Itw Signode India Ltd. Vs. Collector of
Central Excise [1960] INSC 220 (24 November 1960)
KAPUR, J.L.
HIDAYATULLAH, M.
SHAH, J.C.
CITATION: 1961 AIR 663 1961 SCR (2) 651
CITATOR INFO :
RF 1961 SC 668 (8) R 1964 SC1722 (9) D 1969
SC 288 (12) RF 1972 SC 391 (6) RF 1980 SC1271 (7)
ACT:
Income-tax--Business deduction--Import of
goods by steamer--Government notification prohibiting import by
steamer--Payment of penalty in lieu of confiscation--Allowable
expenditure--Commercial expense--Sea Customs Act, 1878 (8 of 1878), s.
167(8)--Indian Income-tax Act, 1922 (11 of 1922), S. 10(2)(XV).
HEADNOTE:
The appellant firm imported dates from abroad
partly by steamer and partly by country craft. At the relevant time import of
dates by steamers had been prohibited by Government (1) [1945] 1 3 I.T.R. Supp.
1.
(2) [1956] S.C.R. 551.
652 notification, and the consignments which
were imported by steamer were, therefore, confiscated by the customs
authorities under s. 167, item 8, of the Sea Customs Act, i878, but under s.
183 of the Act the appellant was given an option to pay Rs. 82,250 as penalty
in lieu of confiscation.
The appellant paid the amount and got the
dates released.
Before the Income-tax authorities it claimed
to deduct the amount paid as penalty as an allowable expenditure under S. 1O(2)(XV)
of the Indian Income-tax Act, 1922, but the claim was rejected. It was
contended that the order of confiscation was against the stock-in-trade and not
against the person of the appellant firm and as the amount paid was expended
for the release of the stock-in-trade, it was an allowable expenditure.
Held, that the amount paid by the appellant
by way of penalty for a breach of the law could not be considered to be an
expenditure laid out wholly and exclusively for the purpose of the business and
was not an allowable deduction under S. 1O(2) (xv) of the Indian Income-tax
Act, 1922.
Expenses which are permitted as deductions
are such as are made in order to enable a person to carry on and earn profit in
the 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 loss in
trade and a penalty imposed for breach of the law during the course of trade
cannot on grounds of public policy be said to be a commercial expense for the
purpose of a business or disbursement made for the purpose of earning the
profits -of such business.
Case law reviewed.
CIVIL APPELLATE JURISDICTION: Civil Appeal
No.110 of 1957.
Appeal by special leave from the judgment and
order dated February 25, 1955, of the former Bombay High Court in I.T.R. No.
57/X of 1954.
N. A. Palkhivala and I. N. Shroff, for the
Appellant.
A. N. Kripal and D. Gupta, for the
Respondent.
1960. November 24. The Judgment of the Court
was delivered by KAPUR, J.-This is an appeal by special leave against the
judgment and order of the High Court of Bombay answering the question submitted
to it. against the assessee firm who is the appellant before 653 us, the
respondent being the Commissioner of Income-tax.
The appeal relates to the assessment year
1949-50, the accounting year ended on July 25, 1948. The appellant is a firm
doing the business of importing dates from abroad and selling them in India.
During the accounting year the appellant imported dates from Iraq. At the
relevant time the import of dates by steamers was prohibited by two
notifications dated December 12, 1946, and June 4, 1947, but they were
permitted to be brought by country craft. Goods which had been ordered by the
appellant were received partly by steamer and partly by country craft.
Consignments, which were imported by steamer and were valued at Rs. 5 lacs were
confiscated by the Customs Authorities under s. 167, item 8 of the Sea Customs
Act but under s. 183 of that Act the, appellant was given an option to pay
fines aggregating Rs. 1,63,950 which sum on appeal was reduced to Rs. 82,250.
This sum was paid and the dates were
released. On the sale of the goods certain profits accrued out of which it
sought to deduct Rs. 82,250 paid as penalty on ordinary principles of
commercial accounting. The Income-tax Officer disallowed this claim which was
also disallowed by the Appellate Assistant Commissioner. On appeal to the
Income-tax Appellate Tribunal this sum was held to be allowable by a majority
of two to one. At the instance of the respondent the Tribunal referred the
following question to the High Court for its opinion:- "Whether on the
facts and in the circumstances of the case, the payment of Rs. 82,250 is an
allowable expenditure under Section 10(2) (xv) of the Indian Income-tax
Act?" The High Court held that the above amount of Rs. 82,250 could not be
said to have been paid for salvaging the goods but was paid as a penalty
incurred in consequence of an illegal, act on the part of the appellant and was
therefore not an allowable item under s. 10(2)(xv) of the Income-tax Act.
