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Issues Involved:
1. Disallowance of Rs. 12,000 representing penalty/redemption fine imposed under Central Excise Rules. 2. Disallowance of Rs. 2,66,289 under Section 40A(3) of the Income Tax Act. 3. Growth incentive of Rs. 2,68,141 and its exclusion from the purview of Section 37(3A) of the Income Tax Act. Issue-Wise Detailed Analysis: 1. Disallowance of Rs. 12,000 Representing Penalty/Redemption Fine: The first issue revolves around the disallowance of Rs. 12,000, which includes a penalty of Rs. 2,000 and a redemption fine of Rs. 10,000 imposed under the Central Excise Rules. The CIT(A) confirmed the disallowance. The facts, as narrated by the Assessing Officer, indicate that the Central Excise authorities conducted a raid and found discrepancies in the stock records of the assessee. As a result, a penalty of Rs. 2,000 was levied, and goods worth Rs. 35,015 were confiscated, which could be redeemed by paying a fine of Rs. 10,000. The assessee argued that the penalty and redemption fine were allowable expenditures, citing a bona fide recording mistake in the excise register. However, the Revenue contended that the penalty and fine were for contravention of Central Excise Rules and thus not deductible. The Tribunal considered the Supreme Court's decision in Haji Aziz & Abdul Shakoor Bros. vs. CIT, which held that a penalty for infraction of the law is not a deductible expense. Consequently, the penalty of Rs. 2,000 was confirmed as non-deductible. However, the Tribunal found that the redemption fine of Rs. 10,000 was compensatory in nature, following the Madras High Court's decision in CIT vs. N.M. Parthesarathy, and allowed it as a deductible expenditure under Section 37(1) of the Act. 2. Disallowance of Rs. 2,66,289 under Section 40A(3): The second issue pertains to the disallowance of Rs. 2,66,289 under Section 40A(3) of the Act, which prohibits cash payments exceeding Rs. 2,500. The Assessing Officer found that the assessee made cash payments to various parties, including railway clearing agents and labour contractors, in contravention of this provision. The assessee argued that the payment to the railway agent was covered by Rule 6DD(b), and the payments to labour contractors were covered by Rule 6DD(j). However, the CIT(A) disagreed, stating that the payment to the railway agent could not be considered a payment to the railways and that the payments to contractors were for labour supply, not wages distribution. The Tribunal noted that the Board's Circular No. 34, dated 5th March 1970, clarified that payments to railway clearing agents are exempt under Rule 6DD(b). Therefore, the payment to M/s Mahajan & Mahajan was allowable. As for the payments to labour contractors, the Tribunal found that the absence of bank accounts at Dewas and the urgency of payments on weekends needed verification. The Tribunal set aside this issue and directed the Assessing Officer to re-examine it, considering the absence of bank accounts and the timing of payments. 3. Growth Incentive of Rs. 2,68,141: The third issue involves the growth incentive of Rs. 2,68,141 paid to stockists who purchased goods beyond their targets. The Assessing Officer included this amount in the calculation for disallowance under Section 37(3A), treating it as sales promotion expenses. However, the CIT(A) directed the exclusion of this amount, relying on the Tribunal's decision in Moped India Ltd. vs. IAC, which held that incentive bonuses do not fall within the purview of Section 37(3A). The Revenue argued that the growth incentive was directly related to sales promotion and should be included for disallowance. The assessee countered that the incentive was a discount for exceeding sales targets and not for sales promotion, citing several judicial decisions. The Tribunal agreed with the assessee, noting that the Calcutta High Court in CIT vs. Santosh Agencies held that special discounts to dealers are not sales promotion expenses. The Tribunal distinguished the Karnataka High Court's decision in Smith Kline & French (India) Ltd. vs. CIT, which dealt with physicians' samples as sales promotion. The Tribunal concluded that the growth incentive was not sales promotion and upheld the CIT(A)'s decision to exclude it from the purview of Section 37(3A). Conclusion: - The assessee's appeal is partly allowed, confirming the disallowance of Rs. 2,000 as a penalty but allowing the redemption fine of Rs. 10,000. - The issue of cash payments to labour contractors is remanded to the Assessing Officer for re-examination. - The Revenue's appeal is dismissed, confirming that the growth incentive of Rs. 2,68,141 is not subject to disallowance under Section 37(3A).
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