Madras H.C : The penalty paid under r. 173Q of the Central Excise Rules and the amount paid in lieu of confiscation of goods, could be allowed as a deduction in computing the income of the assessee

High Court Of Madras

CIT vs. Rane Brake Linings Ltd.

Sections 37(1)

R. Jayasimha Babu & K. Gnanaprakasam, JJ.

T.C. No. 902 of 1988

16th November, 2000

Counsel Appeared

Mrs. Chitra Venkataraman, for the Revenue : P.P.S. Janardhana Raja, for the Respondent



The question referred to us is as to whether the Tribunal was right in holding that the penalty paid under r. 173Q of the Central Excise Rules and the amount paid in lieu of confiscation of goods, could be allowed as a deduction in computing the income of the assessee.

The assessee is a manufacturer of excisable goods and is required to comply with the Central Excise Act and Rules framed thereunder. The provision of that Act and Rules exposes the assessee to penalty provided for under the Act and Rules. As a consequence of violation of r. 173Q of the Central Excise Rules, such infraction having resulted from the removal of the goods without making entries in the register. The assessee was called upon to pay and paid a sum of Rs. 18,500 as penalty. In lieu of the confiscation of the goods to which assessee had become subject by reason of the violation of certain other provisions of the Rules, the assessee was levied a fine of Rs.

3,500 in lieu of the confiscation.

The argument that was advanced for the assessee that these are minor irregularities and are the result of the want of care on the part of these employees and not the result of any deliberate violation of law was accepted by the Tribunal, as affording sufficient basis to hold that these penalties should be treated as business expenditure.

The expenditure which can be deducted in connection with the business carried on by the assessee is the expenditure which can properly be regarded as such. The penalties paid for violating the law in the course of the conduct of business cannot be regarded as deductible expenditure as the assessee is expected to carry on business in accordance with law and not in violation of the law. Penalty incurred by the assessee for the violation of the applicable statute, unless the true nature of that penalty is compensatory, is not to be regarded as deductible item of expenditure.

The amount paid by the assessee here as penalty cannot be regarded as compensatory as the penalty was an amount which was otherwise payable as excise duty. The penalty was in addition to the duty payable on the manufacture of goods for the violation of excise rules while the goods remained under the custody of the manufacturer. The fine levied in lieu of the confiscation only enabled the assessee to retain the goods which otherwise would have had to be surrendered to the authorities. The fine was paid in order to avoid confiscation.

The fine so paid cannot be regarded as compensatory as the fine levied was not for recovery of duty which ought to have been but had not been paid. This Court in the case of CIT vs. Chemical Constructions (2000) 162 CTR (Mad) 15 : (2000) 243 ITR 858 (Mad) has held that it is only compensatory element in a levy termed penalty that is eligible for being regarded as business expenditure and that it is only that part which is purely penal that has to be excluded, from such expenditure.

On the facts of the case before us, it must be held that the amounts paid as penalty were in fact penalties and were not amounts which were compensatory in character. Assessee was, therefore, not entitled to treat the same as part of his deductible business expenditure. The Tribunal was in error in holding otherwise.

The question referred to us is, therefore, answered in favour of the Revenue and against the assessee.

[Citation : 255 ITR 218]

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