Judgment:
1. The only substantive grounds raised in this appeal by the Revenue for the assessment year 1987-88 read as under :- 1. On the facts and in the circumstances of the case the CIT (A) has erred in deleting the addition of Rs. 3,32,148 made on account of confiscation of goods by the customs department.
2. It is prayed that the order of the CIT (A) be set aside and that of the Assessing Officer restored.
2. Brief facts of the case are these. The assessee is an individual.
His previous year relevant to assessment year 1987-88 ended on 31-3-1987. During the course of assessment proceedings, the Assessing Officer noticed that the assessee had debited a sum of Rs. 3,32,148 on account of confiscation of goods by the Customs Department. These goods were neither shown as sold nor reflected in the closing stock. On enquiries from the assessee, the Assessing Officer found that the assessee had imported 30 bags of wool waste from M/s. M.J. & Co. Stross Ltd., U.K. But on inspection by the customs authorities these goods were found to be synthetic/acrylic waste and fibre with negligible quantities of wool waste. Since this was a case of violation of law, the Collector of Customs, Bombay, passed an order confiscating the said goods. The assessee was, however, given an option to take delivery of the goods on payment of fine and penalty amounting to Rs. 1,25,000 and Rs. 25,000 respectively aggregating to Rs. 1,50,000. The assessee did not exercise the option and allowed the goods to be confiscated. The plea of the assessee before the Assessing Officer was that if he had taken delivery of the goods, he would have paid a substantial amount by way of demurrage in addition to the aforesaid fine and penalty which would have resulted in a higher loss. The Assessing Officer, however, held that the loss of Rs. 3,32,148 was on account of forfeiture of goods by the Customs Authorities which was not incidental to the assessee's business and was therefore, not an allowable deduction.
3. The assesses preferred an appeal before the CIT (A) and the CIT (A) relying on a host of judgments came to the conclusion that since the confiscated goods represented stock-in-trade of the assessee, the loss suffered by the assessee was revenue loss and was an admissible deduction. The Revenue has come up in further appeal.
4. At the time of hearing the learned D.R. submitted that the loss of Rs. 3,32,148 had arisen to the assessee on account of the infraction of law. Relying on the Bombay High Court decision in the case of T.Khemchand Tejoomal v. CIT [1986] 161 ITR 492 27 Taxman 72. it was submitted that it was the fault of the assessee if the goods imported did not conform to the specifications of the licence and that the loss had arisen because of violation of Customs Laws by the assessee. The learned D.R. strongly supported the order of the Assessing Officer.
5. Shri Subhash Aggarwal, the learned Counsel for the assessee, submitted that as per sales invoice dated 6-5-1983 the description of goods shown was wool waste. It was further pointed out that the indent placed with Ashish International was also in respect of wool waste as per copy of the indent placed at page 1 of the assessee's paper book.
It was vehemently argued that the assessee imported the goods under a bona fide impression that these were wool waste but the goods actually imported, however, did not conform to that. Relying on the Tribunal's decision in the case of International Woollen Mills v. ITO [1982] 1 ITD 654 (Cal.), it was submitted that on similar facts, the Tribunal had held that the loss had arisen in the ordinary course of business without any infringement of law and the loss was, therefore, revenue in nature and admissible as a deduction. Regarding the case of T.Khemchand Tejoomal (supra) it was submitted that the said decision did not take into consideration the decisions of Madras High Court in the cases of CIT v. Textool Co. Ltd. [1982] 135 ITR 200 and CIT v. Lakshmi Mills Co. Ltd. [1982] 135 ITR 203 10 Taxman 189. It was emphasised that if the assessee had paid the fine and penalty amounting to Rs. 1,50,000 and got the goods released by paying demurrage to the Port Trust Authorities, the assessee would have suffered a higher loss and that to avoid such a higher loss, the assessee had chosen the option of surrendering the goods confiscated by the Customs Authorities. The learned counsel for the assessee also placed reliance on the Bombay High Court decision in the case of Zenith Steel Pipes Ltd. (No. 2) v.CIT [1990] 186 ITR 594 in support of his contention that the loss of Rs. 3,32,148 was an admissible loss. Shri Aggarwal also relied on the decision of the Punjab and Haryana High Court in the case of CIT v.Shri Ram Chander [1986] 159 ITR 689 and submitted that the loss claimed by the assessee was an allowable loss.
6. In reply, the learned D.R. submitted that the facts in the cases of International Woollen Mills [supra], Zenith Steel Pipes Ltd. (No. 2) (supra) and Ram Chander (supra) were distinguishable.
