expenditure was incurred for any purpose, which was
prohibited by law, the same is deemed not to be incurred for the
purpose of business or profession. The said Explanation incorporates a
deeming fiction, which must be given full effect to.
6. In the facts of the present case, we are not inclined to examine
the larger issue raised by the appellant-Revenue because of the
findings of fact recorded by the Tribunal. The requirement of
Explanation is that payment in form of expenditure should not be made
for the purpose, which is prohibited by law. Finding of the Tribunal,
as recorded in the impugned order, is that M/s India Craft had initially
entered into a contract and had purchased Isobutanol under REP
licence and the same was subsequently purchased by the respondent-
assessee on high-sea basis. This was a commercial transaction
between two unrelated parties. It is in these circumstances, that the
respondent-assessee had applied for clearance of goods in India.
Earlier similar goods had been cleared by the Customs authorities
under REP licence. The fault or defect in the REP licence was not
attributable to the respondent-assessee as the licenses were issued to
India Craft. The respondent-assessee was not to be blamed and had not
indulged in any offence or incurred any expenditure for the purpose,
which was prohibited by law. The respondent-assessee had to pay
redemption fine in order to save and protect themselves and in terms of
the order passed by the Supreme Court, they had received the balance
consideration from the auction proceeds. As noticed above, the goods
had been sold in auction pursuant to the direction of the Supreme
Court. The finding recorded by the Tribunal is that the conduct and
action of the respondent-assessee was not blameworthy or
commanding censure. The respondent-assessee wanted to set-off the
redemption fine from the consideration received by them. In fact, the
respondent-assessee had only received the net amount after adjustment
of the redemption fine. Of course, the penalty amount is not a subject
matter of the present appeal and we express no opinion in that regard.
7. In view of the aforesaid, we do not think that the appellant-
Revenue is entitled to succeed in the present appeal. The substantial
question of law in the facts of the present case as found by the Tribunal
has to be answered in favour of the respondent-assessee and against the
appellant-Revenue. Ordered accordingly. No costs.
SANJIV KHANNA, J.
V. KAMESWAR RAO, J.
AUGUST 07, 2014
NA/VKR
