TMI Blog1993 (10) TMI 1X X X X Extracts X X X X X X X X Extracts X X X X ..... appeal to this court, As the decision to be rendered by us in Civil Appeal No. 2149 (NT) of 1977 could form the basis for disposal of the remaining appeals, we shall proceed to consider that appeal and decide it at the first instance. Civil Appeal No. 2149 of 1977 : CIT v. Mihir Textiles Ltd. : This appeal arises from the judgment in Income-tax Reference No. 175 of 1976 decided by the Gujarat High Court. The questions referred by the Tribunal under section 256(1) of the Income-tax Act for the opinion of the High Court in that reference were these : "1. Whether the payment made to the Textile Commissioner by the assessee for contravention of the direction 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, on the facts and in the circumstances of the case, the payment of Rs. 1,70,766 made to the Textile Commissioner under the provisions of clause 21C(1)(b) of the Cotton Textiles (Control) Order, 1948, as amended from time to time, was business expenditure allowable under section 28 of the Income-tax Act, 1961 ? 3. Whether the payment of Rs. 5,17,781 made by the assessee to the Gove ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... filed against that appellate order before the Tribunal did not meet with success. However, at the instance of the Revenue the Tribunal referred the questions set out in the beginning of this judgment for getting the opinion of the High Court on them. A Division Bench of the High Court which examined the reference, answered questions Nos.1 and 2 against the Revenue and in favour of the assessee following its earlier decision in CIT (Addl.) v. Rustam Jehangir Vakil Mills Ltd.[1976] 103 ITR 298 (Guj).It also answered question No. 3 against the Revenue and in favour of the assessee following its earlier decision in CIT v. Tarun Commercial Mills Co. Ltd. [1977] 107 ITR 172 (Guj). The reference was decided accordingly by the High Court by its judgment rendered on November 18, 1976. The Revenue, which was not satisfied with the said judgment of the High Court, has filed the present appeal in this court on a certificate of fitness obtained from the High Court to appeal to this court. It was not disputed before us that if the answers given by the High Court in Rustam Jehangir Vakil Mills' case [1976] 103 ITR 298 (Guj) are sustainable, the answers given to questions Nos. 1 and 2 by the H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n under clause 21C(1)(b) of the Control Order, 1948, to pay to the Textile Commissioner the amount envisaged thereunder in lieu of production and packing of the minimum quantity of the standard cloth in the year 1968-69, paid an amount of Rs. 91,387 to the Textile Commissioner. In the return of Rustam Mills filed for the accounting year 1968-69, deduction of the amount of Rs. 91,387 was claimed as an allowance under section 37 of the Income-tax Act on account of its business expenditure of that year on the plea that it was an expense wholly and exclusively laid out for the purpose of its business. The Income tax Officer refused to allow the deduction so claimed. However, in the appeal of Rustam Mills, the Appellate Assistant Commissioner, allowed the deductions claimed and that order was confirmed by the Tribunal in the further appeal carried before it by the Revenue. In the reference carried before the High Court at the instance of the Revenue, the aforesaid questions were answered against it by the High Court, as already stated. The answers so given to the questions by the High Court were based on its view that the amount paid by Rustam Mills to the Textile Commissioner was neith ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ear and that amount referred to as "penalty" was required to be deposited with the Government of India. Tarun Mills which did not export the required quantity of "Sanforized" cloth during its accounting year 1967-68, made a deposit of Rs. 18,247 with the Central Government in exercise of its option under the bond to pay an amount in lieu of the shortfall in the quantity of "Sanforized" cloth to be exported, and claimed that amount as its business expenditure in the income-tax return of the said accounting year. But, the Income-tax Officer refused to allow the said amount of deduction claimed as business expenditure of Tarun Mills during the relevant year. In the appeal of Tarun Mills, the Appellate Assistant Commissioner reversed the order of the Income-tax Officer and allowed deduction of that amount as its business expenditure. The Revenue's appeal therefrom filed before the Tribunal did not succeed. At the instance of the Revenue, the question adverted to earlier, having been referred to the High Court, it was answered against the Revenue and in favour of the Tarun Mills, as stated earlier. In giving that answer, the High Court took the view that even if the bond referred to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 