TMI Blog1985 (1) TMI 33X X X X Extracts X X X X X X X X Extracts X X X X ..... n baled by Shree Mahalaxmi Cotton Ginning Pressing Factory, Sri Ganganagar (" the Factory " herein). It had paid to the factory Rs. 26.10 per bale for pressing. This rate was fixed by the Association of Ginning and Pressing Factories of Sri Ganganagar District (hereinafter referred to as " the Association "). The Government of Rajasthan made an order (" the Order " herein), vide No. SO/90 dated October 16, 1973, in exercise of the powers conferred by sub-r. (2) of r. 114 of the Defence of India Rules, 1971, and all other powers enabling it in this behalf, fixing the pressing charges at Rs. 16 per bale. The order was challenged by the association in this court. A stay order was made on April 3, 1974, i.e., after the accounting period. As the dispute was pending, the assessee-firm debited pressing charges at Rs. 26.10 to the cotton account and credited the same to the provision for pressing charges account. Actual payment to the factory was made at Rs. 26.10 per bale. In the accounting period immediately next following, corresponding to the assessment year 1975-76, the factory paid back to the assessee Rs. 14,200 as the association had decided to charge Rs. 16 only with retrospecti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Sri Ganganagar District had in the meanwhile decided to charge Rs. 16 only with retrospective effect for pressing a bale. The assessee claimed the entire expenditure as its business expenditure for this year and accordingly filed its return." A reference application was filed under s. 256(1) of the Act and the Tribunal has referred the above-mentioned question for our opinion. We have heard Mr. R. Balia, learned counsel for the assessee. It was contended by Mr. Rajesh Balia, learned counsel for the assessee, that the order of the Tribunal is incorrect when it maintained the disallowance in the assessee's total income on the ground that the assessee had not incurred any liability to pay pressing charges and in accordance with the mercantile system of accounting, the same should be allowed to the assessee while completing the assessment for the year 1974-75. According to the rate fixed by the association, the assessee-firm was required to pay to the factory at Rs. 26.10 per bale for pressing, whereas according to the order, the assessee was required to pay only Rs. 16 per bale. By means of the stay order passed by this court on April 3, 1974, in the writ proceedings challenging ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... one irretrievably. " The other important expressions used in s. 37(1) are " laid out " or It expended wholly and exclusively for the purpose of the business Section 41(1) of the Act provides for " Profits chargeable to tax The material part of s. 41(1) of the Act is as under: " Section 41. (1) Where an allowance or deduction has been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee, and subsequently during any previous year the assessee has obtained, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation thereof, the amount obtained by him or the value of benefit accruing to him, shall be deemed to be profits and gains, of business or profession and accordingly chargeable to income-tax as the income of that previous year, whether the business or profession in respect of which the allowance or deduction has been made is in existence in that year or not. " It was contended before the Tribunal on behalf of the assessee that the amount of Rs. 14,200 should not have been added back for t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion, we may quote the following observations (page 5): "Moreover, we do not think that this inquiry is relevant, for we are dealing with a question of income-tax and not judging the legality or propriety of the transaction on an application to reduce the capital of the company. The only question is whether this was done in the ordinary course of business for the purposes we have already pointed out, however mistaken the directors and shareholders of the company may have been." Sections 2(25) and 348 of the Companies Act, 1956 (before amendment in 1960), came up for consideration while examining the provisions of s. 10(2)(xv) of the old Act in CIT v. Ramakrishna Mills (Coimbatore) Ltd. [1974] 93 ITR 49 (Mad). Their Lordships of the Madras High Court have observed as under (headnote) : "Even if the payment infringed section 348 of the Companies Act, the company will be entitled to the deduction under s. 10(2)(xv) as, in considering the allowability of an expenditure under s. 10(2)(xv) of the Incometax Act, one cannot travel beyond the provisions of the Income-tax Act and deny the benefit of deduction under that section on the ground that the payment is unauthorised or has been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , that the allowability of a deduction under s. 10(2)(xv) has to be considered only in the light of the provisions of the I.T. Act and that it is not possible to travel outside the provisions of that Act and deny the benefit of that section, on the ground that the payment is unauthorised or has been prohibited by some other statute. It was observed as follows (p. 125) : " In view of the said decision even though there is an infringement of s. 360 of the Companies Act in this case, still there being admittedly an actual payment for the actual services rendered by Chockalingam Chettiar as general manager, the amounts paid will be an allowable deduction under s. 10(2)(xv)." In Narsingdas Surajmal Properties P. Ltd. v. CIT [1981] 127 ITR 221 (Gauhati), the question which arose was whether, on the facts and in the circumstances of the case, the deduction claimed by the assessee for the sum of Rs. 12,000 each year for the assessment years 1962-63, 1963-64 and 1964-65, would be admissible deduction, although such amount was payable under an unregistered deed executed on January 5, 1961, which deed is said to be in partial modification of an earlier registered agreement dated November ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt of Rs. 14,200 at the rate of Rs. 26. 10 per bale. It was business expenditure though the order which was published on October 16, 1973, prohibited any excess payment beyond Rs. 16 per bale for pressing. As the operation of the order was stayed on April 3, 1974, the assessee made the payment according to the rates fixed by the association. In view of Eastern Investment Ltd.'s case [1951] 20 ITR 1 (SC), Ramakrishna Mills' case [1974] 93 ITR 49 (Mad), Sree Rajendra Mills' case [1974] 93 ITR 122 (Mad), Piara Singh's case [1980] 124 ITR 40 (SC) and Narsingdas Surajmal's case [1981] 127 ITR 221 (Gauhati), the payment made at the rate of Rs. 26.10 per bale for pressing was an allowable deduction under s. 37(1) of the Act and it could only be added after the payment by the factory in the assessment year 1975-76. In our opinion, the Tribunal was not right in coming to the conclusion that the assessee-firm during the accounting year which ended on March 31, 1974, corresponding to the assessment year 1974-75, by making payment in excess of Rs. 16 per bale had not incurred any liability whereby it disallowed the claim for deduction of Rs. 14,200 for arriving at the assessee's total income. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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