Sushil Gupta Vs PCIT (Supreme Court of India)
The appeal before the High Court was admitted to consider whether the Income Tax Appellate Tribunal was justified in holding that redemption fine of ₹75 lakh was allowable as business expenditure under Section 37 of the Income-tax Act. The dispute arose from the assessment year 1988-89. The assessee had originally filed a return declaring income of ₹1,47,020, which was accepted without scrutiny. The assessment was later reopened under Section 148 after the Assessing Officer received information that the assessee had paid ₹75 lakh towards redemption fine imposed in connection with the import of almonds, which was not a permissible import.
During reassessment proceedings, the assessee contended that the imports had been made by M/s. Rajnikant Bros., whose import licence was used, and that he had merely acted as an agent. He further asserted that the redemption fine had been imposed on and paid by M/s. Rajnikant Bros. The Assessing Officer summoned M/s. Rajnikant Bros., whose accountant produced the agreement dated 14 October 1985 and stated that although the imports were made in the name of M/s. Rajnikant Bros., all transactions, including payment of the redemption fine of ₹75 lakh, had been undertaken by the assessee, while M/s. Rajnikant Bros. received only agreed service charges. The assessee subsequently claimed that he had merely advanced funds to M/s. Rajnikant Bros., but failed to produce books of account.
The Assessing Officer rejected the explanation and treated the expenditure as unexplained expenditure under Section 69C. The Commissioner of Income Tax (Appeals) upheld the addition, observing that the source of the expenditure had not been satisfactorily explained. The assessee also contended that, if the payment was attributed to him, it should be allowed as business expenditure under Section 37. The Commissioner rejected this plea, holding that the payment arose from carrying on business in contravention of law and therefore could not be regarded as expenditure wholly and exclusively incurred for business purposes.
Before the Tribunal, the assessee challenged both the addition under Section 69C and the disallowance under Section 37. The Tribunal noted that the Customs Tribunal had reduced the redemption fine from ₹1.20 crore to ₹75 lakh and deleted the personal penalty, observing that there was no mala fide because of vagueness in the import policy. Relying principally on CIT v. Ahmedabad Cotton Mfg. Co. Ltd., the Tribunal concluded that the assessee had acted under a bona fide belief regarding the permissibility of imports and treated the redemption fine as allowable business expenditure.
The Revenue challenged the Tribunal’s decision before the High Court. The Revenue argued that the payment was redemption fine covered by Explanation 1 to Section 37(1), that the Assessing Officer and the Commissioner had found the assessee to be the actual importer using the licence of M/s. Rajnikant Bros., and that the Tribunal had wrongly applied Ahmedabad Cotton Mfg. Co. Ltd.. The assessee argued that he was not the importer, that the imports had been made by M/s. Rajnikant Bros., and that the payment represented an additional cost incurred to secure release of goods, relying principally on CIT v. Pannalal Narottamdas & Co.
The High Court examined the background of the import licence issued to M/s. Rajnikant Bros., the subsequent litigation concerning import of dry fruits under additional licences, and the Supreme Court’s earlier directions restraining such imports. It found that both the Assessing Officer and the Commissioner had concluded, on the basis of evidence including the statement of the representative of M/s. Rajnikant Bros., that the assessee himself had undertaken the imports by using the licence and had paid the redemption fine. According to the High Court, the Tribunal failed to consider this material evidence and instead proceeded on assumptions similar to those in Pannalal and Ahmedabad Cotton Mfg. Co. Ltd., although the factual foundation was materially different.
The High Court distinguished the line of authorities represented by Pannalal, where the assessee was found not responsible for the underlying breach of law and the payment was treated as additional cost of goods, from the line represented by Haji Aziz & Abdul Shakoor Bros., where payments made for the assessee’s own infraction of law were held not deductible. After reviewing decisions including Haji Aziz & Abdul Shakoor Bros., Maddi Venkataraman & Co. Pvt. Ltd. v. CIT, Rohit Pulp and Paper Mills Ltd. v. CIT, M.S.P. Senthikumara Nadar & Sons v. CIT, Agra Leatheries Ltd. v. CIT, T. Khemchand Tejoomal v. CIT, Ahmedabad Cotton Mfg. Co. Ltd., Prakash Cotton Mills Pvt. Ltd. v. CIT, CIT v. N.M. Parthasarathy and Commissioner of Income Tax v. Hero Cycles Ltd., the High Court held that the present case fell within the principles laid down in Haji Aziz & Abdul Shakoor Bros. because the redemption fine arose from the assessee’s own infraction of law in importing goods through the licence of M/s. Rajnikant Bros. It answered the substantial question of law in favour of the Revenue, set aside the Tribunal’s order, and held that the redemption fine was not allowable as business expenditure. It also observed that, in view of the Revenue succeeding, release of ₹1,90,50,000 in favour of the assessee did not arise, while leaving it open to the Revenue to seek appropriate relief regarding that amount in pending civil proceedings.
The Supreme Court record placed along with the High Court judgment states that the application for withdrawal of the Special Leave Petitions (IA No. 194078/2026) was allowed. Consequently, the Special Leave Petitions were dismissed as withdrawn with liberty as prayed for in the application.
As a result, the Supreme Court did not examine the merits of the High Court judgment or decide the substantive issue regarding deductibility of the redemption fine. The High Court judgment therefore remained undisturbed, as the Special Leave Petitions were dismissed upon withdrawal rather than on merits.
Read HC Judgment in this case: Redemption fine for infraction of law not allowable U/s 37: Bombay HC
FULL TEXT OF THE SUPREME COURT JUDGMENT/ORDER
1. Application (IA No.194078/2026) for withdrawal of petitions is allowed.
2. The Special Leave Petitions are, accordingly, dismissed as withdrawn with liberty as prayed for in the application.
