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Issues:
1. Whether the payment made by the assessee under the Cotton Textiles (Control) Order, 1948, was a penalty for infraction of the law or a business expense? 2. Whether the payment of Rs. 2,38,140 by the assessee was allowable as a deduction under section 37 of the Income-tax Act, 1961? Analysis: The High Court of Bombay addressed a reference under section 256(1) of the Income-tax Act, 1961, regarding the nature of a payment made by the assessee under the Cotton Textiles (Control) Order, 1948. The Tribunal referred two questions to the court, focusing on whether the payment was a penalty for violating the law and if it could be considered a business expense under the Income-tax Act. The assessee, a textile manufacturing company, paid Rs. 2,38,140 to the Textile Commissioner under the Control Order, claiming it as a business expenditure in its income computation. The Income-tax Officer initially allowed the deduction, but the Commissioner of Income-tax later reversed this decision, stating the payment was not deductible as it was for an infringement of legal obligations. The Tribunal overturned the Commissioner's decision, holding that the payment was a business expense incidental to the company's operations and allowable under section 37 of the Income-tax Act. The court analyzed the Control Order's provisions, emphasizing that the payment by the producer was a compliance option, not a penalty for non-compliance. The court highlighted that the producer had the choice to either pack the minimum quantity of cloth or make a payment in lieu of packing, with no penal consequences for choosing the latter. Drawing parallels from previous judgments, the court cited the Gujarat High Court's decision in a similar case, where payments made under the Control Order were deemed allowable business expenditures. Additionally, a case involving contractual liabilities was referenced to differentiate between penalties for law breaches and contractual obligations. The court concluded that the payment made by the assessee was not a penalty but an expenditure necessary for conducting its business, thus justifying the Tribunal's decision. Consequently, both questions were answered in favor of the assessee, with no costs awarded.
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