V.S Desai, J.:— The question raised on this reference is : “Whether the penalties totalling Rs. 31,302 paid in breach of the Sea Customs Act in respect of imports of stock-in-trade, but on bills of lading, purchased in good faith, is a proper deduction under section 10(1) of the Income-tax Act?”

2. The assessee is a registered firm dealing, inter alia, in gum. In the course of its business it purchased bills of lading and other shipping documents from certain parties in respect of some consignments of gum imported by them from Africa. When the goods arrived in India and were sought to be cleared through customs by the assessee on the basis of the documents purchased by it, it was found that the imports were unauthorised and the goods were liable to be confiscated and a penalty was liable to be imposed under section 167(8) of the Sea Customs Act. The assessee paid an amount of Rs. 31,302 as and by way of penalty for saving the goods from being confiscated. These penalties were paid by the assessee between the dates October 28, 1944, and January 16, 1945, which fell within the Samvat year 2001, which was the accounting year of the assessee for the assessment year 1946-47. In the course of the assessment for the said year, the assessee claimed the amount of Rs. 31,302 as an allowable deduction under section 10 of the Act. The Income-tax Officer disallowed the said claim on the ground that the penalty paid to the Collector of Customs for infringement of Import Control Regulations was not allowable. In the appeal before the Appellate Assistant Commissioner, it was contended on behalf of the assessee that the amount must be regarded as a part of the purchase price of the gum pur chased by the assessee on the facts and in the circumstances of the case. It was urged that the assessee had purchased the consignments of gum in good faith from the five importers, who were importing them from Africa. He was not aware of any faults committed by them in the said importation and it was only when the goods arrived in India “that the assessee found that the imports were unauthorised and the penalties imposed by the customs autho rities had to be paid if the goods were to be saved from confiscation. The parties from whom the assessee had purchased the goods declined to pay the penalties or any other expenses incurred subsequent to the property in the goods had passed to the assessee. The assessee, therefore, argued before the Appellate Assistant Commissioner that in these circumstances the penalty amount which the assessee had to bear was an additional cost to it for the goods purchased and was, therefore, allowable in the computation of its income. The Appellate Assistant Commissioner did not accept these conten tions urged on behalf of the assessee because, in his opinion, the appellant had failed to prove that the penalty was levied for faults of the five parties from whom it had purchased the goods. The Appellate Assistant Commissioner, accordingly confirmed the order of the Income-tax Officer in respect of the said amount. In the appeal before the Income-tax Appellate Tribunal, how ever, it took the view that the assessee was entitled to plead that it had purchased the documents of title in good faith and paid consideration thereon and thereafter it had to pay the penalties in order not to lose the goods which had become its property. In these circumstances, the Tribunal pointed out that the penalty amount which was paid by the assessee had to be regarded as part of the cost of the goods imported by it and, accordingly, a proper deduction under section 10(1) itself. Not satisfied with the deci sion of the Tribunal, the department asked for a reference under section 66(1) of the Indian Income-tax Act, and on the said application of the department, the Tribunal framed the question, which we have already set out above, and referred it to this court.

3. A notice of motion has been taken out by the department complaining that the question framed by the Tribunal is not the question which arises on its order and for framing a proper question and substituting it in place of the question framed by the Tribunal. Now, the complaint of the department is that, in the question as framed by the Tribunal, it has assumed that the bills of lading were purchased in good faith by the assessee when there is neither a finding to that effect recorded by the Tribunal, nor is there any justification for such an assumption. The proper question, therefore, which has been suggested by the deparment in its notice of motion is as follows:

“Whether, on the facts and in the circumstances of the case, the penalty of Rs. 31,302 paid by the assessee to the customs authorities for-infringement of Import Control Regulations constitutes an allowable deduction under section 10 of the Income-tax Act?”

