Law:

Section:

Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of - Assessment year 1971-72 - Tribunal found that assessee had illegally imported plastic sponges because of which customs authorities had levied penalty - Whether penalty having been paid for infraction of law, could not be claimed as a permissible deduction nor could be allowed to be added towards cost of goods -Held, yes FACTS The assessee had obtained import licences for importing natural sponges but instead it Illegally imported plastic sponges without any proper import licence. As a result penalty was levied by the customs authorities. The assessee claimed deduction of the penalty amount as business expenditure on the ground that the customs merely imposed fine to enable the assessee to take away the confiscated goods for home consumption. The Tribunal, however, negatived the assessee's claim on the ground that penalty having been paid for infraction of law, was not a permissible deduction and that the expenditure was not laid out wholly or exclusively for carrying on business. It further rejected the assessee's contention that, alternatively, the assessee be permitted to add that amount towards the cost of the goods. On reference : HELD The questions whether or not the true nature of the aforesaid amount was penalty, fine or something else and whether the assessee could have imported items other than natural sponges under the import licences, were no more open to the assessee, inasmuch the question referred did not raise any factual controversy. The facts could no more be agitated because the correctness of the facts as found by the Tribunal, was never disputed before it after its decision. No rectification was sought under section 254(2) before the Tribunal. Similarly, the Tribunal's order did not raise the controversy about the scope of import licence. The question referred by the Tribunal at the instance of the assessee raised the precise controversy whether or not the penalty amount was a permissible deduction. The Supreme Court, in Haji Aziz and Abdul Shakoor Bros. v. CIT [1961] 41 ITR 350 held that in case where the penalty has to be incurred because of the fault of…

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