Penalty paid for unauthorized import, if incurred due to the fault of the assessee, cannot be regarded as wholly laid out for the purpose of the business, but if incurred due to the fault of others, it can be regarded as wholly and exclusively incurred for the purpose of the business and is allowable as a deduction under section 10 (1) or 10 (2) (xv) of the Income-tax Act.

JUDGMENT - V.S. Desai, J.

1. The question raised on this reference is :

"Whether the penalties totalling Rs. 31,302 paid in breach of the Sea Customs Act in respect of imports of stock-in-trade, but on bills of lading purchased in good faith, is a proper deduction under section 10 (1) of the Income-tax Act ?"

2. The assessee is a registered firm dealing, inter alia, in gum. In the course of its business it purchased bills of lading and other shipping documents from certain parties in respect of some consignments of gum imported by them from Africa. When the goods arrived in India and were sought to be cleared through 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. The assessee paid an amount of Rs. 31,302 as and by way of penalty for saving the goods from being confiscated. These penalties were paid by the assessee between the dates October 28, 1944, and January 16, 1945, which fell within the Samvat year 2001, which was the accounting year of the assessee for the assessment year 1946-47. In the appeal before the Appellate Assistant Commissioner, it was contended on behalf of the assessee that the amount must be regarded as a part of the purchase price of the sum purchased by the assessee on the facts and in the circumstances of the case. It was urged that the assessee had purchased the consignments of gum in good faith from the five importers, who were importing them from Afirca. He was not aware of any faults committed by them in the said importation and it was only when the goods arrived in India that the assessee found that the imports were unauthorised and the penalties imposed by the customs authorities had to be paid if the goods were to be saved from confiscation. The parties from whom the assessee had purchased the goods declined to pay the penalties or any other expenses incurred subsequent to the property in the goods had passed to the assessee. The assessee, therefore, argued before the Appellate Assistant Commissioner that in these circumstances the penalty amount which the assessee had to bear was an additional cost to it for the goods purchased and was, therefore, allowable in the computation of its income. The Appellate Assistant Commissioner did not accept these contentions urged on behalf of the assessee because, in his opinion, the appellant had failed to prove that the penalty was levied for faults of the five parties from whom it had purchased the goods. The Appellate Assistant Commissioner accordingly confirmed the order of the Income-tax Officer in respect of the said amount. In the appeal before the Income-tax Appellate Tribunal, however, it took the view that the assessee was entitled to plead that it had purchased the documents of title in good faith and paid consideration thereon and thereafter it had to pay the penalties in order not to lose the goods which had become its property. In these circumstances, the Tribunal pointed out that the penalty amount which was paid by the assessee had to be regarded as part of the most of the goods imported by it and, accordingly, a proper deduction under section 10 (1) itself. Not satisfied with the deduction of the Tribunal, the department asked for a reference under section 66 (1) of the Indian Income-tax Act, and on the said application of the department, the Tribunal framed the question, which we have already set out above, and referred it to this court.

3. A notice of motion has been taken out by the department complaining that the question framed by the Tribunal is not the question which arises on its order and for framing a proper question and substituting it in place of the question framed by the Tribunal. Now, the complaint of the department is that, in the question as framed by the Tribunal, it has assumed that the bills of lading were purchased in good fai

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