1980 PLP 277 (PTD)
COMMISSIONER OF INCOME‑TAX Versus MATHURA PRASAD HARDWAR PRASAD DEORIA
| Citation | 1980 PLP 277 (PTD) |
| Forum / Court | Allahabad (India) |
| Bench Members | M. C. Desai, C. J. and R. S. Pathak, J |
| Parties | COMMISSIONER OF INCOME‑TAX Versus MATHURA PRASAD HARDWAR PRASAD DEORIA |
| Primary Law | Income‑tax Act (XI of 1922)‑, SUPPLEMENTARY STATEMENT OF CASE, STATEMENT OF THE CASE |
Q1: What are the key laws and sections cited in 1980 PLP 277 (PTD)?
This judgment primarily cites: Income‑tax Act (XI of 1922)‑, SUPPLEMENTARY STATEMENT OF CASE, STATEMENT OF THE CASE as referenced in Pakistani case law index.
Q2: Which judicial bench decided the case 1980 PLP 277 (PTD)?
The case was heard and decided by the Allahabad (India) bench comprising: M. C. Desai, C. J. and R. S. Pathak, J.
Q3: What is the official citation format for this judgment on Pakistan Law Portal?
Cite this legal precedent as: 1980 PLP 277 (PTD) (COMMISSIONER OF INCOME‑TAX Versus MATHURA PRASAD HARDWAR PRASAD DEORIA). Read the full summary and cross-referenced laws free on Pakistan Law Portal.
Laws Cited
Representation
- 6. The assessee agrees to the statement of the case. The authorised representative for the Department contends that it is not a fact that the penalty was imposed as a result of any negotiations between the Governments of India and Pakistan, acid requests us to delete this fact from the statement of the cast. It is clear from the Tribunal's order that this fact was specifically found by the Tribunal. We do not, therefore, agree to his request.
- S. C. Das for Appellant.
- S. B. L. Srivasava R. L. Gulati and R. K Gulati for Respondent.
Headnotes / Summary
‑‑ S. 10 (2) (xvi)‑Business expenditure‑Penalty for contravention of law‑Amount of penalty imposed for wrongful export of goods from India to Pakistan in contravention of law‑Held, not a business expendi ture of nature mentioned in S. 10 (2) (xvi). Commissioners of Inland Revenue v. Warnes & Co. Ltd. (1919) 2 K B 444; and Haji Aziz & Abdul Shakoor Bros. v. Commissioner of Income‑tax (1961) 41 I T R 350 eel. By this application the Commissioner of Income‑tax, U. P. and V.P requires the Appellate Tribunal to refer to the High Court a question law alleged to arise out of the Tribunal's order in I. T. A. No. 2579 of 1953‑
54. Inasmuch as in our opinion, a question of law does arise out of the order of the Tribunal, We hereby draw up a statement of the case and refer it to the High Court of Judicature at Allahabad under section 65 (1) of the Indian In‑come‑tax Act, 1922.
