TMI Blog1975 (11) TMI 40X X X X Extracts X X X X X X X X Extracts X X X X ..... 21-C(1)(b) of the Cotton Textiles (Control) Order, 1968, was business expenditure allowable under section 28 or under section 37 of the Act ? In Income-tax Reference No. 16 of 1974, in the second question the amounts of payments made in the accounting period relevant for the different assessment years have been substituted but barring that difference arising from the particular facts of that case, the principle involved in both the cases is the same. Hence, we shall dispose of both these references by this common judgment. In Income-tax Reference No. 14 of 1974, we are concerned with assessment year 1969-70, the relevant accounting year being the financial year ending on March 31, 1969. The assessee is a limited company manufacturing cotton textiles and a direction was issued by the Textile Commissioner under the provisions of the Cotton Textiles (Control) Order, directing the assessee to produce certain types of cloth or what is known as produce and pack minimum quantity of the particular type of cloth as set out in the direction. The aassessee did not, manufacture that type of cloth and thereafter under clause 21-C(1)(b) the assessee was called upon to pay different amounts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t hereinabove, the only difference being that the amounts paid to the Textile Commissioner naturally differed from the payments made by the assessee concerned in Income-tax Reference No. 14 of 1974. In order to appreciate the contentions arising in this case, it is necessary to refer to some of the provisions of the Cotton Textiles (Control) Order, 1948. This Order was issued by the Government of India in exercise of the powers conferred upon it by section 3 of the Essential Supplies (Temporary Powers) Act, 1946, which was subsequently substituted by the Essential Commodities Act and the Cotton Textiles (Control) Order, 1948, is deemed to have been continued under the provisions of the later statute. So far as we are concerned, we will only note that " producer " for the purposes of this order means a person engaged in the production of cloth or yarn or both by power as defined in section 2(g) of the Factories Act, 1946, and the expression " produce " and its grammatical variants shall be construed accordingly. Under clause 21, sub-clause (1), no manufacturer of cloth shall sell or otherwise dispose of cloth except in packed condition in the manner indicated in that sub-clause. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g cash payment by way of assistance from the Textile Commissioner in respect of such excess quantity packed at such rates and in respect of such maximum quantity as may be specified by the Central Government from time to time. Clause 21-C, sub-clause (2), provides that all payments received from producers under paragraph (b) of sub-clause (1) shall, as far as may be, be utilised towards payments, if any, to producers under paragraph (a) of the said sub-clause. It is common ground between the parties before us that there is no direct provision in the Cotton Textiles (Control) Order providing for the imposition of penalty as such for failure to carry out the directions issued by the Textile Commissioner under clause 21-A of the order. 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 be 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 look ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat is known in technical language as the " production mix " of each textile unit concerned depending upon the availability of raw materials and depending upon the ruling prices for the controlled variety of cloth on the one hand and the price of raw cotton and the quality and quantity of cotton available in the market and the capacity of the installed machinery of the particular textile mill to manufacture the particular type of cloth up to the particular quantity on the other 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 circumnstances, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e-tax. It may be pointed out that this decision of the Madras High Court and the principles laid down in this decision have been approved by the Supreme Court in the subsequent decision in Haji Aziz and Abdul Shakoor Bros. v. Commissioner of Income-tax. In the case before the Madras High Court the assessee-firm, which carried on business in coffee, entered into contracts with the India Coffee Board and purchased coffee in the accounting year 1942-43 at a rate far below the price of coffee to be sold within India, with a contractual obligation to export the whole of the coffee so purchased to places outside India. In addition, the assessee also purchased coffee from others out of their export quota, which also it was under an obligation to export. The assessee, however, exported only part of the coffee, and sold the balance within India, in contravention of its obligations. When the Coffee Board came to know in 1946 of the sales within India and called upon the assessee to explain, the assessee admitted that it had failed to export part of the coffee purchased and agreed to pay liquidated