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Disallowance of payment of additional royalty/penalty on blazes cut on unallotted trees as business expenditure. Analysis: The case involved a dispute regarding the disallowance of payment of additional royalty/penalty on blazes cut on trees not allotted to the assessee as business expenditure. The assessee had entered into a contract for cutting blazes for resin collection, facing penalties for cutting larger blazes than permitted and placing blazes on unallotted trees. The Income-tax Officer disallowed the claim of the assessee as business expenditure, leading to an appeal before the Tribunal. The Tribunal differentiated between penalties for cutting blazes on allotted trees and unallotted trees, allowing the former as business expenditure but disallowing the latter. The matter was remanded to the Income-tax Officer for reassessment based on the Tribunal's observations. The legal principle established by the Supreme Court in the case of Haji Aziz and Abdul Shakoor Bros. v. CIT was crucial in this judgment. The Supreme Court held that expenses deductible for business purposes must be incurred to enable profit-making, not merely connected to the business. Penalties for contravention of statutory provisions are not considered commercial losses and are not deductible as business expenditure. The judgment emphasized that penalties incurred for legal infractions are not normal incidents of business and cannot be claimed as deductible expenses. The Supreme Court's ruling in CIT v. Ahmedabad Cotton Mfg. Co. Ltd. reiterated the principle that payments made in obedience to legal provisions, without breaching the law, can be treated as business expenditure. If the payment is made as a measure of business expediency under the law or statutory scheme, it qualifies as an allowable deduction under section 37 of the Income-tax Act. The assessing authority must determine whether the payment was required by law or imposed as a penalty for legal breaches to decide its deductibility. The judgment highlighted that decisions such as CIT v. Himalaya Rosin-Turpentine Manufacturing Co. and CIT v. C. Balajee and Sons were not directly applicable to the case at hand. The Tribunal's distinction between the two types of payments, based on the Supreme Court's principles, was deemed correct. Consequently, the reference was answered in favor of the Revenue, affirming the Tribunal's decision to disallow the payment of additional royalty/penalty on blazes cut on unallotted trees as business expenditure.
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