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TMI Blog1993 (10) TMI 1X X X X Extracts X X X X X X X X Extracts X X X X ..... on 256(1) of the Income-tax Act for the opinion of the High Court in that reference were these : "1. 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 ? 2. Whether, on the facts and in the circumstances of the case, the payment of Rs. 1,70,766 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 under section 28 of the Income-tax Act, 1961 ? 3. Whether the payment of Rs. 5,17,781 made by the assessee to the Government for non-fulfilment of its obligation to export specified quantity of sanforized cloth is allowable as payment incidental to carrying on of the assessee's business ?" The facts which led to the reference of the said questions for the opinion of the High Court were briefly these: A textile mill was being run by Mihir Textiles Ltd., Ahmedabad the assessee, during the accounting year 1971-72 previous to the assessment year 1972-73. The assessee, being a manuf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ills Ltd.[1976] 103 ITR 298 (Guj).It also answered question No. 3 against the Revenue and in favour of the assessee following its earlier decision in CIT v. Tarun Commercial Mills Co. Ltd. [1977] 107 ITR 172 (Guj). The reference was decided accordingly by the High Court by its judgment rendered on November 18, 1976. The Revenue, which was not satisfied with the said judgment of the High Court, has filed the present appeal in this court on a certificate of fitness obtained from the High Court to appeal to this court. It was not disputed before us that if the answers given by the High Court in Rustam Jehangir Vakil Mills' case [1976] 103 ITR 298 (Guj) are sustainable, the answers given to questions Nos. 1 and 2 by the High Court in the judgment under the present appeal also become sustainable. So also, it was not disputed before us that if the answer given by the High Court in Tarun Commercial Mills' case [1977] 107 ITR 172 (Guj), followed in answering question No. 3 in the judgment under the present appeal is sustainable, the answer to question No. 3 given by the High Court in the judgment under appeal as well becomes sustainable. This situation leads us to the necessity of examin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenditure of that year on the plea that it was an expense wholly and exclusively laid out for the purpose of its business. The Income tax Officer refused to allow the deduction so claimed. However, in the appeal of Rustam Mills, the Appellate Assistant Commissioner, allowed the deductions claimed and that order was confirmed by the Tribunal in the further appeal carried before it by the Revenue. In the reference carried before the High Court at the instance of the Revenue, the aforesaid questions were answered against it by the High Court, as already stated. The answers so given to the questions by the High Court were based on its view that the amount paid by Rustam Mills to the Textile Commissioner was neither penalty nor something akin to penalty paid for infraction of any law or public policy inasmuch as that amount was paid by Rustam Mills by exercising its option under clause 21C(1)(b) of the Control Order, 1948, which formed part and parcel of a statutory scheme. Coming to Tarun Mills' case [1977] 107 ITR 172 (Guj), the question referred for the opinion of the High Court at the instance of the Revenue was (at page 174) : "Whether, on the facts and in the circumstances of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... return of the said accounting year. But, the Income-tax Officer refused to allow the said amount of deduction claimed as business expenditure of Tarun Mills during the relevant year. In the appeal of Tarun Mills, the Appellate Assistant Commissioner reversed the order of the Income-tax Officer and allowed deduction of that amount as its business expenditure. The Revenue's appeal therefrom filed before the Tribunal did not succeed. At the instance of the Revenue, the question adverted to earlier, having been referred to the High Court, it was answered against the Revenue and in favour of the Tarun Mills, as stated earlier. In giving that answer, the High Court took the view that even if the bond referred to the amount payable by Tarun Mills for non-fulfilment of its export obligation as "penalty" such amount being payable at the option of Tarun Mills for non-fulfilment of its export obligation under the scheme, it could not be regarded as penalty or something akin to penalty payable for any breach of law or public policy, for the very scheme under which that amount was payable by Tarun Mills to the Government provided for such payment at the option of the concerned mills. As the an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ole of the coffee outside India. When the assessee was found to have committed the breach in performing his export obligation the assessee paid liquidated damages to the Coffee Board as provided for in the terms of the contract. The assessee, thereupon, claimed that amount as deduction under section 10(2)(xv) of the Indian Income-tax Act, 1922. The Madras High Court which examined the nature of the payment made by the assessee found that that payment was akin to penalty, for it was paid for infraction of public policy underlying the Coffee Market Expansion Act, 1942, which was left to be enforced by the Coffee Board. That amount, it was found, was not an amount spent in the assessee's normal trading activity and not an amount paid as an incidental expenditure on account of business. In fact, this is what the High Court had to say in the matter : The breach of its contractual obligations to the Board was not in the normal course of business, and the liability the assessee had to discharge for such breach was not incidental to the trading activities that it carried on. Hence, deduction of the said amount claimed by the assessee as business expenditure was not accepted by the High Cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f clause 21A to any producer to pack a specified quantity of cloth during the period specified in the directions-. . . . (b) such producer may, in lieu of packing the whole or part of the minimum quantity of cloth specified in the said direction, make payment to the Textile Commissioner in respect of the deficiency at such rates as may be specified by the Central Government and within such time as may be determined by the Textile Commissioner. (2) All payments received from producers under paragraph (b) of sub-clause (1) shall, as far may be, be utilised towards payments, if any, to producers under the said paragraph (a)." The Textile Commissioner's direction issued to the textile mills to produce and pack a specified quantity of standard cloth was in exercise of the powers conferred upon him under the said clauses. Rustam Mills instead of complying with the directions as to production and packing of required quantity of standard cloth availed of the option of making payment as provided under clause 21C(1)(b) and paid to the Textile Commissioner a sum of Rs. 91,387. It is this amount which was claimed by Rustam Mills as deduction under section 37 of the Income-tax Act, 1961, in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... export target prescribed for them or to pay to the Government the sum or sums calculated at the rate of 10 paise per linear yard to cover up the shortfall in the export obligations. The option envisaged in the bond entered into between the parties clearly indicates that the option was with the manufacturers and that option may be availed of for a variety of reasons in the interest of commercial expediency, The export obligations which the textile manufacturers may have incurred for the use of trade mark 'Sanforized' may not be fulfilled for various factors over which the manufacturers may not have control. The trend and competition in the international market, the quality and quantity of the goods produced by the manufacturers may be some of the factors which may ultimately have a bearing on the question of achieving the target. In the interest of business, textile manufacturers opt for payment of compensation or damages to cover up the shortfall in the export obligations. It is no doubt true that the word used in the scheme which we have set out above for the sum to be paid in default of fulfilling the export obligation has been described as a penalty but in the ultimate analysis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able under section 37 of the Income-tax Act, as an incident of business laid out and expended wholly and exclusively for the purposes of the business. However, such payment of the assessee is one which is made in exercise of the option given to such assessee by the law or the statutory scheme and there arises no need for the assessing authority to go into the question whether the payment could be regarded as one made as a measure of business expediency, for it cannot ignore the fact that the law or the statutory scheme enables incurring of such expenditure in the course of the assessee's business. As is pointed out by us already, the High Court has answered the questions referred in Rustam Mills' case [1976] 103 ITR 298 (Guj) as well as in Tarun Mills' case [1977] 107 ITR 172 (Guj), taking into consideration the facts that the payments concerned therein were made in compliance with the law or the scheme concerned therein and not for committing any breach or infraction of the law or statutory scheme. Therefore, the judgment of the High Court under the present appeal being rendered following its earlier judgments in Rustam Mills' case [1976] 103 ITR 298 (Guj) and Tarun Mills' case [ ..... X X X X Extracts X X X X X X X X Extracts X X X X
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