damages in accordance with one of the three alternatives provided in the contract. The damages ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lated back as an item of expenditure to the year 1942-43 and, therefore, the deduction could not be allowed under section 10(2)(xv) from the profits of 1942-43. The Madras High Court also held in that case that although what the assessee paid to the Coffee Board was called liquidated damages, the payment was really akin to a penalty for committing an act opposed to public policy, a policy that underlay the Coffee Market Expansion Act, 1942, and which the Act left it to the Coffee Board to enforce. The breach of its contractual obligations to the Board was not in the course of the normal trading activities of the assessee. The money was not expended or paid out for the purpose of the assessee's business and was not even incidental to the business itself. Therefore, the amount was not an expenditure allowable under section 10(2)(xv). In connection with this decision of the Madras High Court, the Supreme Court observed in Haji Aziz and Abdul Shakoor Bros. v. Commissioner of Income-tax : " The Madras High Court in Senthikumara Nadar Sons v. Commissioner of Income-tax held that payment of penalty for an infraction of the law fell outside the scope of pemissible deductions under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lty for a breach of the law can be said to be an amount wholly and exclusively laid for the purpose of the business. The distinction sought to be drawn between a personal liability and a liability of the kind now before us is not sustainable because anything done which is an infraction of the law and is visited with a penalty cannot on grounds of public policy be said to be a commercial expense for the purpose of a business or a disbursement made for the purposes of earning the profits of such business. " In this case of Haji Aziz and Abdul Shakoor Bros. v. Commissioner of Income-tax the Supreme Court affirmed the decision of the Bombay High Court in Commissioner of Income-tax v. Haji Aziz and Abdul Shakoor Bros. The Punjab High Court has followed the decision of the Bombay High Court in Raj Woollen Industries v. Commissioner of Income-tax. The Supreme Court in the decision in Haji Aziz and Abdul Shakoor Bros v. Commissioner of Income-tax has also considered the decisions of the courts in England, namely, Strong Company of Romsey Ltd. v. Woodifield and Commissioners of Inland Revenue v. E. C. Warnes Co. Ltd. and also Commissioners of Inland Revenue v. Alexander von Glehn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ropriate prices in the rest of the items of production. If a particular manufacturer exceeds the minimum quantity specified in the direction issued by the Textile Commissioner to him, he is entitled under clause 21-C(1)(a) to be reimbursed by way of some assistance in cash. If a manufacturer does not incur any particular item of extra expenditure by producing the minimum quantity of cloth specified in the direction issued by the Textile Commissioner, then in order to see that he does not make any undue profit by refraining from production of such minimum quantity, this particular piece of legislation provides in clause 21-C(1)(b) for making a payment in cash to the Textile Commissioner in lieu of the production of the whole or part of the minimum quantity. Hence, what is being done at the time of making the payment is an incident of the production of cloth by the manufacturer depending upon the exercise of option which he will do in view of the technical or technological reasons of his own production machinery. Under these circumstances it is obvious that the payments made under clause 21-C(1)(b) can never be said to be by way of a payment extracted or required for an infraction of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Tribunal has done. Of course, whatever falls under section 37(1) would also be covered by the more general provisions of section 28 but since the case falls under the specific provision, it is not necessary to refer to the more general provisions of section 28. It was urged on behalf of the revenue by Mr. Kaji that only a loss incurred from the commercial point of view can fall under section 28 and if any expenditure is incurred while carrying on the business, unless it is covered by the words of section 28(1) that expenditure may not be deductible. It is not necessary for us in the course of this judgment to decide this point, because we find, on the facts of this case, that the expenditure incurred by the manufacturer concerned in making the payment under clause 21-C(1)(b) was incurred wholly and exclusively for the purposes of the business and hence is covered by section 37(1) of the Income-tax Act, 1961. It is, therefore, not necessary to discuss the decisions in Prafulla Kumar Malik v. Commissioner of Income-tax, Commissioner of Income-tax v. Pannalal Narottamdas Co. and Commissioner of Income-tax v. Prafulla Kumar Mallick. These three decisions were cited at the Bar b ..... X X X X Extracts X X X X X X X X Extracts X X X X
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