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TMI Blog1980 (11) TMI 25X X X X Extracts X X X X X X X X Extracts X X X X ..... f the total income: Rs. (i) Compensation paid for short packing of controlled cloth 85,411 (ii) Contribution paid for production of higher medium cloth 2,800 ------------ Total 88,211 ------------ (2) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in allowing deduction of Rs. 5,600 representing payment on account of shortfall in export performance from the computation of total income holding that such payments do not partake of the nature of penalty disallowable under s. 37 ? (3) Whether the Appellate Tribunal was right in coming to the conclusion that the entire expenses of Rs. 8,000 disallowed by the ITO as entertainment expenses were not hit by the provision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the assessee, the order of the ITO was upheld by the AAC. On further appeal by the assessee the Tribunal has allowed this item as a deductible expenditure. The ITO had also disallowed a sum of Rs. 8,000 out of the general charges on the ground that the said amount pertained to entertainment and, therefore, was hit by s.37(2B) of the Act. The AAC, on appeal by the assessee, upheld the order of the ITO. On further appeal by the assessee, the Tribunal came to the conclusion that the disallowance of Rs. 2,000 would be adequate and reasonable and, therefore, the disallowance was reduced from Rs. 8,000 to Rs. 2,000. At the instance of the Department, the Tribunal has referred the aforesaid question of law arising out of the order of the Trib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e upon decision of the Gujarat High Court in Addl. CIT v. Rustam Jehangir Vakil Mills Ltd. [1976] 103 ITR 298 in which after examining the relevant provisions of the Cotton Textiles (Control) Order, 1948, the High Court held that the amount paid by the assessee was deductible. A similar view is taken by the Madras High Court in CIT v. Vasantha Mills Ltd. [1979] 120 ITR 321. We are in respectful agreement with the view taken in the aforesaid decisions and are of the opinion that the Tribunal did not commit any error of law in holding that the amount of Rs. 85,411 paid by the assessee as compensation for shortfall in the packing of controlled cloth was deductible from the income of the assessee. Similarly, the assessee paid a sum of Rs. 2,8 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ount of shortfall in export performance. The assessee was allowed to import 63 bales of American cotton subject to the condition that it would export cloth valued at Rs. 4,11,733 by March 31, 1971. There was, however, shortfall in the export performance by a sum of Rs. 74,504 and the assessee had to pay an amount of Rs. 5,600. The learned counsel for the revenue strongly contended that this amount was paid by the assessee as a penalty and, therefore, the Tribunal committed an error in holding that this amount was also deductible from the income of the assessee. He placed reliance upon a decision of the Punjab and Haryana High Court in Cineramas v. CIT [1977] 110 ITR 762. The contention of the learned counsel for the Revenue cannot be uphe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deration the amount allowed by the Tribunal in the previous year. In CIT v. Lakhmichand Muchhal (Misc. Civil Case No. 15 of 1977, decided on 12-9-80) [since reported in [1982] 134 ITR 234), a Division Bench of this court has cited with approval the observations made by the Gujarat High Court in the aforesaid decision, as follows: (p. 235): " ...the term 'entertainment' in the context of s. 37(2B) of the Act on its true construction and meaning would include the acts or practice of receiving and entertaining the strangers and friends; but if the acts or practice of being hospitable in the sense of providing meals, drinks or other wants of guests are a part and parcel of the express or implied terms and conditions of business, trade or prof ..... X X X X Extracts X X X X X X X X Extracts X X X X
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