Whether redemption fine paid to Customs authority is compensatory in nature and thus, allowable as legitimate business expenditure - YES: ITAT

THE issue before the Bench is - Whether redemption fine paid to the Customs is compensatory in nature and thus, allowable as legitimate business expenditure. YES is the answer.

Facts of the case

The assessee is engaged in the business of import and sale of goods. The assessee entered into an agreement with Export House for import of certain goods. The assessee entered into agreement with the Export House and imported a consignment of "Almonds in Shell". After the

order of the Supreme Court that dry fruits could not be imported against the additional licences issued to Export Houses. The Collector of Customs, Madras confiscated the goods. The assessee made a payment of Rs. 75 lacs to Customs Authorities for releasing the goods and claimed the same as business expenditure. While making assessment of the assessee, the A.O. disallowed the payment of Rs. 75 lacs u/s 69-C on the plea that the source of expenditure was not explained. The A.O. also held that the expenditure was in the nature of fine for infraction of law.

On appeal, the CIT(A) confirmed the action of the A.O. In an appeal filed by the assessee before the Tribunal, the Tribunal allowed the appeal and restored the entire issue for reconsideration to the file of the CIT(A). In the second round, the CIT(A) confirmed the disallowance.

Before the Tribunal, the Counsel of the Assessee submitted that the amount so paid was not in the nature of penalty but was in the nature of redemption fine. It was further submitted that other consignments of almonds imported by other export houses were cleared by the Bombay Customs under identical under similar import licences. It was contended that import of almond in shell could not be said to have been prohibited goods, hence redemption fine cannot be said to have been in the nature of penalty but it was merely payment for redeeming the goods or buying back the goods from Customs. The DR submitted that as per the order, additional licences produced by the assessee were not valid for the import of dry fruits viz. almond in shell and the import had correctly been held to be unauthorized. Therefore, redemption fine cannot be said to be incurred wholly and exclusively for the purpose of business. He further contended that penalty was paid by the assessee because of his own fault.

On appeal, the Tribunal held that,

++ the import of almond was not in contravention of law in force, the goods were imported under Import Licence issued by Government authorities. It is also clear from the order of Customs Tribunal 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. 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;

++ the amount paid by the assessee to the Customs Authorities in terms of order 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. So far as the explanation of the source of fund is concerned, we found that the payment was made by sister concern of the assessee namely through Account Payee cheque/DD. The certificate/confirmation from M/s Mangla Bros. was also given to the lower authorities. There is no reason to doubt the source of payment. The fact that the assessee is challenging the disallowance of payment made to Customs Authority clearly establishes that the same was recorded in the books of account and therefore claimed as business expenditure.