* IN THE HIGH COURT OF DELHI AT NEW DELHI
DECIDED ON: 5th August, 2013
+ ITA 101/2000
M/S USHA MICRO PROCESS CONTROLS LTD. ..... Appellant
Through: Mr. Prakash Kumar, Advocate.
versus
COMMISSIONER OF INCOME TAX ..... Respondent
Through: Mr. Sanjeev Sabharwal, Sr. Standing
Counsel.
CORAM:
HON'BLE MR. JUSTICE S. RAVINDRA BHAT
HON'BLE MR. JUSTICE NAJMI WAZIRI
% MR. JUSTICE S. RAVINDRA BHAT (OPEN COURT)
1. The appeal under section 260A of the Income Tax Act, 1961 impugns
the order of the Income Tax Appellate Tribunal (ITAT) dated 30.12.1999.
2. This Court had by order dated 09.1.2001 framed the following
question of law:
"Whether Tribunal was justified in holding that the levy
of Rs. 4 lakhs in respect of redemption fine and personal
penalty was in the nature of fine and penalty and are not to be
allowed as deductible business expenditure while computing
total income of the assessee?"
3. 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
ITA 101/2000 Page 1
Tribunal directed the deletion of personal penalty but proceeded to uphold
the order in so far as the fine in lieu of confiscation is concerned --to Rs.
4,00,000/-; the original amount was Rs. 10,00,000/-.
4. For Assessment Year 1985-86, the assessee had claimed Rs.
4,00,000/- as deductible under Section 37(1) of the Income Tax Act.
5. The appellant claimed benefit of Section 37(1) of the Income Tax Act
in respect of payments made towards the penalty as well as redemption fine.
The CIT appeals had granted the benefit to the appellant; however regular
appeals before the ITAT succeeded.
6. The appellant relies upon the decision of the CEGAT especially
paragraph Nos. 18 and 19 to say that the Explanation to Section 37(1) of the
Income Tax Act which can be the only rationale for refusal to permit the
claim as a deduction was inapplicable. Learned counsel also relied upon the
judgment of Madras High Court reported as Commissioner of Income Tax v.
N.M. Parthasarathy, 1995 (212) ITR 105 as well as the ruling of the
Supreme Court in M/s. Prakash Cotton Mills Pvt. Ltd. v. Commissioner of
Income Tax (Central), Bombay, 1993 (201) ITR 684.
7. Learned counsel for respondent Mr. Sabharwal argued that the
impugned order ought not to be interfered with since the Tribunal took the
note of the relevant tests and considered the scheme of enactment while
concluding that the amount of Rs.4,00,000/- involved in the present case fell
under the explanation of Section 37 (1) of the Income Tax Act.
8. The observations of the CEGAT are pertinent. They are extracted
below:
18. Keeping in view the totality of the facts and circumstances
of the case, we reduce the fine in lieu of the confiscation to Rs.
4,00,000.00 (Rupees four lacs only).
ITA 101/2000 Page 2
19. 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.
9. 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
ITA 101/2000 Page 3
under section 37(1) of the Income Tax Act as laid down by the
apex court in the two latest decisions aforecited. Further, the
expenses incurred by way of payment of fees to advocates in
defending penalty proceedings must also be construed as an
allowable deduction. We, therefore, answer questions Nos. 1
and 4 in the affirmative and against the Revenue."
10. 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.
S. RAVINDRA BHAT, J
(JUDGE)
NAJMI WAZIRI, J
(JUDGE)
AUGUST 5, 2013/mv
ITA 101/2000 Page 4
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