TMI Blog1982 (4) TMI 33X X X X Extracts X X X X X X X X Extracts X X X X ..... heme, by the Central Govt., for importing raw materials, subject to certain conditions. For the compliance with the said conditions, the assessee on November 9, 1965, executed a bond in favour of the President of India for the sum of Rs. 13,67,565.79, and National and Grindlays Bank Ltd. stood as surety in respect of the said bond. Under the said bond, which was entered into by the assessee in favour of the President of India as aforesaid, the assessee bound itself to pay to the Government the sum of Rs. 13,67,565.79. The recitals in the bond show that the consideration of the bond was that the joint Chief Controller permitted the assessee to import and clear the goods specified in the schedule thereto. The relevant provisions of the bond run as follows: " if the said importers shall within six months or such further time as may be granted by the said joint Chief Controller, export art silk fabrics of the value equal to 143 per cent. of the c.i.f. value of the imported goods to foreign countries excluding Nepal, Tibet, Sikkim, Bhutan and former Portuguese possessions in India or fulfil our (sic) obligation hereunder by transfer of import entitlements from other manufacturers expo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee for the purposes of its business and was an expenditure incurred in connection with the infraction of administrative regulations. The ITO disallowed this expenditure in the computation of the assessee's income. This view of the ITO was upheld by the AAC on an appeal preferred by the assessee. The assessee then preferred a second appeal to the Income-tax Appellate Tribunal. The Tribunal took the view that the said amount paid by the assessee, namely, the amount of Rs. 2,73,513, was not paid by the assessee by way of penalty but only by way of damages. The Tribunal also held that no violation of public policy was involved in the transaction and that the assessee had not committed any breach of the law of the land and, on the basis of these reasons, the Tribunal allowed the appeal of the assessee and held that the said amount of Rs. 2,73,513 was an allowable deduction. It is from this decision of the Tribunal that the aforesaid question has been referred to us. Chapter IV of the said Act deals with the computation of the total income for the purpose of the said Act. Section 37 is a section dealing with deductions which are to be allowed in the computation of the total inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... said amount which the assessee had to pay was an amount which it had to pay by way of damages for a breach of contract and that the said breach was purely incidental to and connected with the trade or business of the assessee. Before going into a discussion of the submissions urged by the counsel and the case law on the subject, we may point out that as observed by Lord Loreburn in Strong and Co. of Romsey Ltd. v. Woodifield [1906] 5 TC 215, 220 (HL), it is impossible to frame any formula which shall describe what is a loss connected with or arising out of a trade. Certain general principles can be derived from the decided cases, but it is next to impossible to evolve any formula which would enable a person to decide definitely and finally as to whether an item of expenditure can be said to be business expenditure or not. It is possible to give illustrations by way of cases where the expenditure concerned must be regarded as business expenditure and similarly it is equally possible to give illustrations where the expenditure would not be regarded as business expenditure, but it is difficult to formulate precisely a principle on which the two could be distinguished in all cases. Ho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee in the course of its business and incidental thereto. We now come to some of the cases cited before us. Mr. Joshi, learned counsel for the Commissioner, first drew our attention to the decision of Division Bench of the Punjab and Haryana High Court in Cineramas v. CIT [1977] 110 ITR 762. In that case it was held that the commercial expediency is not always a correct or conclusive test to determine whether expenditure is laid out wholly and exclusively for purposes of the assessee's business. All that is necessary is that the expenditure must be in some way connected with the trade. It must be an ordinary or contemplable incident of trade. Bat, infractions of law, including breaches of obligation, are not normal incidents of business. Penalties and damages paid in connection with such infractions and breaches cannot be expenditure laid out or expended wholly and exclusively for the assessee's business. The facts in that case were that the assessee who carried on business in exhibition of films was a member of the East Punjab Motion Pictures Association. A member failing to carry out the directives of the association could be suspended from the membership of the association bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee before it had been given an option either to produce cloth of particular variety or to make the payment of Rs. 30,872 and there was nothing wrong in the assessee thinking that it was advantageous to make the payment rather than produce the cloth and suffer a loss and hence the payment could not cease to be one made wholly and exclusively for the purpose of the business. This decision was arrived at after taking into account the aforesaid decision of the Punjab and Haryana High Court. Moreover, as pointed out by a Division Bench of the Allahabad High Court in CIT v. J. K. Cotton Spg. and Wvg. Mills Co [1980] 123 ITR 911 at p. 920, there is a string of cases in which a view has been taken different from the one taken by the Punjab and Haryana High Court in Cinerama's case [1977] 110 ITR 762. In the case before the Allahabad High Court, the assessee, which was engaged in, the manufacture of cloth, was recognised as a registered user of a trade mark. One of the conditions laid down for the use of the trade mark was the export of a certain percentage of fabrics manufactured under the trade mark. The user of the trade mark was authorised for the period 1963 to 1965. Thereafter, whe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and exclusively laid out for the purpose of the business of the assessee within the meaning of s. 10(2)(xv) of the Indian I.T. Act, 1922, and the fine paid by the assessee was not an allowable deduction under the section. It was held that it was not enough that the disbursements are made in the course of or arise out of or are concerned with or made out of the profits of the business but they must also be for the purpose of earning the profits of the business. They cannot be deducted if they fall on the assessee in some character other than that of a trader. If a sum is paid by an assessee conducting his business because in deducting it he has acted in a manner which has rendered him liable to penalty for an infraction of the law, it cannot be claimed as a deductible expense, as it cannot be called a commercial loss incurred in carrying on his business. Infraction of the law is not a normal incident of business. The principles laid down in this decision could undoubtedly apply in the case of all legitimate businesses, but they are of no assistance to Mr. Joshi in the present case, because we are of the view that in the case before us the assessee has not committed any infraction of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is decision again is not very helpful in the case before us. In that case, the assessee deliberately committed a breach of the obligation to export coffee to the extent that it had agreed to do and it was found that the penalty imposed for doing this, by way of liquidated damages, was really in the nature of a penalty for committing an act opposed to public policy. In the present case, however, as we have already pointed out, there is nothing to show that the breach of the export obligation under the bond committed by the assessee was deliberate. In fact, the facts suggest that it Occurred by reason of the sheer inability of the assessee to complete its export obligation in time and the assessee completed that obligation within one month after the prescribed time. Moreover, in the present case, it could not be said that the action of the assessee in failing to complete its export liability within the prescribed time was an act opposed to public policy, because within one month after the period provided under the bond, the assessee, in fact, completed its export obligation. In these circumstances, in our view, the principle laid down in this decision has no application to the case b ..... X X X X Extracts X X X X X X X X Extracts X X X X
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