Against this judgment the appellant firm has come in appeal to this Court by
special leave.
83 654 any contract of hire purchase was
contemplated, cannot be applied simpliciter, because such a contract has in it
not only the element of bailment but also the element of sale.
At common law the term 'hire -purchase'
properly applies only to contracts of hire conferring an option to purchase,
but it is often used to describe contracts which are in reality agreements to
purchase chattels by installments, subject to a condition that the property in
them is not to pass until all installments have been paid. The distinction
between these two types of hire purchase contracts is, however, a most
important one, because under the latter type of contract there is a binding
obligation on the hirer to buy and the hirer can therefore pass a good title to
a purchaser or pledge dealing with him in good faith and without notice of the
rights of the true owner, whereas in the case of a contract which merely
confers an option to purchase there is no binding obligation on the hirer to
buy, and a purchaser or pledgee can obtain no better title than the hirer had,
except in the case of a sale in market overt, the contract not being an
agreement to buy within the Factors Act, 1889, or the Sale of Goods Act,
1893." The observations quoted above are based mostly on two leading cases
which have come to be regarded as the locus classicus upon the subject, namely
Lee v. Butler (1) in which the transaction was described by Lord Esher, M.R.,
as "Hire and Purchase Agreements" and Helby v. Matthews (2) in which
the House of Lords distinguished the former case on the ground that in that
case there was a binding contract to buy and not merely an option to buy,
without any obligation to buy. Both these cases were decided in terms of
Factors Act of 1889 (52 & 53 Viet. c. 45, s. 9). Both the kinds of
agreements exemplified by the two leading cases aforesaid would now be included
in the definition of 'hire-purchase' as contained in s. 21 of the Hire Purchase
Act, 1938 (1 & 2 Geo., 6, c. 53):- "'Hire-purchase agreement' means an
agreement for the bailment of goods under which the bailee (1) [1893] 2 Q.B.
318. (2) (1895] A.C. 471.
655 may buy the goods or under which the
property in the goods will or may pass to the bailee, and where, by virtue of
two or more agreements, none of which by itself constitutes a hire-purchase
agreement, there is a bailment of goods and either the bailee may buy the
goods, or the property therein will or may pass to the bailee, the agreements
shall be treated for the purposes of this Act as a single agreement made at the
time when the last of the agreements was made." It is clear that under the
Law, as it now stands, which has now been crystallised into the section of the
Hire Purchase Act, quoted above, the transaction partakes of the nature of a
contract or bailment with an element of sale, as aforesaid, added to it. 'in
such an agreement, the hirer may not be bound to purchase the thing hired;. he may
or may not be. But in either case, if there is an obligation to buy, or an
option to buy, the goods delivered to the hirer by the owner on the terms that
the hirer, on payment of a premium as also of a number of installments, shall
enjoy the use of the goods, which ultimately may become his property, the
transaction amounts to one of hire-purchase, even though the title to the goods
has remained with the owner and shall not pass to the hirer until a certain
event has happened, namely, that all the stipulated installments have been
paid, or that the hirer has exercised his option to finalise the purchase on
payment of a sum, nominal or otherwise.
But it has been contended on behalf of the
petitioners that there is no binding agreement to purchase the goods and that
title is retained by the owner not as a security for payment of the price but
absolutely. According to third term of the agreement, on the hirer duly
performing and observing the terms of the agreement, with particular reference
to the payment of the monthly installments, "the hiring shall come to an
end and the vehicle shall, at the option of the hirer, become his absolute
property; but until such payments as aforesaid have been made, the vehicle
shall remain the property of the owners. The hirer shall also have the option
of purchasing the vehicle at any 656 belonging to him may be, the name and
residence of the said person and the amount of penalty or increased rate of
duty unrecovered; and such Magistrate shall thereupon proceed to enforce payment
of the said amount in like manner as if such penalty or increased rate had been
a fine inflicted by himself." These sections show the punishments provided
for the breach of the prohibitions in regard to importation or exportation of
goods under ss. 18 and 19; the power of the Customs Authorities to give an
option to pay in lieu of confiscation and how the penalties are to be imposed.
Therefore when the appellants incurred the liability they did so as a penalty
for an infraction of the law; but it cannot be said that the money which they
had to pay was not paid as a penalty and in fact under s. 167(8) it was a
penalty.
