IN THE ITAT, COCHIN BENCH

P. SOMAN

v.

ITO, Ward-3, Kottayam

N. Barathvaja Sankar, Accountant Member

And Riyaz S. Padvekar, Judicial Member

IT Appeal No. 954 (Coch.) of 2005

[Assessment year 1989-90]

November 30, 2006

Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of - Assessment year 1989-90 - Whether redemption fine levied on assessee-jeweller by Custom authorities, for keeping primary gold and gold ornaments in his licensed premises without forming part of stock-in-trade in violation of provisions of Gold (Contract) Act could be allowed as business expenditure - Held, no

FACTS

Consequent upon a search conducted by the Central Excise Department upon the assessee, who was in jewellary business holding license thereof under the Gold (Control) Act, 1968, certain unaccounted gold and gold ornaments were found and seized from his business premises. While the seized material was ordered to be confiscated, an option was given to the assessee to redeem certain gold ornaments on payment of certain fine. The assessee claimed said redemption fine as a business expenditure in his return. The Assessing Officer, however, disallowed the same on the ground that the redemption fine paid by the assessee was not in the nature of compensation but in the nature of penalty for contravention of law for keeping the primary gold and gold ornaments in his licensed premises without forming part of the stock-in-trade in violation of the provisions of the 1968 Act. On appeal, the Commissioner (Appeals) upheld the impugned disallowance.

On second appeal:

HELD

If the nature of the payment made is for infraction of law as a sanction then it is not an allowable deduction. If the impost is in the compensatory nature, then it is an allowable deduction under section 37(1). [Para 12]

It is clear from the language used by the Legislature in section 71 of the 1968 Act that the gold is confiscated when there is an attempt to contravene the provisions of the Act or the Rules. Section 73 of the said Act empowers the authorized officer to give the owner of the gold an option to pay in lieu of confiscation which is referred as a fine. Hence, the power of confiscation of the gold is vested in the authority because the owner of the gold has contravened the provisions of the said Act and Rules. [Para 19]

In the instant case, the confiscation was one of the penalties which was more in the nature of proceedings in rem than proceedings in personam, the object being to confiscate the offending goods, which had been dealt with contrary to the provisions of law and in respect of the confiscation also an option was given to the owner of the goods to pay in lieu of the confiscation such fine as the officer thought fit. The principles laid down by the apex court in the case of Haji Aziz & Abdul Shakoor Bros. v. CIT [1961] 41 ITR 350 (SC) were clearly applicable to the facts of the instant case. Therefore, there was no reason to interfere with the order of the Commissioner (Appeals) and the same was to be confirmed. [Para 21]

In the result, the assessee’s appeal was dismissed. [Para 22]