Representation of Cotton Mills Federation (ICMF). - Income Tax - 1123/CBDT

INSTRUCTION NO. 1123/CBDT Dated : December 13, 1977 Section(s) Referred: 37(1) Statute: Income - Tax Act, 1961 It has been represented by the Indian Cotton Mills Federation (ICMF) that the payments made by textile mills to the Federation and other textile mills for transferring the obligation to produce controlled cloth may be allowed as a deduction under section 37(1) of the Income-tax Act, 1961. 2. Various statutory and non-statutory schemes for the production of controlled cloth were in operation since May, 1968. In May, 1968, the Textile Commissioner fixed the quota of controlled cloth to be packed by the various textile under the Cotton Textile (Control) Order, 1948. In case any mill failed to produce the quota, it was required to make payment to the Textile Commissioner an amount calculated at specified rates in respect of the deficiency. This scheme was replaced with effect from June, 1971 by a voluntary scheme formulated by ICMF. Under this scheme mills which had produced controlled cloth were paid subsidy by Indian Cotton Mills' Federation out of a fund called Consumer Subsidy Fund created by them. All composite mills were required to contribute to this fund at specified rates. 3. In January 1973, a new scheme was introduced by I.C.M.F. under which all mills were required to produce certain quantities of controlled cloth. The mills were, however, allowed to transfer their obligation of production to other mills. If the quota allotted is not produced by either or both the mills, the transferor mill was required to contribute to the Consumer Subsidy Fund of the Federation an amount calculated with reference to the shortfall. Again in April, 74, a statutory scheme was introduced and the Textile Commissioner allocated the quota of controlled cloth to be manufactured to the various mills but mills were permitted to transfer their obligation to other mills. The transfer was to be regulated by the Federation. Under this scheme, no payment to the consumer subsidy fund was to be made on account of any shortfall. 4. The board in its instruction No.522 (F.No.204/11/72-ITA.II), dated 12th March, 1973 had already clarified that the contributions to the Consumer Subsidy fund of the Federation should be treated as expenditure deductible u/s.37(1) of the Income-tax Act, 1961 and the subsidies received by the mills would be revenue receipts in their hands. 5. The present instruction is with reference to the schemes in force from January, 1973, whereby the textile mills were permitted to transfer their obligation of production of controlled cloth to other mills and such transfers were regulated by the Federation. Under this scheme, the transferor mills were required to register the transfer with the Federation and to pay registration fee to them. The transferor mills were also required to make certain payments to the transfer mills as per separate agreements in consideration of transfer of obligations. 6. After considering the representation of the Federation, it has been decided by the Board that the payments made by the transferor textile mills of registration fee to the ICMF and for the transfer of obligations of the production of controlled cloth to the transferee mills are expenditure laid out wholly and exclusively for the purposes of business and as such are allowable as deduction u/s.37(1) of the Income-tax Act, 1961. Further, the payments received by the transferee textile mills for undertaking the production of controlled cloth on behalf of the transferor mills would be revenue receipts in their hands and would be taxable as business income.