In support of his argument counsel for the
appellant firm referred to Maqbool Hussain etc. v. The State of Bombay etc.
(1) and to the following passage at p. 742
where Bhagwati, J., said:- "Confiscation is no doubt one of the penalties
which the Customs Authorities can impose but that is more in the nature of
proceedings in rem than proceedings in personam, the object being to confiscate
the offending goods which have been dealt with contrary to the provisions of
the law and in respect of the confiscation also an option is given to the owner
of the goods to pay in lieu of confiscation such fine as the officer thinks
fit. All this is for the enforcement of the levy of and safeguarding the
recovery of the sea customs duties." Similar observations were made by S.
K. Das, J., in Shewpujanrai Indrasanrai Ltd. v. The Collector of Customs &
Ors. (2) where it was said that a distinction must be drawn between an action
in rem and proceeding in personam and that confiscation of the goods is a
proceeding in rem and the penalties are enforced against the goods whether the
offender is known or not. The view taken by this Court in the other two cases
cited by counsel for the appellants, i.e., Leo Roy (1) [1953] S.C.R. 730. (2)
[1959] S.C.R. 821, 836.
657 Frey v. The Superintendent, District
Jail, Amritsar (1) and Thomas Dana v. The State of Punjab (2) is the same. In
Dana case (2) Subba Rao, J., said at p. 298:- "If the authority concerned
makes an order of confiscation it is only a proceeding in rem and the penalty
is enforced against the goods. On the other hand, if it imposes a penalty
against the person concerned, it is a proceeding against the person and he is
punished for committing the offence. It follows that in the case of
confiscation there is no prosecution against the person or imposition of a
penalty on him." In Maqbool Hussain's case (3) the question for decision
was whether after proceedings had been taken under the Sea Customs Act an
accused person could be prosecuted and could or could not rely upon the plea of
double jeopardy, it was held that he could not. In Shewpujanrai's case (4) the
contention raised was that after proceedings had been taken under the Foreign
Exchange Regulation Act it was not open to the Customs Authorities to take any
action under the Sea Customs Act. The other two cases were similar to Maqbool
Hussain's case (3). The contention now raised before us is quite different. What
is to be decided in the present case is whether the penalty which was paid by
the appellant firm was an allowable deduction within s. 10(2)(xv) of the
Income-tax Act which provides:
S. 10(2)(xv) "any expenditure (not being
in the nature of capital expenditure or personal expenses of the assessee) laid
out or expended wholly and exclusively for the purpose of such business,
profession or vocation." The words "for the purpose of such
business" have been construed in Inland Revenue v. Anglo Brewing Co. Ltd.
(5) to mean "for the purpose of keeping the trade going and of making it
pay". The essential condition of allowance is that the expenditure should
have been laid out or expended wholly and exclusively for the purpose of such
business.
(1) [1958] S.C.R. 822. (2) [1959] Supp. I
S.C.R. 274, 298.
(3) [1953] S.C.R. 730. (4) [1959] S.C.R. 821,
836.
(5) (1925) 12 T.C. 803, 813.
658 In deciding this case, reference to
decisions in some English cases will be fruitful. In Commissioners of Inland
Revenue v. Warnes & Co. (1), the assessee who carried on the business of
oil exporters were sued for a penalty on an information exhibited by the
Attorney-General under the Sea Customs Consolidation Act for breach of orders
and proclamations. The matter was settled by consent on the assessee agreeing
to pay a mitigated penalty of pound 2,000.
All imputations on the moral culpability of
the assessees were withdrawn. The provisions of the Act under which this
information was lodged and penalty paid was similar to the provisions of the
Indian Sea Customs Act. This amount was held not to be a proper deduction
because in order to be within the provision similar to s. 10(2) (xv) of the
Indian Act the loss had to be something within commercial contemplation and in
the nature of a commercial loss.
Rowlatt, J., relying on the observation of
Lord Loreburn, L. C., in Strong & Co. v. Woodifield (2) said at p. 452:-
"but it seems to me that a penal liability of this kind cannot be regarded
as a loss connected with or arising out of a trade. I think that a loss
connected with or arising out of a trade must, at any rate, amount to something
in the nature of a loss which is contemplable and in the nature of a commercial
loss. I do not intend that to be an exhaustive definition, but I do not think
it is possible to say that when a fine--which is what the penalty in the
present case amounted to-has been inflicted upon a trading body, it can be said
that that is a "loss connected, with or arising out of" the trade
within the meaning of this rule." This statement of the law was approved
in the Commissioners of Inland Revenue v. Alexander Von Glehn & Co. Ltd.