4. In our opinion, the notice of motion must be rejected. The question as ‘framed by the Tribunal is not on an assumption that the purchase of the consignments by the assessee was in good faith but on the basis of its finding to that effect. As we have already pointed out, the Tribunal observed in its order as follows:

“So far as the assessee is concerned, he is entitled to plead that he purchased the documents of title in good faith and paid consideration thereon and thereafter it had to pay the additional penalties in order not to lose the goods which had become its property. In the circumstances of the case, we have to hold that the penalties paid form only part of the cost of the goods imported and accordingly a proper deduction under section 10(1) itself.”

5. It would be clear from this order that the conclusion of the Tribunal that what was paid as penalties by the assessee was to be regarded as costs of the goods imported was based on its acceptance of the contention of the assessee, which the Tribunal held he was entitled to contend. In other words, the conclusion of the Tribunal was based on its acceptance of the assessee's case that his purchase of the bills of lading was in good faith. It is urged by Mr. Joshi, the learned counsel for the department, that there is no evidence on record to justify a finding of good faith because, as pointed out by the Appellate Assistant Commissioner, the assessee had failed to prove that the penalty was levied for the faults of the five parties and not for his own fault.

6. Now, whether there is evidence to support the said finding is, in our opinion, quite different from whether there is such a finding recorded by the Tribunal or not. If the grievance of the department was that the finding was in the absence of any evidence, it should have asked for a proper question in that connection either in the application which it had made before the Tribunal under section 66(1) or in the event of the Tribunal refusing to refer such a question, on an application made to this court under section 66(2) of the Indian Income-tax Act. It does not appear that any such question has been asked by the assessee and, consequently, the complaint made by the learned counsel with regard to the finding of the Tribunal cannot be entertained. Since, therefore, there is a finding involved in the decision of the Tribunal that the purchases of the assessee were made in good faith, the question as framed by the Tribunal is the proper and correct question. The notice of motion taken out by the department, therefore, for the purpose of amending the said question or substituting it by a question as proposed by the department, must be rejected.

7. Coming now to the question as framed, we think that it must be answered in the affirmative and in favour of the assessee. Under section 10(1) of the Indian Income-tax Act, tax is made payable in respect of the profits or gains of business. Profits or gains of business would be the excess of the sale price over the cost price and in determining the profits or gains, therefore, the cost has to be deducted from the proceeds realised on sale of the goods. On the facts and circumstances of the present case, the actual cost of the goods to the assessee was not only what it had paid to the importers, but in addition thereto what it had to pay by way of penalty, in order to save the goods from being confiscated and lost to it. The penalty paid by it could, therefore, be regarded as part of the cost of the goods to it. It can also be regarded as an amount expended by it wholly and exclusively for the purposes of the business, because unless the said amount was expended, the goods could not have been saved from confiscation. It may be pointed out that, in cases where the penalty has to be incurred because of the fault of the assessee himself, as for instance, for the reason of his having carried on his business in an unlawful manner or in contravention of certain rules and regulations, the penalty paid by the assessee for such conduct thereof, could not be regarded as wholly laid out for the purpose of the business, because the incurring of the said expenses has not been necessitated by the business, but by the conduct of the assessee in trying to carry out the business in an unlawful manner (see Haji Aziz and Abdul Shakoor Bros v. Commissioner of Income-tax [1961] 41 I.T.R 350). In the present case, however, on the finding of the Tribunal the penalty has been imposed not for the fault of the assessee but he had to bear the same for the purpose of getting his goods released from the customs authorities. In the present case, therefore, the expenses incurred by the assessee could be regarded as wholly and exclusively incurred for the purpose of his business. In our opinion, therefore, the conclusion arrived at by the Tribunal that the sum of Rs. 31,302 was allowable to the assessee as proper deduction is correct and the deduction is capable of being allowed under section 10(1) of the Income-tax Act as held by the Tribunal or even under section 10(2)(xv) of the Act.

8. The result, therefore, is that the question referred to us must be answered in the affirmative. We answer accordingly. The department will pay the costs of the assessee.

9. The notice of motion taken out by the department is also dismissed with costs.

Question answered in the affirmative.