7. We have carefully considered the rival submissions as also the facts on record. Before we come to a clear-cut finding, it would be necessary to examine the cases which have been relied upon before us. As regards the case of International Woollen Mills (supra), the facts were that the assessee had imported woollen rags on genuine belief that they were covered by the import licence issued by the Government. Moreover the import had been canalised through the State Trading Corporation of India and not effected directly by the assessee. The exporter had given a certificate in clear terms that these were woollen rags. There was no definition of the term 'rags' in the Customs Act. The assessee to establish its bona fides had clearly stated that if the goods Imported did not conform to the import licence and were serviceable, these could be rendered unserviceable and then delivered to the assessee. On these facts, the Tribunal observed that there was a genuine difference of opinion as to what "woollen rag" was on account of the fact that no definition of the woollen rags had been given in the Customs Act. Since the goods had been imported through the State Trading Corporation of India, the Tribunal observed that it could not be said that the assessee in coalition or in collaboration with the State Trading Corporation subverted the licences which were issued for import of woollen rags to import something which was not permitted under the licence. It was further observed by the Tribunal that the assessee purchased import entitlements and placed orders through lawful agencies with the exporters in the foreign countries and as such the loss had arisen in its ordinary course of business without any infringement of law which should be considered as penal in nature. According to the Tribunal, there was only a venial breach of law which could not stand in the way of the assessee to make a claim which was revenue in nature and allowable in law.
8. From the above it is seen that the facts of that case are clearly distinguishable from those of the instant case. For instance, in the present case, the licence was for importing wool waste. The goods actually imported, contained negligible quantities of wool waste. There was no difference of opinion as to the contents sought to be imported and the contents actually imported. The Import was also direct by the assessee and there was no agency like State Trading Corporation of India in the present case. The fine and penalty had been imposed for the infraction of law and there was no technical breach of law but a real breach of law. Since the facts as obtained in the case of International Woollen Mills (supra) are distinguishable, that case cannot be an authority for allowing the loss of Rs. 3,32,148.
9. As regards the case of Zenith Steel Pipes Ltd. (No. 2) (supra) the facts are these. The assessee had imported certain electrical spare parts for being used in the course of its manufacturing business. The said consignment was received at Bombay port but the same was not traceable. The assessee entrusted the task of tracing the consignment to M/s. Insimax Corporation, Bombay who were paid their fees of Rs. 3,500. The said consignment was traced but the assessee found that the spare parts imported by it were rusted and it was not worthwhile to clear them after paying duty, wharfage, demurrage etc. Accordingly the assessee decided not to take the delivery of the goods and wrote off the amounts paid as purchase price and the fee amounting to Rs. 46,668 as business loss. The matter was ultimately decided in favour of the assessee by the High Court. While deciding the issue, the High Court took pains to emphasise that there was not even a suggestion that the goods were wrongly imported or that the Customs Authorities would have otherwise confiscated them. By implication it means that if the goods had been wrongly imported or if the customs authorities had confiscated the goods, then the loss would not have been allowed as a business loss. From the facts narrated above, it is clear that there was no infraction of law involved in that case. What had happened was that the assessee had imported certain goods which remained untraced at the Bombay port for a long time and because of the passage of time, the goods deteriorated in quality. This fact was discovered when the goods were traced and instead of incurring a higher loss, the assessee chose a course which resulted in a lower loss and the loss was allowed as a revenue loss. The facts in this case are also distinguishable and this authority also does not support the case of the assessee.
10. As regards the decision in the case of Ram Chander (supra) the facts were that the assessee had been found to have been carrying on smuggling of gold for the last several years and this finding was never challenged at any stage. On these facts, the Hon'ble Punjab and Haryana High Court applied the Supreme Court decision in CIT v. Piara Singh [1980] 124 ITR 40 Taxman 67 and held that the loss of Rs. 65,000 suffered on the forfeiture of certain gold by the Customs Authorities was a trading loss. The facts of that case are also distinguishable because in the present matter it is nobody's case that the assessee was doing business of importing goods which did not conform to the licence.
The transaction entered into by the present assessee was an isolated transaction and no finding has been given by the Revenue authorities and no stand has been taken by the assessee that it was the assessee's business over several years to import goods which did not conform to the import licence. This authority is, therefore, of no avail to the assessee.