(3) where also in similar circumstances by consent of the assessee penalty of
pound 3,000 was paid and the penalty plus the costs were claimed as deduction
in arriving at the profits. The Special Commissioners had found that the
penalty and costs were incurred by the assessee in the course of carrying on
(1) [1919] 2 K.B. 444. (2) [1906] A.C. 448.
(3) [1920] .2 K.B. 553.
659 their trade and so incidental thereto and
were admissible deductions. Rowlatt, J., on a reference held it to be a
non-deductible item. This judgment was affirmed on appeal by the Court of
Appeal. Lord Sterndale, M. R., was of the opinion that it was immaterial whether
technically the proceedings were criminal or not. The money that was paid was
paid as a penalty and it did not matter if in the information it was called a
forfeiture.
It was argued by the assessee in that case
that no moral obliquity was attributed to them and that it did not matter
whether the expense was incurred in consequence of an infraction of the law or
whether it was a penalty for doing an illegal act. At p. 565 Lord Sterndale
said:- "Now what is the position here? This business could perfectly well
be carried on without any infraction of the law. This penalty was imposed
because of an infraction of the law, and that does not seem to me to be, any
more than the expense which had to be paid in Strong & Co. v. Woodifield
(1) appeared to Lord Davey to be, a disbursement or expense which was laid out
or expended for the purpose of such trade......." Warrington L.J. said at
p.569:- "It is a sum which the persons conducting the trade have had to
pay because in conducting it they have so acted as to render themselves liable
to this penalty. It is not a commercial loss, and I think when the Act speaks
of a loss connected with or arising out of such trade it means a commercial
loss, connected with or arising out of the trade." In Strong & Co. v.
Woodifield (1) a brewing company owned a licensed house in which they carried
on the business of inn- keepers. They incurred a liability to pay damages on
account of injuries caused to a visitor, by the falling in of a chimney. This
sum was held not to be allowable as a deduction in computing the profits' Lord
Loreburn, L. C., in his speech said no sum could be deducted unless it be money
wholly and exclusively laid out or expended for the purpose of such (1) (1906)
A.C. 448.
660 trade and that only such losses could be
deducted as were connected with it in the sense that they were really
incidental to the trade itself and they could not be deducted if they were
mainly incidental to some other vocation or fell on the trader in some
character other than that of a trader. Lord Davey observed:"I think the
disbursements permitted are such as are made for that purpose. It is not enough
that the disbursement is made in the course of, or arise out of, or is
connected with the trade or is made out of the profits of the trade. It must be
made for the purpose of earning profits." The following passage from Lord
Sterndale's judgment at p.
566 in Von Glehn's case (1) from which we
have already quoted shows the effect of incurring a penalty as a result of a
breach of the law:
"During the course of the trading this
company committed a breach of the law. As I say, it has been agreed that they
did not intend to do anything wrong in the sense that they were willingly and
knowingly sending these goods to an enemy destination; but they committed a
breach of the law, and for that breach of the law, they were fined. That, as it
seems to me, was not a loss connected with the business, but was a fine imposed
upon the company personally, so far as a company can be considered to be a
person, for a breach of the law which it had committed. It is perhaps a little
difficult to put the distinction into very exact language, but there seems to
me to be a difference between a commercial loss in trading and a penalty
imposed upon a person or a company for a breach of the law which they have
committed in that trading. For that reason I think that both the decision of
Rowlatt, J., in this case, and his former decision in Inland Revenue
Commissioners v. Warnes & Co. (2) which he followed were right, and that
this appeal should be dismissed with costs." In Spofforth and Prince v.
Glider (3) the assessee was a firm of chartered accountants, who claimed a
deduction for certain legal costs paid in connection with a (1) [1920) 2 K.B.
55.3. (2) [1919] 2 K.B. 444.
(3) (1945) 26 T.C. 310.
661 successful defence of one of the partners
in a Police Court.
The assessee firm also sought legal advice in
regard to matters connected with some proceedings. Summons were issued against
the assessee firm but were eventually dismissed. The assessee contended that
the whole of the costs incurred in connection with the proceedings were
"wholly and exclusively" laid out or expended for the appellant's
profession and were therefore allowable deductions. The Special Commissioner
had held against the assessee which was upheld by the Court. The test laid down
by Lord Davey in Strong & Co. v. Woodifield (1) was applied and applying
that test it was held that except the expenses for obtaining legal advice the
other expenses were not admissible.