2. Messrs Mathura Prasad Hardwar Prasad, the respondent in this appli cation, is a firm. The aforesaid appeal concerned the assessment made on the respondent in the status of a registered firm for the assessment year1951‑52, the relevant previous year being the year ending with Push Sudi 12, Samvat 2007, corresponding to the period November i8, 1949, to January 19, 1951. The assessee firm dealt in molasses during the previous year. During the previous year the assessee arm exported 1,952 tins of molasses to East Pakistan. The prevalent market rate of molasses at Barharj, where the assessee firm was carrying on the business was Rs. 5‑12‑0 per maund while the tins exported to Pakistan were sold at the rate of Re. 20 per maund. Molasses was not one of the commodities included in the Indo‑Pakistan trade agreement. The assessee firm was not, therefore, entitled to export molasses from India to Pakistan. While these 1,952 tins of molasses were being taken into Pakistan they were seized by the Pakistan Government. As a result of negotiations between the Governments of India and Pakistan, the assessee firm was permitted to take the stock of molasses into Pakistan on condition that the assessee firm should pay a penalty of Rs. 3,110 in addition to the custom duty of 4,665‑12‑
0. The penalty was presumably a fine levied under section 183 of the Sea Customs Act, 1878, adopted by Pakistan. A copy of the letter dated April 30, 1951, written by the Assistant Trade Commissioner to the Secretary to the Government of India, Commerce & Industries Depart ment, New Delhi, in this connection is Annexure "A" and forms part of the case. It was profitable to the assessee to sell the molasses in East Pakistan even after the payment of the above penalty and customs duty as there was still a considerable difference between the purchase price and selling price and the assessee would still make a profit of about Rs. 10‑12‑0 per mauad. The assessee, therefore, paid the customs duty and penalty mentioned above and showed the molasses exported to Pakistan in his profit and loss account. The Income‑tax Officer while taking into account the profit‑free molasses sold in East Pakistan refused to deduct the penalty of Rs. 3,110 paid by the asses see in the above circumstances, in the following word:‑ "The assessee exported molasses to East Pakistan. This commodity has not been included in the Indo‑Pakistan Trade Agreement and, there fore, cannot be and should not have been imported into Pakistan. Since the assessee took it to Pakistan, apart from the customs duty the assessee lead to pad a penalty of Rs. 3,
110. It was not necessary for the purpose of the assessee's business to infringe the customs regula tions and a penalty for infringement of law cannot be an admissible deduction. The sum will, therefore, be added to the income."
3. The assessee appealed to the Appellate Assistant Commissioner and contended that the Income‑tax Officer should have allowed the penalty of Rs. 3,110 as a deduction. The Appellate Assistant Commissioner, while agreeing with the assessee's contention that the penalty was an allowable deduction, refused to allow it on the ground that the payment of the penalty had not been proved.
4. The assessee appealed to the Tribunal against the order of the Appellate Assistant Commissioner and contended that the penalty of Rs. 3,110 in fact had been paid and that it was admissible as a deduction. The Tribunal examined the vouchers for the payment of the penalty and was satisfied that the penalty had in fact been paid. The Tribunal also accepted the assessee's contention that the penalty was, in the circumstances of the case, an admissible deduction under section 10 (2) (xv) of the Act as representing expenditure exclusively laid out for the purpose of the order of the Tribunal which gives its reasons for this conclusion is Annexure "B" and forms part of the case.
5. Out of the facts stated above, the following question of law arises: "Whether the sum of Rs. 3,110 paid as penalty to the Pakistan Govern ment, in the circumstances of the case, is admissible as a deduction under section 10 (2Xxv) of the Indian Income‑tax Act?" In compliance with the direction of the High Court in its order passed in Miscellaneous Case No. 402 of 1954, requiring the Appellate Tribunal to draw up an additional statement of facts under section 66 (4), we do hereby draw up the additional statement of the case.
2. The relevant portion of the last paragraph of the order of the High Court containing the direction to the Tribunal is produced below: "We, therefore, under section 66 (4) refer the case back to the Appellate Tribunal to make additions to its statement of case in the light of the observations made above. In particular, the Tribunal should state: (i) What was the law in force in Pakistan in respect of the import of molasses, and in what respect it was infringed, if at all, by the import of the molasses by the assessee? (ii) Whether the import was altogether prohibited or whether it could be allowed in certain circumstances, and if so, in what circumstances. (iii) Whether the amount realised from the assessee in addition to the customs duty, namely, the so‑called penalty, was by way of punishment for an offence or breach committed, or by way of price paid for allowing the import of molasses? (iv) Whether the assessee could import the molasses into Pakistan in any other way without having the necessity of paying anything in excess of the customs duty? (v) Whether the payment was Levied, not