TMI Blog1976 (4) TMI 35X X X X Extracts X X X X X X X X Extracts X X X X ..... the matter in appeal before the Appellate Assistant Commissioner. The Appellate Assistant Commissioner was of the opinion that the amount provided was, in the facts and circumstances of the case, an expenditure incurred wholly and exclusively for the purposes of the assessee's business. He, therefore, allowed the appeal to the extent to which it related to the claim of Rs. 18,247 on account of the amount paid for non-fulfilment of the export obligations. The revenue, therefore, went in appeal before the Tribunal, which following its decision in Income-tax Appeal No. 976 (Ahd.) of 1970-71 between Income-tax Officer v. Rustam Jehangir Vakil Mills Ltd. by its order of April 27, 1973, held that the payment of Rs. 18,247 must be regarded as revenue expenditure laid out wholly and exclusively for the purpose of the assessee's business. At the instance of the revenue, therefore, the following question has been referred to us for our opinion : " Whether, on the facts and in the circumstances of the case, penalty of Rs. 18,247 paid to the Textile Commissioner for non-fulfilment of the assessee's export obligation was business expenditure incurred wholly and exclusively for the purposes of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... export was to be determined with reference to linear yards instead of the value of the goods. (3) The defaulting mill-companies which failed to fulfil their export targets in the period 1963-1965 were allowed to carry forward the shortfall in the export obligations which were agreed to be achieved and fulfilled in the ensuing period of January, 1966, to November, 1972. (4) In order to fulfil the export obligations the registered users of the trade mark in question were required to execute a bond undertaking to export sanforized cloth of not less than 10% of the production during 1966-1972 as also shortfalls in the export of sanforized cloth during June, 1963, to December, 1965. (5) Mill-companies failing to fulfil the export obligation were to pay 10 paise per linear yard to the extent of the annual shortfall, and the performance of each mill-company was to be reviewed annually and the amount covering the shortfall in the annual export obligation was to be deposited with the Government by the defaulting mill by way of penalty and at the end of seven years period, i.e., 1966-72, a final review was to be made of the cumulative performance of the mill against the total obligatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... D ARE SUCH THAT THE MILL SHALL--(a) either export by 30th September, 1971, the shortfall in the quantity of export of sanforized cloth for the period up to 31st December, 1969, referred to in clause II(3) above, in addition to the mill's export obligation in respect of sanforized cloth for the years 1970 and 1971 in accordance with the agreement dated 5th March, 1970, entered into by the mill with the Government ; (b) or pay to the Government the aforesaid sum or such sum, in the event of the mills exporting any part of the shortfall referred to in para. II(3) by 30th September, 1971, which becomes payable by the mills to the Government at the rate of 10 paise per linear yard in respect of the actual shortfall in the export obligation outstanding as on 30th September, 1971 ; (c) the mill shall furnish all particulars as regards exports of sanforized cloth effected by them in terms of this bond within two months from 30-9-1971 duly certified as true by the chartered accountant after due verifications of the Customs Forms, etc., as already prescribed showing actual quantity of the sanforized cloth exported. " It is in the context of this scheme, the broad features of which have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... statute or a statutory provision which can be even remotely spelled out in the facts and circumstances of this case. There is no breach of public policy in this case, according to the assessee-company, which will convert this amount of liquidated damages into exaction of payment akin to that of penalty and there is no distinction in principle laid down by this court in Additional Commissioner of Income-tax v. Rustam Jehangir Vakil Mills Ltd. [1976] 103 ITR 298 (Guj), where this court has held that such payments are incidents of the produce of cloth by the manufacturer depending upon the exercise of option which he will exercise in view of the technical or technological reasons of his own production and machinery and they cannot be treated as payments extracted or required for infraction of law. In Additional Commissioner of Income-tax v. Rustam Jehangir Vakil Mills Ltd. [1976] 103 ITR 298 (Guj) a similar question arose before a Division Bench of this court where the assessee-companies were limited companies manufacturing cotton textiles. Under the Cotton Textiles (Control) Order, the assessee-companies were under obligation to produce the cloth of a certain count. As the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g terms--See [1976] 103 ITR 298, 303, 304, 305 (Guj) : " The only question is, whether, as urged by Mr. Kaji on behalf of the revenue, the payment made by the producer concerned to the Textile Commissioner in respect of the deficiency of cloth when he has not packed (produced) the whole or part of the minimum quantity of cloth specified in the direction issued to him can be said to be a payment akin to penalty. In terms it does not amount to penalty but the question that we have to consider is, whether looking to the scheme of the Cotton Textiles (Control) Order, it is akin to payment of penalty. " The question so raised on the contention of the revenue was answered by the Division Bench as under : " On a plain reading of clause 21-C(1)(b), in the context of the scheme of clauses 21-A and 21-C as a whole, it is clear that the producer to whom the Textile Commissioner has issued direction under clause 21-A to pack the minimum quantity of a particular type of cloth during the particular period specified in the direction, has three options ; either he can comply with the direction and during the original period specified in the direction or during the extended period, the produc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her hand. It is because of these variable factors which go on varying from unit to unit and from time to time that the Cotton Textiles (Control) Order has left it to the option of the producer concerned to decide whether the producer would produce the minimum quantity specified in the direction issued by the Textile Commissioner or would exceed the minimum quantity or would not produce the minimum quantity either in whole or in part and make the payment contemplated by clause 21-C(1)(b). Under these circumstances, the words used in clause 21-C, namely, that the 'producer may, in lieu of packing the whole or part of the minimum quantity, ... make payment' 'go to indicate that the option has been given to the producer to decide whether he would produce any part of the minimum quantity of cloth specified in the direction issued by the Textile Commissioner or would not produce any part of that minimum quantity and decide to make the payment to the Textile Commissioner at the rates specified by the Central Government and within the time determined by the Textile Commissioner....... Thus, far from the payments being in the nature of penalty or akin to penalty, the payment contemplated by ..... X X X X Extracts X X X X X X X X Extracts X X X X
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