M/S. HAJI AZIZ AND ABDUL SHAKOOR BROS. vs. THE COMMISSIONER OF INCOME-TAX, BOMBAY CITY II

CIVIL APPEAL No. 110/1957Supreme Court[1961] 2 S.C.R. 65124 November 1960Bench: 3 JudgesAuthor: J.L. KAPUR, M. HIDAYATULLAH, J.C. SHAH S.C.R. SUPREME COURT REPORTS14 pages
AI SummaryDismissed

What were the facts?

The assessee, M/s. Haji Aziz and Abdul Shakoor Bros., a firm engaged in importing and selling dates, imported dates from Iraq. At the relevant time, import of dates by steamers was prohibited by Government notifications. Consignments imported by steamer, valued at Rs. 5 lacs, were confiscated by Customs Authorities. Under Section 183 of the Sea Customs Act, 1878, the appellant was given an option to pay a penalty of Rs. 1,63,950 in lieu of confiscation, which was later reduced to Rs. 82,250 on appeal. The appellant paid this amount and secured the release of the dates. The assessee claimed this penalty payment as a deductible expenditure under Section 10(2)(xv) of the Indian Income-tax Act, 1922. The Income-tax Officer and the Appellate Assistant Commissioner disallowed the claim. The Income-tax Appellate Tribunal, by a majority of two to one, held the sum to be allowable. The Revenue preferred an appeal to the High Court, which answered the question against the assessee.

What did the Supreme Court hold?

The Supreme Court held that the amount paid by the appellant by way of penalty for a breach of the law cannot be considered an expenditure laid out wholly and exclusively for the purpose of the business and is not an allowable deduction under Section 10(2)(xv) of the Indian Income-tax Act, 1922. The Court reasoned that expenses permitted as deductions are those made to enable a person to carry on and earn profit in the business. It is not sufficient that disbursements are made in the course of or arise out of the business; they must be for the purpose of earning profits. A penalty imposed for a breach of the law during the course of trade cannot, on grounds of public policy, be considered a commercial expense or a disbursement made for the purpose of earning profits. The Court rejected the distinction sought to be drawn between a personal liability and a liability against the stock-in-trade, stating that any disbursement incurred due to an infraction of the law, visited with a penalty, cannot be a commercial expense. The appeal was dismissed.

What were the issues?

1. Whether the payment of Rs. 82,250, made as a penalty in lieu of confiscation of imported dates, is an allowable expenditure under Section 10(2)(xv) of the Indian Income-tax Act, 1922? Assessee's Contentions: - The expenditure incurred was for the release of stock-in-trade and therefore an allowable expenditure. - An expenditure does not become inadmissible merely because it is occasioned by an infraction of the law not involving moral turpitude. - The expenditure was the result of an order in rem against the stock-in-trade, not a personal liability of the firm, and thus allowable. - The purpose of the expenditure was to save or salvage the goods, making it an allowable item. - The firm had instructed shippers to send goods by country craft, implying no deliberate infraction. Revenue's Contentions: - The payment was a penalty for a breach of the law and not an expenditure laid out wholly and exclusively for the purpose of business. - Penalties imposed for breach of law are not commercial expenses and are not deductible on grounds of public policy. - The High Court rightly held that the amount was paid as a penalty for an illegal act and was not an allowable deduction.

Which sections of the Income-tax Act were involved?

Section 10(2)(xv),Section 167(8),Section 183

AI-generated summary — verify with the full judgment below

2 S.C.R. SUPREME COURT REPORTS 651 Privy Council judgment Montreal Coke and Manufac- 1960 turing Co. v. Minister o1 National Revenue (1) but that Th c .. 'J • e omnnssioner case can nave no applicat10n to the facts of the pre- of Income-tax, sent case because it was found there as· a fact that the Bombay Oity I assessees's financial arrangements were quite distinct v. from the activities by which they earned their ~ncome "'.fs. Jagannath and expenditure incurred in relation to the financing Kissonlal, Bombay of their business was not expenditure in the earnii1g Kapur J. of their income within the statute.

It was then contended that the loss of the respon- dent was a capital loss and for this again reliance was placed on the judgment of this Court in Madan Gopal Bagla's case (2) and particularly on the observation at page 559 where Bhagwati, J., quoted with appro- val the observations of the High Court in the judg- · ment but as we have pointed out the facts of that case are distinguishable and what was said there has no application to the facts and circumstances proved in the present case. · In our view the judgment of the High Court is right and we ther

The order continues below.

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