under any law or rule in force in Pakistan, but under an agreement between the Governments of the two countries? (vi) What were the terms of the trade agreement? and (vii) Could the assessee have made any profit from the 'sale of molasses in Pakistan by importing them in a different way or manner? Since there was no material on record to answer the above questions and to draw up an additional statement of facts, we directed the parties to furnish before us such relevant material which could help us to answer the above ques tions. After taking several adjournments, the Commissioner of Income‑tax (who was the applicant in this case) furnished some information on the basis of which this additional statement is drawn up Although the assessee's counsel was made aware of the material furnished by the Commissioner of Income tax, the assessee has neither contradicted that material nor has he furnished any other material. On the other hand both the departmental representa tive, on behalf of the Commissioner of Income‑tax, and Sri Gulati, on behalf of the assessee, submitted before us that the material now collected and fur nished by the Commissioner of Income‑tax was not before the Tribunal when it had heard and decided the concerned appeal under section 33 and that therefore we could not use that material now in sending the additional state ment of facts. The Departmental Representative further submitted that fresh facts to amplify the original records are not required to be gone into in view of the two Supreme Court judgments in New Jehangir Vakil Mills Ltd. Commissioner of Income‑tax (1959) 37 I T R 11 and Zoraster & Co. v. Commissioner of Income tax (1960) 40 I T R
522. The written statements filed by the Departmental Representative on behalf of the Commissioner of Income‑tax dated December 23, 1961 and March 7, 1962 and the assessee's counsel's written statement dated March 16, 1962, are herewith made Annexures as "AA", "AB" and "AC".
3. Since we have been directed by the High Court to draw up an addi tional statement of facts and to answer the questions referred to us, we feel that it is our duty to comply with such directions and it may be open to the parties to raise before the High Court such objections as they are entitled in law, against the amplifications of the record and against our use of the mate rial now furnished to us by the Commissioner of Income‑tax for drawing up the additional statement of facts. We, therefore, overrule the objections of both the parties and draw up the additional statement as required by the High Court.
4. The relevant accounting year as pointed out by the Tribunal in its statement under' section 66(1) is November 18, 1949, to January 19, 1951. Its spite of our best efforts, neither party was able to tell us the actual dates of export of molasses to Pakistan. The molasses was despatched by boat to Pakistan during the relevant accounting year. Two trade agreements dated June 24, 1949, and April 21, 1950, which were in force from 1st July 1949, to 30th June 1950, and from 21st April 1950, to 31st July 1950, have been filed before us by the Commissioner of Income‑tax. These agreements were said to be in force during the relevant accounting year and besides these agreements none of the parties have stated before us that any other law in respect of import of molasses into Pakistan was in force during the relevant accounting year. These two trade agreements between India and Pakistan forming part of the statement of the case are Annexures "AD" and "AE".
5. In the trade agreement dated June 24, 1949, between India and Pakistan both the Governments agreed to export and import from one country to the other goods specified in Schedules A and B, subject to the terms and conditions contained therein. Schedule B contained the names of goods, which, under the said agreement, could be exported to Pakistan. Molasses is not one of the commodities mentioned in Schedule B. It is very significant to note that under Article 4 it is stated that Articles 1 and 2, which related to the issue of licences for export and import to the traders on their respective applications, are without prejudice to the rights of traders of either country entering into business transactions in respect of goods and commodi ties not forming part of this agreement subject to and in conformity with the laws or regulations of either country for the time being in force. What those other laws and regulations were which governed the trade relations between the traders of both the countries are not placed before us by any of the parties. Hence the question whether or not molasses was one of the com modities which could be exported from India to Pakistan under any regula tions other than the agreements referred to above has not been answered by any of the parties.
6. The agreement dated 21st April 1950, deals with the export and import of various commodities mentioned therein. Molasses is not contained in this agreement.
7. Since molasses was not one of the commodities found either in Schedule B to the first agreement or in the second agreement, we cannot at once come to a conclusion that the export of molasses from India to Pakistan was forbidden by any law. The very questions on which the hon'ble High Court has directed us to furnish additional material have been referred by the commissioner of Income‑tax to the office of the Deputy High Commis sioner of India in Pakistan and their answers contained in their letter which forms part of the statement and is Annexure "AF".
