Demurrage for release of confiscated goods is deductible - Demurrage paid to port authorities in connection with release of confiscated goods is not a fine paid for infraction of law and is thus allowable as business expenditure - Nanhoomal Jyoti Prasad v. CIT [1980] 123 ITR 269 (All.).
[1980] 123 ITR 269 (ALL.)
HIGH COURT OF ALLAHABAD
Nanhoomal Jyoti Prasad
v.
Commissioner of Income-tax
C.S.P. SINGH AND R.R. RASTOGI, JJ.
IT REFERENCE NO. 654 OF 1975
AUGUST 6, 1979
JUDGMENT
C.S.P. Singh, J.—The Income-tax Apellate Tribunal, Allahabad Bench, Allahabad, has referred the following question for opinion of this court :
"Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the amount of Rs. 19,119.00 demurrage of the warehouse in which the goods were stored during the pendency of the case were not admissible deduction under s. 10(2)(xv) of the Indian Income-tax Act, 1922, in computing the business profits?"
The assessee is a registered firm with its head office at Halsi Road, Kanpur. It had a rolling mill in the name and style of M/s. Mahavir Rolling Mills. The assessee used to manufacture iron bars, out of billets and plate cutting, etc. During the earlier year, the assessee had imported certain goods under an import licence. On the goods being inspecyed by the customs authorities it was found that they were different from the goods which were covered by the licence. The goods were detained, and a notice was issued to the assessee to show cause why action against it should not be taken for having committed an offence under section 167(8) of the Sea Customs Act, and for contravention of Import Control Order. The assessee. gave various explanations, but those were not accepted. The Collector of Customs found that the imported goods were not covered by the assessee's licence and, therefore, he confiscated the goods by an order dated February 10, 1959. An option was, however, given to the assessee under s. 183 of the Sea Customs Act to pay an amount of Rs. 22,000 as fine in lieu of confiscation, and clear the goods for home consumption subject to the debit of the goods against the import permit held by the assessee. The assessee paid the amount and cleared the goods, and got the goods released. A period of 48 months had elapsed since the date of the confiscation order and the release of the goods, as the assessee had been agitating the correctness of the order of the Collector of Customs before various authorities. The port authorities charged an amount of Rs. 19,119 as demurrage for the goods not being cleared within the free period allowed under the Port Rules. The assessee claimed deduction of the demurrage as a business expenditure, but that claim was not accepted by the ITO, and the AAC has also repelled it. An appeal was filed before the Tribunal. The claim of the for the amount paid by way of demurrage was refused by the Tribunal on the ground that the demurrage was paid not for any business reasons, but because the goods that were imported were in contravention of the Import Control Orders. According to the Tribunal, there was no essential differenee between the fine paid by the assessee, and the amount paid by way of demurrage. In order to decide as to whether the demurrage paid should be allowed as a business expenditure it is necessary to consider the nature of the claim. Demurrage as applicable to ships is a payment made in the nature of compensation paid for delay of the ship in loading or unloading the goods beyond a particular period. The only distinction between demurrage and damages is that while demurrage is a liquidated amount, the other is an unliquidated one. But the claim is based on the detention of the ship beyond the period allowed for loading and unloading of the goods : See Lockhart v. Falk [1875] LR 10 Exchequer 132, Dunlop & Sons v. Balfour, Williamson's & Co. [1892] 1 QB 507 (CA). Similar is the position so far as the railways are concerned. In the event of parties not taking delivery of goods within the free period allowed for clearance, a fixed amount for each day of delayed delivery is charged. The position in respect of port authorities does not appear to be different. The amount of demurrage charged is compensation for delay in clearing the goods from the godowns of the port authorities. The demurrage that is charged by way of compensation includes amount chargeable for storage and safe custody of the goods by the port authorities. Thus, when demurrage is paid by a trader, he pays an amount for the storage and safe custody of the goods by the port authorities or the railways, and also an additional amount for delayed clearance. The constitutive factor for payment of the demurrage will vary in each case, but the payment essentially is by way of liquidated damages for use of the port facilities beyond the free period allowed under the port rules. The payment in the present case was, thus, not a fine paid to the port authorities by the assessee for any criminal act, but compensation for use of the port facilities beyond the free period allowed under the rules. The delay was undoubtedly occasioned on account of the fact that the assessee had imported goods which were not in accordance with its import licence, but that will not alter the character of the payment. There is no other aspect of this matter. On the payment of the fine the was allowed to clear the goods against the existing import licence, and use it for home consumption. The result was that once the fine was paid the import licence would be treated as covering the goods imported, for, without such an adjustment against the existing import licence, the assessee could not have cleared the goods from the custom a authorities. It has been seen that a period of nearly 48 months elapsed from the date when the goods embarked at the port and when the import licence was regularised by payment of fine, and the demurrage is for this period. On the import licence being arised and the being allowed to clear the goods against the existing import licence, commercial expediency dictated and required the assessee to take delivery of the goods from the port authorities after paying compensation to them for the use of their dock facilities beyond the free period allowed under the rules. In case, the demurrage had not been paid by the assessee his stock-in-trade would have been auctioned by the authorities for the realisation of the demurrage. The payment was made in order to preserve the stock-in-trade, and to utilise it for its manufacturing business. This being so, we are of the view that the expenditure in question was laid out wholly and exclusively for the assessee's business. Counsel for the parties drew our attention to cases of various types, viz., litigation costs, penalty paid for breach of contract, expenses incurred for carrying on illegal business, money lost through theft, where questions arose as to whether the expenses were allowable, but we feel that no useful purpose would be served in referring to these decisions as none of these cases deal with the case of the, present type. The only principle that emerges from these cases is that the payment should be made by the assessee in his character as a trader, and on grounds of commercial expediency, and should be spent exclusively for the purposes of the assessee's business. Cases were also cited where amounts paid by way of fine for infraction of the law were disallowed, the leading case being of Haji Aziz Abdul Shakoor Bros., a decision of the Supreme Court reported in [1961] 41 ITR 350. These cases are not in point, for, it has been seen that the demurrage paid by the assessee is not a fine for infraction of any law but paid by way of compensation for use of the port facility beyond the free period allowed under the Port Trust Rules.
We answer the question referred in the negative, in favour of the assessee is entitled to its costs, which are assessed at Rs. 200. Counsel fee is assessed at the same figure.
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