An expense incurred in contravention of the law is not an admissible deduction under section 10(2)(xv) or section 10(1) of the Indian Income-tax Act, 1922.

GROVER, J.

1. The assessee firm dealt in raw wool and yarn apart from carrying on other business. In the account year ending March 31, 1955, relevant for the assessment year 1955-56 the export of wool to foreign countries could be done only under a licence to be issued by the Government. During the account year in question the assessee was granted a licence to export, which is popularly known as "export Quota", to the extent of 22,000 lbs. of wool. Similarly Messrs. Sri Kant Banwari Lal and Co. (hereinafter to be referred to as S.B. and Co.) had secured some quota to export wool. The assessee entered into a contract with Messrs. J. C. Gilbert Ltd., London, in April, 1954, agreeing to sell 37 bales of Indian wool at 53 d. per lb. The delivery was to be c.i.f. Liverpool. The assessee having exhausted its own export quota entered into an arrangement with S.B. and Co., by virtue of which it was the latter company which exported the bales from time to tome which had previously been sold to that company by the assessee in India and were repurchased by the assessee while they were in course of transit on board the ship and which was ultimately delivered to Messrs. J. C. Gilbert Ltd., London, in fulfilment of the agreement between them and the assessee. The sale to S.B. and Co., by the assessee in India was at the rate of Rs. 2 per lb. and the purchase from S.B. and Co., in its turn was at the rate of Rs. 2-3-6 per lb. What the assessee did was that when it sold the goods to S.B. and Co., at the rate of Rs. 2 per lb. it credited its trading account with the sale proceeds at that rate. When S.B. and Co., sold the goods to the assessee at the rate of Rs. 2-3-6 per lb., the assessee debited its trading account with the cost of the said goods at that rate. Now it is the difference between these two figures which led to the final figure of Rs. 6,800 which was claimed by the assessee as a deduction while computing its business profits under section to of the Indian Income-tax Act, 1922.

2. The Income-tax Officer regarded the transactions of sale and purchase entered into between the assessee and S.B. and Co., as "pseudo transactions", i.e., transactions which were not genuine. According to him, the ownership in the goods never passed from the assessee to S.B. and Co., and the difference between the aforesaid two figures merely represented "the cost of acquisition of shipping rights which is not an expense for carrying on the business and which is not admissible under section 10(2)(xv)." He further considered that it was of no consequence in so far as the computation of income under section 10 of the Income-tax Act was concerned as to what shape was given by the assessee to it in his book. Before the Appellate Assistant Commissioner, the position adopted by the assessee was somewhat different and it was sought to deduct a sum of Rs. 6,800 under section 10(1) of the Act. The Appellate Assistant Commissioner agreed with the Income-tax Officer that there were no genuine sale and repurchase transaction and he further came to the conclusion that the real nature of the transactions was merely to acquire the quota rights which belonged to S.B. and Co., and such an acquisition was not permissible under the law. He rejected the assessees contention that the sum of Rs. 6,800 was not in the nature of capital expenditure if at all it was to be considered as a deduction falling under section 10(2)(xv). Before the Income-tax Appellate Tribunal the case as finally presented on behalf of the assessee was that the amount in question had been paid to the quota-holder, namely, S.B. and Co., for the use of its quota and the amount was an admissible deduction under section 10(2)(xv) inasmuch as it was not in the nature of capital expenditure. This contention did not find favour with the Tribunal, although the Tribunal considered that there was no substance in the contention raised on behalf of the Department that the sum of Rs. 6,800 was in the nature of