In Farrie v. Hall (2) F, a sugar broker was
sued in the High Court for libel and the Court held that F had acted
maliciously and that the defence of privilege could not prevail and awarded
damages against him. F sought to claim the amount of damages as an allowable
deduction contending that it was an expenditure laid out wholly and exclusively
for the purposes of his trade or was a loss connected with or arising out of
the trade. Relying on the cases above mentioned this amount was disallowed because
it fell on the assessee in his character of a calumniator of a rival sugar
broker and it was only remotely connected with his trade as a sugar broker.
Therefore it was not laid out exclusively and wholly for the purpose of his
business. We were also referred to the observations of Danckwerts, J. in Newson
v. Robertson (3) where it was said that if the expenditure is incurred by the
tax-payer for more than one -purpose including the commercial purposes in the
sense that it is incurred for the purposes of earning profits of the trade and
also some outside purpose then the expenses cannot be claimed at all as not
being wholly and exclusively laid out or expended for the purpose of the trade.
In that case expenses claimed by a Barrister for (1) [1906] A.C. 448. (2)
[1947] 28 T.C. 200.
(3) [1952] 33 T.C. 452, 459.
84 662 travelling between his house and his
chambers were disallowed because his object and purpose in travelling was mixed
and not wholly and exclusively for the purpose of the profession.
Coming now to Indian cases; In Mask & Co.
v. Commissioner of Income-tax, Madras (1) the assessee in breach of his
contract sold crackers at a lower rate and a decree was passed against him for
damages for breach of contract which he claimed as an allowable deduction. It
was held that as the assessee had disregarded the undertaking given and his
conduct was palpably dishonest it did not constitute an allowable expenditure.
Sir Lionel Leach, C. J., after referring to Warne's case (2) and Von Glehn's
case (3) held that the amount did not constitute an expenditure falling within
s. 10(2)(xii). The Madras High Court in Senthikumara Nadar & Sons v.
Commissioner of Income-tax, Madras (4) held that payments of penalty for an in.
fraction of the law fell outside the scope of permissible deductions under s.
10(2)(xv). In that case the assessee had to
pay liquidated damages which was akin to penalty incurred for an act opposed to
public policy a policy underlying the Coffee Market Expansion Act, 1942, and
which was left to the Coffee Board to enforce.
Reference was also made during the course of
arguments to Commissioner of Income-tax v. Hirjee (1). In that case the
assessee was prosecuted under the Hoarding and Profiteering Ordinance but was
finally acquitted and claimed the amount spent in defending himself under s.
10(2)(xv) in his assessment. It was held that the distinction between the legal
expenses on a successful and unsuccessful defence was not sound and that the
deductibility of such expenses under s. 10(2)(xv) must depend on the nature and
purpose of the legal proceedings in relation to the business whose profits are
in computation and are unaffected by the final outcome of the proceedings.
A review of these cases shows that expenses
which (1) [1943] 11 I.T.R. 454.
(3) [1920] 2 K.B. 553.
(2) [1910] 2 K.B 444.
(4) [1957] 32 I.T.R. 138 (5) [1953] S.C.R.
714.
663 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. As was pointed out in Von
Glehn's case (1) expenditure is not deductible unless it is a commercial loss
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 con- templable 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
are 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 contravention of any specific statutory provision,
it cannot be said to be a commercial loss falling on the 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.
It was argued that unless the penalty is of a
nature which is personal to the assessee and if it is merely ordered against
the goods imported it is an allowable deduction.
That, in our opinion, is an erroneous
distinction because disbursement is deductible only if it falls within s. 10(2)(xv)
of the Income-tax Act and no such deduction can be made unless it falls within
the test laid down in the cases discussed above and it can be said to be
expenditure wholly and exclusively laid for the purpose of the business. Can it
be said (1) (1920) 2 K.B. 553.
664 that a penalty paid for an infraction of
the law, even though it may involve no personal liability in the sense of a
fine imposed for an offence committed, is wholly and exclusively laid for the
business in the sense as those words are used in the cases that have been
discussed above.
In our opinion, no expense which is paid by
way of penalty for a breach of the law can be said to be an amount wholly and
exclusively laid for the purpose of the business. The distinction sought to be
drawn between a personal liability and a liability of the kind now before us is
not sustainable because anything done which is an infraction of the law and is
visited with a penalty cannot on grounds of public policy be said to be a
commercial expense for the purpose of a business or a disbursement made for the
purposes of earning the profits of such business.
In our opinion the High Court rightly held
that the amount claimed was not deductible and we therefore dismiss this appeal
with costs.
Appeal dismissed.
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