8. In its order the hon'ble High Court has referred to the letter written by the Assistant Indian Government Trade Commissioner and wanted to know whether the Tribunal had accepted the contents of that letter as true or not. The Bench which is now drawing up the additional statements is not the same Bench which heard and disposed of the concerned appeal or the one which had drafted the original statement under section 66(1). However, by a reading of the Tribunal's order, we are of the opinion that the Tribunal has accepted the contents of the letter dated April 30, 1951, written by the Assistant Indian Government Trade Commissioner.
9. Since the required material is not found on the record of this Tribunal and no information other than the one with us as referred to above has been placed before us by any of the parties, we regret we are unable to say whether there was any law to force in Pakistan in respect of import of molasses except the two agreements which have been filed before us and which we have made annexures. However, we invite the attention of the hon'ble High Court to the answers given by the Deputy High Commissioner for India in East Pakistan which forms part of the statement of the case and is Annexure AF".
10. Copies of the draft statement of the case were served on both the parties. The assessee sent in written suggestions. The Departmental Repre sentative pointed out some typographical mistakes in the statement which were rectified. Sri R. L. Gulati, counsel, appeared for the assessee before us and suggested that the last sentence in paragraph 7 of the draft statement should be deleted. The suggestion was accepted and accordingly the said sentence beginning with the words "the assessee" and ending with the words Annexure "AF" is deleted. Sri Gulati also submitted before us that the written suggestions sent by his client should be ignored. Hence we have not considered the written suggestions sent by the assessee. The draft statement is accordingly finalised.
Judgment & Decree
M. G. DESAI, C. J. ‑This is a statement of a case referred at the instance of the Commissioner of Income‑tax U. P., by the Income‑tax Appellate Tribunal, Allahabad Bench, to this Court, the question calling for an answer being: "Whether the sum of Rs. 3,110 paid as penalty to the Pakistan Govern ment, in the circumstances of the case, is admissible as a deduction under section 10(2)(xv) of the India Income‑tax Act?" In the associate case there is a similar statement of another case by the Income‑tax Appellate Tribunal at the instance of the Commissioner of Income‑tax and the question raised by it is similar, only the amount being different. From the statements we find that the assessee s in the two cases, who carry on business in molasses in village Barhaj of District Deoria, exported molasses to East Pakistan through boats. The import of molasses into Pakistan was prohibited by Pakistan. There had been a trade agreement between India and Pakistan, called the Indo‑Pakistan Trade Agreement, under which the two Governments had agreed to allow import of certain goods from the other country. The Indo‑Pakistan Trade Agreement did not contain any reference to Pakistan allowing import of molasses from India into Pakistan. Presumably, Pakistan has prohibited import of molasses into Pakistan from India. In spite of this prohibition the assessee s exported molasses to Pakistan through boats. When the boats reached the port in East Pakistan they were seized by the customs authorities of Pakistan. After the seizure, correspondence took place between the Governments of Pakistan and India and ultimately the Pakistan Government was persuaded to allow entry of the molasses into Pakistan on payment by the assessee s penalties of Rs, 3,000 and odd in this case and Rs. 5,000 and odd in the associated case. The penalties were paid by the assessee s the molasses were allowed to enter into Pakistan and were taken possession of by the customers of the assessee. The assessee s made profit out of the transactions in spite of their having had to pay penalties in addition to the customs duty. Then the question arose whether they were entitled to deduct the penalties paid by them from their profits for the purpose of income‑tax. The assessing authority disallowed the deductions because molasses were not included in the Indo‑Pakistan Trade Agreement and could not be, and should not have been, exported to Pakistan and the payment of the penalties could not be said to be necessary for the purpose of their business. The Income‑tax Appellate Assistant Commissioner on appeal held that the deductions were allowable because the penalties were paid for the purpose of carrying on the business in molasses in East Pakistan and the pay ment of the penalties was as much obligatory as the payment of the customs duty, but disallowed the deductions because the assessee bad not proved the amounts of the penalties paid by them. The assessee s produced evidence of the penalties paid by them before the Income‑tax Appellate Tribunal in second appeal, and the Tribunal allowed the deductions. It said in its judgment In the export some