M/S USHA MICRO PROCESS CONTROLS LTD. vs. COMMISSIONER OF INCOME TAX

Briefly, the facts are that the petitioner had imported some software during the relevant Assessment Year i.e. 1985-86. It had sought to re-export the software after making some declarations. The customs authorities were of the opinion that the appellant’s action was not legal and directed it to pay differential duties. In addition its Managing Director was made personally liable to penalty. The goods were sought to be confiscated. The matter was carried in appeal. Eventually the Customs, Excise and Gold (Control) Appellate Tribunal (CEGAT) decided the matter on 30.5.1999. The 2013:DHC:3868-DB

Now coming to the penalty, we would like to observe that in the foregoing paragraphs we have held the importation of hardware as authorised and regarding the importation of software, the appellants had requested for the re-exportation of the software and had also placed on record to the effect that the software which was sent with the hardware was not ordered by the appellants and the appellants were keen for sending them back. There is complete absence of the elements of mens reg (sick) and the valuation of the hardware has been taken at a higher figure due to difference of opinion.

In Prakash Cotton Mills Pvt. Ltd.’s case (supra), the Supreme Court pertinently observed that whenever an authority has to decide whether to grant or refuse deduction under section 37(1) of the Income Tax Act, the governing test would be whether the amount payable is compensatory in nature. In N.M. Parthasarathy’s case (supra), the identical situation where redemption fine under the Customs Act was in issue, the Court after examining the scheme of the enactment held as follows: “22. Coming to the facts of the case on hand, the goods belonging to the assessee had been confiscated under section 111(d) of the Customs Act, 1962, read with section 3 of the Imports and Exports (Control) Act, 1947. However, under section 125 of the Customs Act, 1962, an option had been given to the owner assessee to pay, in lieu of such confiscation, a fine of Rs. 1,84,000 which had been reduced on appeal to Rs. 84,000 and the goods had been cleared exercising the option. If the seized goods, without the exercise of option, had been confiscated once and for all, it goes without saying that the property in the goods shall vest in the Government, in the sense of the Government becoming the absolute owner thereof. The fine amount, whatever be its quantification, that is to say, whether it is equivalent to or below the value of the goods seized, cannot at all, in such a situation, be stated to be penal in nature, notwithstanding its nomenclature, but it is reparatory or compensatory in nature. Once it is compensatory in nature, its goes without saying that the authority has to allow deduction 2013:DHC:3868-DB

In the present case, this Court notices that originally the penalty which the appellant had been directed to pay was deleted by the CEGAT. What remained was the confiscation; the appellant was given the choice of redeeming the goods by depositing redemption fine as is evident from combined reading of paragraph Nos. 18 and 19 of CEGAT order. The Tribunal went so far as to say that valuation of goods in question was on the basis of difference of opinion. Nevertheless, that being the rationale for deletion of penalty, the Tribunal felt that the order of confiscation did not require to be upset, instead redemption fine was reduced to Rs. 4,00,000/-. On a proper application of the ruling in M/s. Prakash Cotton Mills Pvt. Ltd.’s case (supra), this Court is of the opinion that the amount of redemption fine in the present case was compensatory and therefore, fell outside the mischief of explanation of Section 37(1) of the Income Tax Act. 11. In the above conclusion, the question of law framed is answered in favour of the appellant/assessee and against the Revenue. The appeal is allowed in above terms.