Directions to manufacturers regarding class or specifications of cloth. - Income Tax - 910/CBDT

INSTRUCTION NO. 910/CBDT Dated: January 8, 1976 Section(s) Referred: 37 Statute: Income - Tax Act, 1961 The Cotton Textile(Control) Order, 1948 was issued by the Government in the Ministry of Commerce and Industry by virtue of section 3 of the Essential Supplies (Temporary Powers) Act, 1946. Under this Order, the textile Commissioner is empowered to issue directions from time to time to manufacturers regarding class or specifications of cloth which they shall or shall not manufacture or the maximum or minimum quantities of cloth which they should manufacture. Such direction is made having regard to the demand for cloth, needs of the public, production pattern of different units of the industry, etc. The manner in which cloth should be packed in bales with reference to the weight or meterage is also directed by the Textile Commissioner. Under clause 21A(1), the Textile Commissioner may order any producer to pack such minimum quantity of such cloth as may be specified by him. 2. With the objective of ensuring an adequate supply of popular varieties of fabrics for common consumption of reasonable rates, price stamping of "controlled cloth" was introduced in 1964. All textile mills were required to pack a prescribed minimum quantity of such "controlled cloth" every quarter. But due to technical or other reasons, some mills were not able to pack the minimum prescribed quantity while some other mills packed more than the prescribed minimum. It was, therefore, provided under clause 21C that a producer who packs more than the minimum quantity of controlled cloth during the prescribed period will be entitled to receive cash payments by way of assistance subsidy from the Textile Commissioner at such rates specified by Government on the actual excess quantity packed and a producer who does not pack the whole or part of the prescribed minimum quantity of such cloth, has to make payment to the Textile Commissioner at such rates specified by the Government on the deficiency. 3. A question has arisen for consideration of the Board whether the payment made by the Textile Mills on account of non-fulfilment of the prescribed quota of production would be allowable as deduction in the hands of the producer u/s 37 of the Income-tax Act, 1961. It is a well known fact that production of coarse cloth fetches lesser profits to producers than production of fine varieties and, in view of this, the manufacturers are not readily willing to produce popular varieties cloth required for common consumption of the weaker sections of society. The Government in these circumstances had come forward with a scheme that those who do not produce the required quantity of coarse cloth will be required to pay a levy for deficiency in production and those who produce more will be suitably rewarded by way of assistance. In view of the fact that the payment of levy is for failure to fulfill a statutory obligation and is opposed to public policy and calculated to defeat the very objective behind the scheme viz., ensuring adequate quantities of varieties of cloth to the economically weaker section of the society, the levy partakes the nature of penalty and would not be allowable as deduction u/s 37 of the Income-tax Act. The cash assistance received would, however, be includible as revenue receipt in the hands of the manufacturer. 4. Board have obtained a list of concerns which have made payment and which have received payment on the direction of the Textile Commissioner during the period from 2nd May, 1968 to 31st May, 1971, a copy of which is enclosed. A copy of the list of total amount paid and total amount received is also enclosed. 5. The Board desires that a review of the completed assessment in the cases mentioned in the list should be undertaken immediately to see that remedial action is taken to retrieve the loss of revenue, where the payment stands allowed and to include the assistance received as revenue receipt in cases it stands excluded. Consequential action in respect of surtax assessments should also be initiated. 6. A report regarding the results of the review may be sent to the Board positively by 31st January, 1976 indicating the name of the concern, the amount of disallowance/amount taxed and the resultant tax effect. Commissioners should personally ensure that no remedial action gets barred by time after the receipt of this instruction.