trouble arose in Pakistan due to some differences between the State of Pakistan and the Indian Government. These commodities were, therefore, seized and were not allowed to pass through. But by negotiations between the two Governments, the Government of Pakistan was prevailed upon to allow the import into their country by payment of a penalty . . . ." This statement is incorrect and is not supported by the statements of the cases. Apparently, the Income‑tax Appellate Tribunal misunderstood the negotiations that took place between the two Governments after the seizure. As a matter of fact the molasses were seized as soon as the boats carrying them reached the port in East Pakistan and then ensued correspondence between the two Governments about the seizure. The seizure must have been under some law of Pakistan banning entry of molasses from India into Pakistan and not on account of some differences existing between the two Governments. The goods must have been seized under some law of Pakistan and could not have been seized merely because of differences between the two Governments. We ignore what was stated by the Income‑tax Appellate Tribunal in its judgment and must accept the statements of the cases which were agreed to by the assessees and the Commissioner of Income‑tax. In Commissioner of Income‑tax v. Provident Investment Co. Ltd. (1957) 32 I T R 190 S. K. Das, J. observed that it is not open to the assessee or the Commissioner of Income tax to go behind a statement of a case and to ask the High Court to give an answer to the question of law raised in the case on different assumptions or in a different set of circumstances and that the answer must be given on the basis of the facts and the circumstances as stated in the agreed statements of the cases. We, therefore, accept the facts as given in the agreed statements of the cases and ignore what the Appellate Tribunal had said in its judgment The assessees produced evidence before the Tribunal about the penalties paid by them and the Tribunal deducted the amounts from the profits and gains of the assessees' business, taking the same view as the Income‑tax Appellate Assistant Commissioner. These references came up before this Court for hearing once before and this Court under section 66(4) called upon the Tribunal to submit further statements of cases particularly dealing with certain questions stated in this Court's order. The Tribunal did not have any more materials than what was stated in the original statements of the cases and obtained further materials by making fresh enquiries. It is agreed by Sri S. G. Das and Sri R. h. Gulati that the Tribunal had no jurisdiction to bring on the record fresh materials by making enquiries after it had submitted the statements of the cases to this Court and that in answering the question referred to us we must ignore all the materials now placed before us in the supplementary statements of the cases. Under section 10(2) (v) of the Income‑tax Act profits of business are to be computed after making allowance on account of "any expenditure . . . . . laid out or expended wholly or exclusively for the purpose of such business' and the question before us is that whether the penalties paid by the assessee in the circumstances stated above are expenditure laid out or expended wholly or exclusively for the purpose of their business. The onus of proving that the penalties were such expenditures undoubtedly rested upon the assessees; they claimed the allowances and it was for them to establish that the allowances were permissible. We find as a matter of fact that the penalties were paid because Pakistan had banned import into Pakistan of molasses from India. When import of molasses from India into Pakistan was banned no business to molasses in Pakistan could be carried on by any dealer of India. When a dealer in India could not carry on any business in molasses in Pakistan the assesses exporting molasses into Pakistan cannot be said to be an act done by them for the purpose of their business and the penalties paid by them. to the Pakistan Government for its allowing the molasses to be imported into Pakistan cannot be said to be an expenditure of the nature mentioned in section 10(2)(xv). The Pakistan Government after seizing the molasses could have confiscated them. But it was on account of negotiations that the Government of India carried on with the Pakistan Government that the latter agreed, against its own laws, to allow the entry of the molasses into Pakistan on payment of certain penalties. The assessees knew that entry of molasses into Pakistan was prohibited and that they could not carry on business in molasses with a Pakistani customer. In spite of this knowledge they exported molasses to Pakistan and when the Pakistan Government allowed them to enter into Pakistan after receiving penalties, it cannot be said that the payment of the penalties was an expenditure laid out or expended sV1olly or exclusively for the purpose of the assessee's business. Paying a penalty for doing a prohibited act cannot be said to be such expenditure. We do not know under which law exactly the Pakistan