11. The facts of the Madras High Court decision in the case of Textool Co. Ltd. (supra) are also distinguishable. In that case, the assessee had to import certain materials as component parts for the purpose of manufacturing carding engines. The imports had to be made under import licences. The licences were to be applied for through the Indian Cotton Mills Federation. Under the licensing scheme the assessee had to pay the Federation certain sums in advance as premiums to cover the entire imports under the licences. If the assessee was not in a position to utilise the licences to the fullest extent, and there were shortfalls in actual imports, to that extent the assessee's premiums with the Federation would stand forfeited. For assessment years 1968-69 and 1969-70 the assessee wrote off Rs. 2,28,287 and Rs. 1,87,185 respectively, which represented premiums forfeited to the Federation on account of partial non-utilization of the import licences on the assessee's part. On these facts it was held that the loss was incurred in the course of the assessee's business and was incidental to the business. The facts clearly show that the assessee had to abide by the scheme of import licences under which the assessee had to pay premiums to the Federation in advance covering the entire import entitlement.
Owing to the business exigencies, the assessee could not fully utilise the import entitlement resulting in a forfeiture of part of the advance deposited with the Federation. On these facts, the forfeiture was held to be for business purposes and the amounts written off had to be allowed as a deduction. The facts clearly show that the write-off of the loss was incidental to the assessee's business and there was no infraction of law as such. The facts of the present case, however, are clearly different involving infraction of law.
12. In the case of Lakshmi Mills Co. Ltd. (supra), the facts were these. Under the Scheme of canalising of imports of foreign cotton through the Indian Cotton Mills Federation, each mill had to give a guarantee at the rate of Rs. 100 per bale of cotton for the quantity of foreign cotton which the mill had agreed to obtain by way of import based on the number of spindles working on higher counts in each mill and in the event of any mill rejecting the allotment falling to its share, it would have to forfeit the guarantee amount of Rs. 100 per bale. During the accounting years relevant to assessment years 1969-70 and 1970-71, the assessee company did not utilise its right to import foreign cotton and thereby forfeited the guarantee amounts which it had already deposited with the Federation in order to avoid higher losses which would have entailed if cotton were imported. On these facts the Madras High Court held that in view of the finding that the surrender of the guarantee amounts by the assessee was for purposes of avoiding possibly higher losses which would have entailed in the assessee's business in the event of import and utilization of foreign cotton, the losses were incidental to the assessee's business and being of revenue nature were allowable as such.
13. The facts narrated above clearly show that the only question before the Hon'ble High Court was whether the write-off of the losses was incidental to the assessee's business. It will be immediately noticed that there was no question of any infringement of laws in this case and as such the facts of the case are distinguishable from those of the present case.
14. We now come to the decision in the case of T. Khemchand Tejoomal (supra) relied on by the learned D.R. In that case, the assessee firm which secured a licence for importing automobile spare parts entered into a contract to import and sell to M/s. Bipin Automobiles certain capacitors. 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 imported the goods but since the goods did not conform to some of the specifications in the licence, the Customs Authorities confiscated the goods but gave an option to the assessee to pay penalty of Rs. 4,400 and clear the goods. The assessee exercised that option and cleared the goods by paying the penalty. On these facts it was held that it was the assessee who had got the import licence and imported the goods and it was the fault of the assessee if the goods imported did not conform to the specifications of the licence. The licence was utilised by the assessee firm itself and that fact could not be altered by the circumstances that they had agreed to sell the goods to be imported by them to M/s. Bipin Automobiles. The penalty of Rs. 4,400 was held to have been rightly added to the income of the assessee.
15. The facts of the above case are more or less akin to the facts of the instant case. It was the assessee in the present case who had imported the goods and it was the fault of the assessee if the goods imported did not conform to the specifications of the licence. In a case like this the assessee cannot plead innocence if the goods are not found to conform to the specifications of the import licence. The fault clearly lies at the door of the assessee. No evidence has been produced by the assessee to establish his innocence in this regard. The foreign party would not have issued a sales invoice at the behest of the assessee. When the assessee plays with fire, he cannot turn round to say that his fingers have been burnt. The only difference in the case before the Bombay High Court and the present case is that in that case the assessee had exercised the option and paid the penalty and got its goods released whereas in the present case the assessee did not exercise the option and allowed the goods to be confiscated. The goods were, however, confiscated because of infraction of law which was the genesis of the problem.
16. In the case of Haji Aziz & Abdul Shakoor Bros. v. CIT [1961]41 ITR 350, the Supreme Court held that if a sum is paid by an assessee conducting his business, because in conducting if he has acted in a manner which has rendered him liable to penalty for an infraction of the law, it cannot be claimed as a deductible expense as it cannot be called a commercial loss incurred in carrying of his business.
According to the Supreme Court infraction of the law is not a normal incident of business.
17. The present loss of Rs. 3,32,148 has resulted because of an infraction of the law which according to the Supreme Court is not a normal incident of business. In a situation like this the loss cannot be allowed as a deduction. We hold accordingly. In the ultimate analysis, the order of the CIT (A) is set aside on the point and that of the Assessing Officer restored.