1989 (9) TMI 386 - HC - Income Tax

Summary

Issues:
1. Allowability of gratuity liability as a deduction.
2. Allowability of expenditure on guests and selling agents.
3. Allowability of amount paid for cancellation of a contract.
4. Allowability of amount paid for non-delivery of export cloth in time.

Analysis:

1. Gratuity Liability Deduction:
The Tribunal referred questions regarding the allowability of gratuity liability and other expenditures under the IT Act, 1961. The Court relied on the case law CIT vs. Eastern Spinning Mills Ltd., where it was held that gratuity liability is allowable as a deduction. Consequently, the Court answered this question in favor of the assessee.

2. Expenditure on Guests and Selling Agents:
The Court determined that the expenditure incurred on guests and selling agents, being part of the business operations, should be allowed as a deduction from business profits. Following the legal principles applicable at the time, the Court answered this question affirmatively in favor of the assessee.

3. Cancellation of Contract Payment:
The Tribunal examined a case involving the cancellation of a contract for the supply of yarn. The Tribunal found that the payment made by the assessee to settle the contract was justified and should be allowed as a deduction. The Court agreed that the transaction was not speculative and was necessitated by business exigency, leading to the conclusion that the payment was allowable. Hence, the Court answered this question in favor of the assessee.

4. Non-Delivery Penalty Deduction:
Regarding the payment made for non-delivery of goods in time as per the contract's default clause, the ITO initially disallowed the claim, considering it a penalty. However, the AAC and the Tribunal found that the payment was part of the contractual obligation and not a penalty for breaching any law. The Court concurred, emphasizing that the payment was made in the course of carrying on the business and should be considered a business expenditure. Therefore, the Court answered this question affirmatively in favor of the assessee.

In conclusion, the Court answered all four questions in the affirmative and in favor of the assessee, allowing the deductions claimed. The judgments were delivered by Suhas Chandra Sen and Bhagabati Prasad Banerjee, JJ., with no order as to costs.