1981 (9) TMI 93

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..... er business expenditure admissible under section 37 of the Income-tax Act, 1961?" The assessee owns a textile mill in Coimbatore. It is also a member of an association of textile manufacturers called the Indian Cotton Mills Federation, Bombay. The assessee manufactures higher counts of yarn and textiles made of higher counts. These manufactured articles could be made only from the yarn made out of imported Cotton, described in the trade as " global " cotton. The Indian Cotton Mills Federation acts as canalising agency and as a cartel for the import of foreign cotton. The allotment of import entitlement by the Federation to the member-mills is on the basis of the number of spindles working on higher counts in each mill. . Under the scheme o .....

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..... tion which arose in the assessment proceedings was whether the write-off of these amounts by the assessee in its profit and loss account could be allowed in the computation of its profits under the head " Business ". The ITO disallowed the claim. The matter came before the Tribunal in appeal. It was urged before the Tribunal by the department that the forfeiture of the guarantee amount with the Indian Cotton Mills Federation amounted to a penalty and, in that view, there can be no deduction in respect of the write-off of the said amount. The Tribunal, however, did not regard the giving up of the guarantee amounts as penalty. They took the view that at best it could only be a breach of contract. For coming to this conclusion, the Tribunal re .....

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..... 's while to forfeit the guarantee deposit rather than import further cotton bales, since that would avoid a greater loss which would otherwise have resulted to the assessee. For that as well as other reasons, the Bench upheld the assessee's claim for deduction, agreeing with the views expressed by the Tribunal in that case. In the present case, the Tribunal has not gone into the details of the guarantee deposits made by the assessee with the Indian Cotton Mills Federation, or the terms subject to which the guarantee deposits were held by the Federation, or the circumstances in which the deposits stood forfeited. The order of the AAC, however, briefly touches these points in the following passage in his order : " At the material time quite .....

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