MADDI VENKATARAMAN versus COMMISSIONER OF INCOME TAX

Citation: [1997] SUPP. 6 S.C.R. 67 · Decided: 02-12-1997 · Supreme Court of India · Bench: S.C. SEN · Disposal: Dismissed

Judgment (excerpt)

MADDI VENKATARAMAN 
A 
v. 
COMMISSIONER OF INCOME TAX 
DECEMBER 2, 1997 
[SUHAS C. SEN ANDS. SAGHIR AHMAD, .TJ.] 
B 
Income Tax Act, 1961 : Section 37. 
Income tax~AY 1970-71-Business expe11diture/loss-Pe11alty and 
fi11e-Deductio11 of-Assessee incwred expenditure for evadi11g provisions of C 
FERA-Penalty imposed-Held : Not deductible as business expe11di-
ture/loss-Furthe1; pennitting such deduction would b1r contrary to public 
/ ., 
policy-Foreign Exchange Regulation Act, 1947, Ss.4(2), 5(1)(e), 23(1)(a) 
and 23-c. 
Income tax--Business expenditure--ll/egal activities--Deduction D 
of-Held : If the entire business is illegal, expenditure inczm·ed in illegal 
activities is an allowable deduction-However, if the business is lawful the 
expenditure on illegal activities cannot be allowed to be deducted. 
The appellant-assessee was a public limited company engaged in the 
business of tobacco. On the basis of a search carried out by the Enforce-
E 
ment Directorate in the assessee's business premises, it was found that the 
assessee bad remitted to a private party in Singapore, in violation of the 
provisions of Foreign Exchange (Regulation) Act, 1947(FERA). Proceed-
ings were taken against the assessee for infringement of Sections 4(2) and 
5(1)(e) of FERA and ultimately a penalty of Rs. 35,000 was imposed under F 
section 23(1)(a) read with Section 23-c ofl<'ERA. The assessee in its Income 
tax return for the assessment year 1970-71 claimed deduction of Rs. 
2,95,000 as business expenditure/loss. According to the assessee it had a 
certain amount of sub-standard tobacco which could not be sold at the 
floor price fixed by the Government of India and it had no alternative but G 
to sell the tobacco at a discount of 20% to a Singapore party. On paper, 
the full sale price was paid by the Singapore party, but in reality 20% of 
the price paid by the party was remitted back to him through one S. The 
amount remitted was Rs. 2,88,000 which together with the sum payable to 
S for his services amounted to Rs. 2,95,000. The High Court decided the 
case against the asses see. Hence this appeal. 
67 
H 
68 
SUPREME COURT REPORTS [1997) SUPP. 6 S.C.R. 
A 
Dismissing the appeal, this Court 
HELD : 1.1. The High Court referred to a large number of decisions 
where it has been held that payments tainted with illegality cannot be 
claimed as deduction under the Income Tax Act, 1961. Moreover, if an 
assessee is penalised under one Act, he cannot claim that amount to be 
B set-off against his income under another Act because that will be frustrat-
ing the entire object of imposition of penalty. [72-G-H] 
1.2. One exception to this rule which has been recognized by the 
Court is where the entire business of the assessee is illegal and that income 
C is sought to be taxed by the Income Tax Officer then the expenditure 
incurred in the illegal activities will also have to be allowed as deduction. 
But if the business is otherwise lawful and the assessee resorts to unlawful 
means to augment his profits or reduce his loss, then the expenditure 
incurred for these unlawful activities cannot be allowed to be deducted. 
Even if the assessee had to pay fine or penalty because of an inadvertent 
D infraction of the law, which did not involve any moral obliquity, the result 
will be the same. Even in such cases, deduction will uot be permitted of the 
amounts paid as penalty or fine or of the value of the goods confiscated 
by the statutory authority as expenditure wholly and exclusively incurred 
for the purposes of carrying on the trade. It has been consistently held by 
E 
the English Courts that fines or penalties payable for violation of law 
cannot be permitted as deduction under the Income Tax Act. That will be 
against public policy. Even though the need for making such payments 
arose out of trading operations, the payments were not wholly and ex-
clusively for the purpose of the trade. One can carry on his trade without 
F 
violating the law. In fact, Section 37 of the Act presumes that the trade will 
be carried on lawfully. [73-A-D] 
Commissioner of Inland Revenue v. E.C. Warnes, 12 Tax Cases 227; 
Commissioner of Inland Revenue v.Alexander Von Gletin & Co. Ltd., 12 Tax 
Cases 232; Cattermole (H.M. Inspector of Taxes) v. Borax & Chemicals Ltd., 
G 31 Tax Cases 202 and Strong v. Woodifield ,5 Tax Cases 215, referred to. 
1.3. The Indian Courts hale also consistently held that payments 
tainted with illegality cannot be treated as 

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