1993 (10) TMI 1 - SC - Income Tax

Whether the payment made to the Textile Commissioner by the assessee for contravention of the direction given by the Textile Commissioner was in the nature of penalty and not incidental to the carrying on of the assessee s business - Whether the payment made to the Textile Commissioner under the provisions of clause 21C(1)(b) of the Cotton Textiles (Control) Order 1948 as amended from time to time was business expenditure allowable u/s 28 of the Income-tax Act 1961

Summary

Issues Involved:
1. Nature of payment made to the Textile Commissioner - whether it is a penalty or incidental to business.
2. Allowability of payment under section 28 of the Income-tax Act, 1961.
3. Allowability of payment for non-fulfillment of export obligations as business expenditure.

Issue-Wise Detailed Analysis:

1. Nature of Payment to the Textile Commissioner:
The primary issue was whether the payment made by the assessee to the Textile Commissioner for contravention of directions was in the nature of a penalty or incidental to the carrying on of the assessee's business. The Gujarat High Court had previously addressed similar questions in Rustam Jehangir Vakil Mills Ltd. and Tarun Commercial Mills Co. Ltd. cases, where it ruled that such payments were not penalties but were incidental to business operations. The Supreme Court upheld this view, stating that the payments were made under a statutory scheme and were not penalties for infraction of law or public policy. The payments were made in exercise of an option provided by the law, thus qualifying as business expenditure.

2. Allowability of Payment under Section 28 of the Income-tax Act, 1961:
The second issue was whether the payment of Rs. 1,70,766 made to the Textile Commissioner under clause 21C(1)(b) of the Cotton Textiles (Control) Order, 1948, was allowable as business expenditure under section 28 of the Income-tax Act, 1961. The High Court had allowed this payment as a deductible business expenditure, following its earlier decision in Rustam Jehangir Vakil Mills Ltd. The Supreme Court concurred, emphasizing that the payment was made in compliance with the statutory scheme and was incidental to the business, thereby qualifying as an allowable expenditure under section 37 of the Income-tax Act.

3. Allowability of Payment for Non-fulfillment of Export Obligations:
The third issue was whether the payment of Rs. 5,17,781 made to the Government for non-fulfillment of the obligation to export a specified quantity of sanforized cloth was allowable as business expenditure. The High Court had ruled in favor of the assessee, following its earlier decision in Tarun Commercial Mills Co. Ltd., where it held that such payments, even if termed as penalties, were not for infraction of law but were made under a statutory scheme. The Supreme Court upheld this view, stating that the payment was made in the interest of business expediency and was not a penalty for infraction of law or public policy. Thus, it was allowable as business expenditure under section 37 of the Income-tax Act.

Conclusion:
The Supreme Court dismissed the appeals, affirming the High Court's judgment that the payments made by the assessee were not penalties but were incidental to the business and allowable as business expenditure under section 37 of the Income-tax Act, 1961. The payments were made in compliance with statutory schemes and were not for any breach or infraction of law or public policy. Therefore, the judgment of the High Court was upheld, and the appeals were dismissed with no costs.