Government seized the molasses. It may be similar to the Indian Sea Cute Act or some other Act. We also do not know whether the Act prohibiting entry into Pakistan of molasses from India contains any provision for payment of penalties for infringement of the ban. The penalties imposed by the Pakistan Government in the two cases were in addition to the, customs duty payable on the molasses ; consequently, the ban imposed on the entry of molasses into Pakistan from India could not have been for revenue purposes and must have been for other reasons. The assessees, therefore, could not know that the Pakistan Government would agree to allow molasses to be imported inter Pakistan on payment of penalties and had no justification to export them into Pakistan and their exporting them into Pakistan could not be said to be carrying on business. It was by chance that the Pakistan Government allowed the molasses to enter into Pakistan after realizing the penalties; it could have very well refused entry and confiscated the molasses. If the assessee would not have been entitled, in the event of the confiscation, to deduct the cost price from their profits they should not be entitled to deduct the penalties under section 10(2)(xv). In Commissioner of Inland Revenue v. Wares & Co. Ltd. (1919) 2 K B 444, it was held that a penalty paid by an assessee on account of irregulari ties committed by him in the course of his business of exporting oil was not deductible from his profits in the assessment of income‑tax. Rowlatt, J. said that a penal liability of this kind cannot be regarded as a loss connected with or arising out of a trade and that a loss connected with or arising out of a trade must amount to something in the nature of a loss which is con- templatable and in the nature of a commercial loss. This case was approved of by the Supreme Court in Haji Aziz & Abdul Shakoor Bros. v. Commis sioner of Income‑tax (1961) 41 I T R
350. S. K. Das, J., speaking for the Supreme Court, observed at page 668: ‑ ".. expenses which are permitted as deductions are such as are made for the purpose of carrying on the business, i.e. to enable a person to carry on and earn profit in that business. It is not enough that the disbursements are made in the course of or arise out of or are concerned with or made out of the, profits of the business but they must also be for the purpose of earning the profits of the business an expenditure is not deductible unless it is a commercial less in trade and a‑ penalty imposed for breach of the law during the course of trade cannot be described as such. If a sum is paid by an assessee conducting his business, because in conducting it he has acted in a manner which has rendered him liable to penalty, it cannot be claimed as a deductible expense. It must be a commercial loss and in its nature must be contemplatable as such. Such penalties which are incurred by an assessee in proceedings launched against him for an infraction of the law cannot be called commercial losses incurred by an assessee in carrying on his business. Infraction of the law is not a normal incident of business and, therefore, only such disbursements can be deducted as a re really incidental to the business itself. They cannot be deducted if they fall on the assessee in some character other than that of a trader. Therefore, where a penalty is incurred for the contraventions of any specific statutory provision, it cannot be said to be a commercial loss falling on foe assessee as a trader, the test being that the expenses which are for the purpose of enabling a person to carry on trade for making profits in the business are permitted but not if they are merely connected with the business." Tea observation fully support the view that we take. We have proceeded on the basis that a Pakistani law prohibiting entry into East Pakistan of molasses from India. Even if it be said that there is no material on the record to show that there did exist such a law in Pakistan it would not help the assessee because as we said earlier it was for them to show that the penalties paid by them were for infraction of a law ‑in force in Pakistan and that they could carry on business in molasses in Pakistan though subject to certain conditions. In the result, we answer the question in the negative. We direct that a copy of this judgment under the seal of the Court and the signature of the Registrar shall be sent to the Appellate Tribunal. We further direct that the Commissioner of Income‑tax will be entitled to his costs of this reference which we assess at Rs. 100 from the opposite party. Counsel's fee is also assessed at Rs.
100. For the reasons stated in our judgment in I. T. Reference No. 402 of 1954 we answer the question referred to this Court in the negative. We direct that a copy of this judgment under the seal of the Court and the signature of the Registrar shall be sent to the Appellate Tribunal. We further direct that the Commissioner of Income‑tax will be entitled to his costs of this reference which we assess at Rs. 100 from the opposite party. Counsel's fee is also assessed at Rs.
100. Questions answered in the negative.