41 ITR 350 (SC). In Senthikumara Nadar's case [1957] 32 ITR 138 (Mad), the assessee was doing business in coffee. It had entered into contracts with the Indian Coffee Board entitling it to purchase coffee at a rate far below the price of coffee sold within India, undertaking an obligation to export the whole of the coffee so purchased outside India. The assessee which purchased coffee at a low price because of the contracts, did not fulfil its export obligation by sending the whole of the coffee outside India. When the assessee was found to have committed the breach in performing his export obligation the assessee paid liquidated damages to the Coffee Board as provided for in the terms of the contract. The assessee, thereupon, claimed that amount as deduction under section 10(2)(xv) of the Indian Income-tax Act, 1922. The Madras High Court which examined the nature of the payment made by the assessee found that that payment was akin to penalty, for it was paid for infraction of public policy underlying the Coffee Market Expansion Act, 1942, which was left to be enforced by the Coffee Board. That amount, it was found, was not an amount spent in the assessee's normal trading activ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the direction." Sub-clause (2) of clause 21A conferred power on the Textile Commissioner to grant extension of time for complying with the directions issued by him in so far as the price applicable to such quantities of cloth so packed is the price in force during the period specified in the direction under sub-clause (1) or during the extended period, whichever is lower. Clause 21C of that Order read : "(1) Where the Textile Commissioner has issued directions under sub-clause (1) of clause 21A to any producer to pack a specified quantity of cloth during the period specified in the directions-. . . . (b) such producer may, in lieu of packing the whole or part of the minimum quantity of cloth specified in the said direction, make payment to the Textile Commissioner in respect of the deficiency at such rates as may be specified by the Central Government and within such time as may be determined by the Textile Commissioner. (2) All payments received from producers under paragraph (b) of sub-clause (1) shall, as far may be, be utilised towards payments, if any, to producers under the said paragraph (a)." The Textile Commissioner's direction issued to the textile mills to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Revenue was that the amount paid by Tarun Mills was an amount of penalty or an amount akin to penalty for infraction of law or public policy and, therefore, could not have been allowed as deduction of its business expenditure, On consideration of the matter, the High Court relied on Rustam Mills' case [1976] 103 ITR 298 (Guj) and held thus (at page 181) : "We are of the opinion that having regard to the terms contained in the bond we find that it is optional for the manufacturers to achieve the export target prescribed for them or to pay to the Government the sum or sums calculated at the rate of 10 paise per linear yard to cover up the shortfall in the export obligations. The option envisaged in the bond entered into between the parties clearly indicates that the option was with the manufacturers and that option may be availed of for a variety of reasons in the interest of commercial expediency, The export obligations which the textile manufacturers may have incurred for the use of trade mark 'Sanforized' may not be fulfilled for various factors over which the manufacturers may not have control. The trend and competition in the international market, the quality and quantity of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich the amount was paid required such payment to be made, as penalty or as something akin to penalty, that is imposed by way of punishment for breach or infraction of the law or the statutory scheme. If the amount so paid is found to be not a penalty or something akin to penalty due to the fact that the amount paid by the assessee was in exercise of the option conferred upon him under the very law or scheme concerned, then one has to regard such payment as business expenditure of the assessee, allowable under section 37 of the Income-tax Act, as an incident of business laid out and expended wholly and exclusively for the purposes of the business. However, such payment of the assessee is one which is made in exercise of the option given to such assessee by the law or the statutory scheme and there arises no need for the assessing authority to go into the question whether the payment could be regarded as one made as a measure of business expediency, for it cannot ignore the fact that the law or the statutory scheme enables incurring of such expenditure in the course of the assessee's business. As is pointed out by us already, the High Court has answered the questions referred in Ru ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
