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Issues Involved:
1. Whether the payment made to the Textile Commissioner by the assessee for contravention of the directions given by the Textile Commissioner was in the nature of penalty and not incidental to the carrying on of the assessee's business. 2. Whether the payment made to the Textile Commissioner under the provisions of clause 21-C(1)(b) of the Cotton Textiles (Control) Order, 1968, was business expenditure allowable under section 28 or section 37 of the Income-tax Act, 1961. Detailed Analysis: Issue 1: Nature of Payment - Penalty or Business Expense The Tribunal considered whether the payment made by the assessee to the Textile Commissioner for not complying with the production directives was a penalty or a business expense. The Tribunal noted that the Cotton Textiles (Control) Order, 1948, does not directly impose penalties for non-compliance but provides an option to make a payment in lieu of fulfilling the production requirements. The Tribunal highlighted three options available to the producer under clause 21-C(1)(b): 1. Comply with the production directive. 2. Exceed the minimum production and receive assistance. 3. Make a payment in lieu of production. The Tribunal concluded that the payment was part of a structured scheme giving producers discretion based on their production capabilities and market conditions. Therefore, the payment was not akin to a penalty but was an option exercised by the producer in the course of business operations. Issue 2: Allowability of Payment as Business Expenditure The Tribunal then examined whether the payment could be considered a deductible business expenditure under section 28 or section 37 of the Income-tax Act, 1961. The Tribunal referred to the Cotton Textiles (Control) Order's provisions, emphasizing that the payment was a necessary business expense incurred to comply with the regulatory framework and maintain business operations. The Tribunal distinguished this case from the Madras High Court's decision in Senthikumara Nadar & Sons v. Commissioner of Income-tax, where the payment was considered a penalty for an act opposed to public policy. The Tribunal noted that in the present case, the payment was not for an infraction of the law but was a legitimate business expense under the regulatory scheme. The Tribunal also referenced the Supreme Court's decision in Haji Aziz and Abdul Shakoor Bros. v. Commissioner of Income-tax, which held that penalties for legal infractions are not deductible. However, the Tribunal found that the payment in this case did not constitute a penalty but was an expenditure incurred wholly and exclusively for business purposes. The Tribunal concluded that the payment fell within the scope of section 37(1) as it was laid out wholly and exclusively for the purposes of the business. Therefore, the payment was an allowable business expenditure under section 37 of the Income-tax Act, 1961. Judgment: Income-tax Reference No. 14 of 1974: 1. The payment was not in the nature of penalty and was incidental to the carrying on of the assessee's business. 2. The payment was business expenditure allowable under section 37 of the Income-tax Act, 1961. The Commissioner will pay the costs of this reference to the assessee. Income-tax Reference No. 16 of 1974: 1. The payment was not in the nature of penalty and was incidental to the carrying on of the assessee's business. 2. The payments were business expenditure allowable under section 37 of the Income-tax Act, 1961. The Commissioner will pay the costs of this reference to the assessee.
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