Akil Kureshi, J.

1. This appeal was admitted for consideration of following substantial question of law:-

“Whether on the facts and in the circumstances of the case and in law, the Tribunal was justified in holding that the redemption fine of Rs.75,00,000/- is allowable as business expenditure under Section 37 of the Income Tax Act?”

2. The appeal arises in following background:-

2.1 Respondent assessee is an individual. For the assessment year 1988-89, the assessee had filed return of income declaring total income of Rs.1,47,020/-. The return was accepted without scrutiny. Subsequently, information was received by the Assessing Officer that the assessee had made payment of Rs.75 lacs in two separate installments towards penalty for import of almonds which import was not permissible. On the basis of such information, the Assessing Officer reopened the assessment for the said assessment year 1988-89 by issuing the notice under Section 148 of the Income Tax Act, 1961 (“the Act” for short).

2.2 During the course of such assessment proceedings, the assessee was called upon to provide various details by the Assessing Officer. The representative of the assessee remained present before the Assessing Officer and conveyed that the assessee was using import license of M/s. Rajnikant Bros. which is an export house. For using the license, the assessee would pay service charges equivalent to 25% of CIF value of the goods. It was further pointed that the consignment of almond was imported by M/s. Rajnikant Bros. The assessee had merely acted as an agent in the transaction. It was pointed out that upon confiscation of the goods, redemption fine and penalty were imposed by the Collector of Customs, Madras on M/s. Rajnikant Bros. Tribunal in the appeal reduced the redemption fine to Rs. 75 Lacs and deleted personal penalty. It was contended that in any case, the imports were made by M/s. Rajnikant Bros. and the order was passed against M/s. Rajnikant Bros. and not against the assessee. It was also contended that the penalty was paid by M/s. Rajnikant Bros. and not by the assessee. The assessee, however, could not produce the books of accounts to establish this averment. The Assessing Officer, therefore, issued summons to M/s. Rajnikant Bros. asking for a copy of the agreement dated 14.10.1985 entered between the assessee and M/s. Rajnikant Bros. for the use of import licence and other details. In response to the summons, the accountant of M/s. Rajnikant Bros. appeared before the Assessing Officer. A copy of the said agreement dated 14.10.1985 was produced. The procedure attached to the agreement was also produced. The statement of the accountant of M/s. Rajnikant Bros. was recorded. Relevant portion of which reads as under:-

“Q.No.4 : What is the modus operandi of the transaction made by Shri. M.P. Gupta regarding the use of licence?

Ans. Mr. M.P. Gupta has imported almonds in Madras Port on 20.12.195 by using the above said licence. The said material imported in the name of M/s. Rajnikant Bros. Total consideration of import material along with duty, fine, foreign payment and clearing charges etc. are as under:-

	Purchases	Rs.
i.	Foreign payment	55,65,487.23
ii.	Duty	56,00,000.00
iii.	Redemption Fine (Penalty) (As per Madras Customs Order dt. 27.10.86)	75,00,000.00
iv.	Clearing Charges & Expenses	15,72,487.10
v.	Service Charges of M/s. Rajnikant Bros.	12,50,000.00
	(As per Agreement dt. 14.10.85)	--------------------
	Total	Rs. 2,14,87,974.33

Q.No.5 : As stated by you redemption fine of Rs. 75,00,000/- paid to Madras Customs House. Please state who has paid the sum:

Answer: Rs.75,00,000/- paid as custom fine by Mr. M.P. Gupta through Rajnikant Bros. from Banoue Indosuez P. Box 685 A/c No. 11124 201 5301. All