A penalty paid for breach of law is not an allowable deduction under S. 10(2)(xv) of the Income-tax Act, 1922.

Judgment

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 us, the respondent being the Commissioner of Income-tax.

2. 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 of 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.

3. It was argued on behalf of the appellant firm that it had specifically instructed the shippers in Iraq to send the goods by country craft and we have been referred to certain correspondence but it does not appear that that correspondence in any way helps the appellant firm and the Income-tax authorities and the High Court have rightly proceeded on the basis that the appellant firm imported the goods contrary to the regulations.

4. Three questions were raised by counsel for the appellant; (1) that an expenditure does not become inadmissible because it is occasioned by an infraction of the law not involving moral turpitude; (2) in any event the expenditure incurred was as the result of an order in rem against the stock-in-trade of the appellant firm and was therefore allowable as a deduction; (3) on the facts of this case there was no infraction by the appellant firm. The last question was not seriously pressed and it is without substance. The correspondence with has been placed on the record does not support the contention of the appellant firm. It was really the second point which was pressed by counsel although the first point was not given up.

5. It was argued that the order of confiscation, as a consequence of which the amount was paid to get the goods released, was an order in rem without any liability on the appellant firm or on the person of the partners; that it was not sufficient that there should be mere infraction of the law because the allowability of expense item depended on the nature of the proceedings and not on the consequence that followed. The consequences of the breach of the law, it was contended, can be three; (1) confiscation or a fine in lieu of confiscation; (2) personal penalty; (3) prosecution in a criminal Co