Statutory impost paid as damages, penalty or interest, if compensatory in nature, is allowable as business expenditure

Hon’ble Mumbai ITAT has in the case of M/s M.P.Gupta, through LR. Shri Sushil Gupta v/s ITO has held that Statutory impost paid as damages, penalty or interest, if compensatory in nature, is allowable as business expenditure.The brief synopsis of the case is as under;-

The assessee entered into an agreement with an Export House M/s Rajnikant & Bros. As per the terms of the agreement M/s Rajnikan & Bros imported consignment of “Almonds in Shell” at Madras Port. This import was actually for one of the nominee of the assessee M/s Peanut Products of India having factory for processing almonds/nuts in Madras. The assessee and the Export House had bonafide belief that almonds in shell was one of the items allowed for import against the said additional license granted. When the goods arrived at Madras Port, M/s The Indo Afghan Chamber of Commerce  approached the Hon’ble Bombay High Court to block these imports, claiming that such imports would affect their “Fundamental rights”. The Hon’ble Bombay High Court dismissed their Writ Petition vide order dated 31-1-1986 on the ground that the petitioners did not have a fundamental right to have monopoly in the trade and that importers M/s Rajnikant & Bros were not in any way blocking the petitioners from doing their business.

Thereafter, a Writ Petition was filed before the Hon’ble Supreme Court wherein the Hon’ble Supreme Court ordered that dry fruits could not be imported against the additional licenses issued to export houses. After the order of the Hon’ble Supreme Court, the Collector of Customs, Madras confiscated the goods, imposed redemption fine of Rs. 1,20,00,000/- and a penalty of Rs. 20,00,000/- on M/s Rajnikant & Bros. An appeal was filed by  M/s Rajnikant & Bros. against the order of Customs Authorities and the Customs Tribunal (CEGAT) categorically observed in its order that there was lack of clarity in interpreting the import policy even with Licensing Authorities. An appeal was filed by M/s Rajnikant & Bros. against the order of Customs Authorities and the Customs Tribunal (CEGAT) categorically observed in its order that there was lack of clarity in interpreting the import policy even with Licensing Authorities. While framing scrutiny assessment u/s 143(3) of the act, the A.O. disallowed the expenditure of Rs. 75 lacs debited to the P&L account on the plea that it was in the nature of fine for infraction of law. It was also noted that the assessee had not explained the source of expenditure, therefore, addition was made y/s 69-C of the Act. As per our considered view, the import of almond was not in contravention of law in force, the goods were imported under Import License issued by Government authorities. It is also clear from the order  of Customs Tribunal dated 27-10-2014 who has waived the penalty stating that the circumstances of the case do not reveal any malafides considering that there was certain amount of vagueness in the policy itself. It was further observed by the Customs Tribunal that Bombay Custom Authorities in similar instance had not imposed any penalty on the importer. After considering the entirety of facts and circumstances, the Customs Tribunal concluded that there was no any malafides on the part of the assessee insofar as there was certain vagueness in the import policy itself. In the result, the Tribunal completely waived the penalty and the redemption fine was also reduced to 40%. The assessee has claimed an amount of Rs. 75 lacs paid to the Customs Authorities was in the nature of business expenditure.

The Hon’ble Supreme Court in the case of Ahmedabad Cotton Mfg. Co. Ltd.  held that statutory impost paid as damages, penalty or interest, if compensatory in nature, it is allowable as business expenditure. It was further observed that the nomenclature was not conclusive. It was concluded that payment, though referred as a penalty, but in fact made in exercise of option available under statutory scheme, in course of assessee’s business, is allowable business expenditure. In the instant case also the payment was made to release the goods, therefore, the same can be said to be compensatory as the Customs Authorities were recovering the difference between the market price and import cost.

Hon’ble Delhi High Court in the case of M/s Vikas Chemicals  vide order dated 7th August, 2014 have dealt with exactly similar issue wherein the assessee’s claim for deduction of Rs. 45 lacs paid to Customs Authorities was allowed. The Hon’ble Delhi High Court observed that payment was in respect of commercial transaction between two unrelated parties. The assessee had applied for clearance of goods in India. Earlier similar goods have cleared by Customs Authorities under REP license. The fault or defect in the REP license was not attributable to the assessee. The assessee was not to be blamed who has not indulged in any offence or incurred any expenditure for the purpose which was prohibited by law. The assessee had to pay redemption fine in order to save and protect themselves and in terms of the order passed by the Hon’ble Supreme Court, they have received the balance consideration from the auction proceeds. Accordingly the order of the Tribunal was confirmed holding that the amount paid by the assessee to Customs Authorities was in the nature of redemption fine therefore allowable as business expenditure.

Applying the proposition of law as discussed herein above and keeping in view the totality of facts and circumstances of the case, it was   held hat the amount paid by the assessee to the Customs Authorities in terms of order dated 27-10-1986 was in the nature of redemption fine and not penalty and accordingly the same was allowable as business expenditure which enhances the cost of goods.