1. This is a reference under section 256(1) of the Income-tax Act, 1961, made at the instance of the assessee. The question referred to us for our determination in the reference is as follows :
'Whether, on the facts and in the circumstances of the case, in computing the income of the assessee, the sum of Rs. 4,400 was rightly added ?'
2. The relevant facts lie within a narrow compass. The relevant assessment year is 1962-63, for which the relevant previous year is the accounting year March 25, 1961, to March 31, 1962. The assessee is a registered firm doing business mainly in cloth. The assessee secured a licence for importing automobile spare parts. The assessee then entered into a contract to import and sell to M/s. Bipin Automobiles 3,100 capacitors at a profit of 50 per cent. on C. I. F. value. There was a further condition in the contract that the purchaser was to bear all the expenses, including customs duty, etc. Pursuant to this agreement, the assessee placed an order for capacitors with a foreign exporter and the goods, namely, capacitors, were eventually imported. But it was found that the goods did not conform to some of the specifications in the licence and the customs authorities confiscated the goods but gave an option to the assessee to pay a penalty of Rs. 4,400 and clear the goods. The assessee exercised that option and cleared the goods by paying the penalty. The assessee debited the amount of the penalty to the trading account. In valuing the closing stock, the penalty was included. It was in the next year that the sale of the goods to M/s. Bipin Automobiles took place. The penalty was paid in the accounting year relevant to the assessment year. The Income-tax Officer concerned disallowed the claim of the assessee for deduction of the amount of penalty and added back the amount of penalty. The Income-tax Officer found, on verification, that the penalty as such had not been recovered by the assessee from M/s. Bipin Automobiles but the amount of penalty, it appears, was taken into account in determining the price at which the said goods were sold to M/s. Bipin Automobiles. On an appeal by the assessee to the Appellate Assistant Commissioner, he held that the penalty was levied on the appellant and the mere fact that the appellant had billed the vendee in such a manner that the penalty was recovered from the vendee did not change the character of a disallowable item into an allowable one. The Appellate Assistant Commissioner further pointed out that the bill sent to M/s. Bipin Automobiles did not specifically mention the basis on which it was prepared. The Appellate Assistant Commissioner agreed with the view of the Income-tax Officer that the assessee's claim in respect of penalty was not one which could be allowed under section 28 of the Income-tax Act, 1961. The assessee then preferred a second appeal to the Income-tax Appellate Tribunal. The Tribunal came to the conclusion that the assessee had contravened some of the conditions or specifications of the licence and the penalty was levied upon the assessee and not the purchaser. The assessee had rightly debited the penalty to the trading account and the assessee was not right in contending that the debit in respect of the penalty in the trading account was wrongfully made by the assessee. What the purchasers, M/s. Bipin Automobiles, had paid to the assessee was not the penalty but the sale price of the goods purchased by them which had been fixed by taking into account the amount of penalty. In view of these findings, the Tribunal agreed with the conclusion of the Appellate Assistant Commissioner that the amount of penalty could not be allowed as a deduction and upheld the order passed by the Income-tax Officer. The question set out above has been referred to us from the decision of the Tribunal.
3. The submission of Mrs. Jagtiani, learned counsel for the assessee, is that in this case, on the facts found, the assessee must be regarded as a mere nominal licence-holder and the penalty was really levied on M/s. Bipin Automobiles to whom the goods had been sold as aforesaid. It was argued by her that, in these circumstances, the assessee should be allowed to claim the amount of penalty paid by the assessee as a deduction in the computation of profits under section 28 of the Income-tax Act, 1961. She placed strong reliance on the decision of a Division Bench of this court in CIT v. Pannalal Narottamdas & Co. : 67ITR667(Bom) . We shall deal with this case after setting out our own views. In the present case, the facts found by the Tribunal clearly show that it was the assessee who had got the import licence. It was the assessee who imported the goods in question, and it was the fault of the assessee if the goods in question imported did not conform to the specifications of the licence. In these circumstances, there is no escaping the conclusion that the penalty was levied on the assessee for the default of the assessee itself and not on the ground of any other person's default. Nor is this a case in which the assessee can be regarded in any sense as a nominal licence-holder. It is not as if the assessee gave its licence to M/s. Bipin Automobiles for importing the goods in question and M/s. Bipin Automobiles imported the goods. The licence was utilised by the assessee-firm itself and that fact cannot be altered by the circumstance that they had agreed to sell the goods to be imported by them to M/s. Bipin Automobiles. It is well settled that if an assessee has to pay a penalty to the customs authorities in respect of goods imported by the assessee on account of its own default, the amount of that penalty cannot be deducted in the computation of taxable profits of the assessee.
4. Coming to the case of Pannalal Narottamdas & Co. : 67ITR667(Bom) cited by Mrs. Jagtiani, the facts in that case were altogether different. In that case, in the course of its business, the assessee had purchased bills of lading and other shipping documents from certain parties in respect of some consignments of goods imported by them from a foreign country. When the goods arrived in India and were sought to be cleared through the customs by the assessee on the basis of the documents purchased by it, it was found that the imports were unauthorised and the goods were liable to be confiscated and a penalty was liable to be imposed under section 167(8) of the Sea Customs Act, 1878. The assessee paid the penalty for saving the goods from being confiscated. The Tribunal took the view that the assessee was entitled to plead that it had purchased the documents of title in good faith and had paid consideration thereon, and, thereafter, it had to pay the penalties in order not to lose the goods which had become its property and, in these circumstances, the penalty could be legitimately regarded as part of the cost of the goods. It was held by the Division Bench that, on the facts and circumstances, the actual cost of the goods to the assessee was not only what it had paid to the importers but in addition thereto what it had to pay by way of penalty in order to save the goods from being confiscated and lost to it. It is significant that the observations of the Division Bench set out at page 672 of the aforesaid report show that the Division Bench clearly took the view that in cases where penalty had to be incurred because of the fault of the assessee himself, as for instance, by reason of his having carried on his business in an unlawful manner or in contravention of certain rules and regulations, the penalty paid by the assessee for such conduct thereof could not be regarded as wholly laid out for the purpose of the business, and, in support of this conclusion, the decision of the Supreme Court in Haji Aziz & Abdul Shakoor Bros. v. CIT : 1983ECR1942D(SC) , was cited. This decision, in our view, does not advance the argument of Mrs. Jagtiani, and, in fact, the aforesaid observations pointed out by us lend considerable support to the view which we have taken.
5. The question referred to us is, therefore, answered in the affirmative and in favour of the Revenue.
6. The assessee to pay the costs of this reference to the Commissioner.