1985 (1) TMI 33 - HC - Income Tax

Summary

Issues Involved:
1. Whether the assessee-firm incurred any liability during the accounting year to make payment for pressing the bales at more than Rs. 16 per bale.
2. Whether the disallowance of the assessee's claim for deduction of Rs. 14,200 was justified.

Detailed Analysis:

Issue 1: Liability to Pay Pressing Charges
The Tribunal had to determine if the assessee-firm had incurred any liability to pay pressing charges at a rate higher than Rs. 16 per bale during the accounting year ending March 31, 1974, for the assessment year 1974-75. The assessee paid Rs. 26.10 per bale to Shree Mahalaxmi Cotton Ginning & Pressing Factory as per the rate fixed by the Association of Ginning and Pressing Factories of Sri Ganganagar District. However, the Government of Rajasthan had issued an order on October 16, 1973, fixing the pressing charges at Rs. 16 per bale. This order was challenged, and a stay was granted on April 3, 1974, after the accounting period ended. The Tribunal held that any payment exceeding Rs. 16 per bale was void as it was against public policy, and thus, the assessee-firm did not incur any liability beyond Rs. 16 per bale.

Issue 2: Disallowance of Deduction Claim
The Income-tax Officer (ITO) disallowed the assessee's claim for deduction of Rs. 14,200, which was the excess amount paid over Rs. 16 per bale, and added it to the total income for the assessment year 1974-75. The Appellate Assistant Commissioner (AAC) and the Tribunal upheld this disallowance. The Tribunal's reasoning was that the payment of Rs. 26.10 per bale was made after the Government's notification, and thus, the liability to pay more than Rs. 16 per bale did not legally exist.

Analysis of Legal Provisions and Precedents
The court examined Section 37(1) of the Income-tax Act, 1961, which allows deductions for any expenditure laid out wholly and exclusively for business purposes. The court referred to several precedents, including Indian Molasses Co. (P.) Ltd. v. CIT, which defined "expenditure" as something paid out or away and gone irretrievably. The court also considered Section 41(1) of the Act, which deals with profits chargeable to tax when an allowance or deduction has been made in a previous year.

Court's Conclusion
The court noted that the expenditure was incurred for business purposes and was allowable under Section 37(1) despite the notification limiting the pressing charges to Rs. 16 per bale. The court emphasized that the most important consideration is whether the expenditure was incurred solely for business purposes, regardless of its legality under other statutes. The court cited several cases, including Eastern Investments Ltd. v. CIT and CIT v. Sree Rajendra Mills Ltd., to support the view that even if an expenditure is against the law, it can still be deductible if it was incurred for business purposes.

Final Judgment
The court concluded that the assessee-firm had indeed incurred a liability to pay Rs. 26.10 per bale during the accounting year, and thus, the disallowance of Rs. 14,200 was incorrect. The Tribunal's decision was overturned, and the question was answered in the negative, in favor of the assessee-firm and against the Revenue. There was no order as to costs, and the answer was to be returned to the Tribunal as per Section 260(1) of the Income-tax Act.