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Issues Involved:
1. Deduction of compensation paid for non-production of controlled variety of coarse cloth. 2. Deduction of payment for non-fulfillment of export obligations. 3. Deduction of expenses incurred for furnishing a bank guarantee for export obligations. Detailed Analysis: Issue 1: Deduction of Compensation Paid for Non-Production of Controlled Variety of Coarse Cloth The court examined whether the payment of Rs. 3,15,674 made to the Textile Commissioner under the Cotton Textiles (Control) Order, 1948, was an allowable business expenditure under sections 37 or 28 of the Income Tax Act, 1961. The Tribunal had previously allowed this deduction, and the court referenced a similar case, Additional Commissioner of Income-tax v. Rustam Jehangir Vakil Mills Ltd., where it was held that such payments were made under an option and not for the breach of law. Therefore, the payment was considered an allowable business expenditure. The court concluded that this question is required to be answered in the affirmative and in favor of the assessee. Issue 2: Deduction of Payment for Non-Fulfillment of Export Obligations The court analyzed whether the payment of Rs. 35,193 by the assessee-company for non-fulfillment of its export obligations was an allowable expenditure under sections 37 or 28 of the Income Tax Act, 1961. The Income-tax Officer and the Appellate Assistant Commissioner had disallowed this claim, treating it as a penalty for contravention of public policy. However, the Tribunal allowed the deduction, considering it a contractual obligation under the bond executed by the assessee-company in favor of the President of India. The court examined the nature of the payment, determining whether it was a penalty for infraction of law or liquidated damages under a contract. The court found that there was no statutory provision in the Essential Supplies (Temporary Powers) Act, 1946, or the Cotton Textiles (Control) Order, 1948, that linked export obligations with the import of machinery. The payment was considered liquidated damages for shortfall in export targets, not a penalty for infraction of law. The court concluded that the payment was an allowable business expenditure and answered the second question in the affirmative and in favor of the assessee. Issue 3: Deduction of Expenses Incurred for Furnishing a Bank Guarantee for Export Obligations The court considered whether the deduction of Rs. 10,910 as business expenditure under sections 37 or 28 of the Income Tax Act, 1961, was allowable. The expenses were incurred by the assessee-company to furnish a bank guarantee for securing payment to be made for the shortfall in export obligations. The Income-tax Officer and the Appellate Assistant Commissioner had disallowed this claim, but the Tribunal allowed it, considering it a revenue deduction. The court noted that the bank guarantee was necessary for the assessee-company to carry on its business and fulfill its export obligations. The expenses were laid out for the purpose of carrying on business and earning profits. The court applied the same reasoning as in the second issue and concluded that the expenses incurred for furnishing the bank guarantee were an allowable business expenditure. The court answered the third question in the affirmative and in favor of the assessee. Conclusion: All three questions were answered in the affirmative and in favor of the assessee. The Commissioner was directed to pay costs of the reference to the assessee.
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