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TMI Blog1976 (11) TMI 50X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assessee's business" and was, therefore, allowable expenditure under section 37 of the Income-tax Act, 1961. The Tribunal held that breaches of contractual obligations were not incidents of business and, therefore, the amount paid by the assessee as penalty was not allowable expenditure. At the instance of the assessee, the following question has been referred to us for our opinion : "Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the sum of Rs. 4,300 paid by the assessee by way of penalty to the East Punjab Motion Pictures Association was not deductible as business expenditure under the Income-tax Act, 1961 ?" The learned counsel for the assessee invited our attention to paragraph 16(a) of the rules and regulations of the East Punjab Motion Pictures Association which prohibits every distributor-member of the association from supplying films to a non-member exhibitor and vice versa, and argued that in order to survive in the business of an exhibitor of films, the assessee was bound to seek reinstatement of membership by paying the penalty. The payment of penalty was essential to enable the assessee to continue to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nded wholly and exclusively for purposes of the assessee's business". Negativing the assessee's claim, Leach C.J. and Lakshmana Rao J., after referring to Inland Revenue Commissioners v. E. C. Warnes Co. [1919] 12 TC 227 (KB) and Inland Revenue Commissioners v. Alexander von Glehn and Co. [1920] 12 TC 232 (CA), said-See [1943] 11 ITR 454, 462 (Mad) : "In the present case, the assessee was not fined for a breach of law, but was made to pay damages for a breach of the contract entered into. The assessee's action in disregarding the undertaking given was palpably dishonest and we are of the opinion that the award of damages which followed did not constitute an expenditure falling within section 10(2)(xii). It was not incidental to the trade." The decision in Mask Co.'s case [1943] 11 ITR 454 (Mad) was quoted with implicit approval by the Supreme Court in Haji Aziz Abdul Shakoor Brothers v. Commissioner of Income-tax [1961] 41 ITR 350 (SC). In Inland Revenue Commissioners v. E. C. Warnes Co. [1919] 12 TC 227 (KB), a mitigated penalty of pound 2,000 was levied for breaches of certain orders and proclamations under the Customs (War Powers) Act, 1915. The amount was claimed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the law which they have committed in that trading." In Haji Aziz and Abdul Shakoor Bros v. Commissioner of Income-tax [1961] 41 ITR 350 (SC) the Supreme Court held that a fine paid by the assessee under the Customs Act as an alternative to confiscation of the goods imported by him was not "expenditure laid out or expended wholly and exclusively for the assessee's business". After referring to several decided cases including Mask and Co. v. Commissioner of Income-tax [1943] 11 ITR 454 (Mad), Inland Revenue Commissioners v. E. C. Warnes Co. [1919] 12 TC 227 (KB) and Inland Revenue Commissioners v. Alexander von Glehn Co. (1920] 12 TC 232 (CA), the Supreme Court said-See [1961] 41 ITR 350, 359 (SC) : "A review of these cases shows that expenses which are permitted as deductions are such as are made for the purpose of carrying on the business, i.e., to enable a person to carry on and earn profit in that business. It is not enough that the disbursements are made in the course of or arise out of or are concerned with or made out of the profits of the business but they must also be for the purpose of earning the profits of the business. As was pointed out in Alexander von Glehn' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cts were that the assessee who was carrying on the business of extracting rosin and selling it, entered into an agreement with the Tehri Garhwal State for extracting rosin according to certain terms and conditions. If he failed to observe the conditions, he was to pay compensation. The assessee was obliged to pay a sum of Rs. 5,000, said to have been imposed by way of fine, to the Tehri Garhwal State for committing breach of some of the terms of the agreement. They claimed the sum as allowable expenditure under section 10(2)(xv) of the Indian Income-tax Act, 1922. Falshaw and Kapur JJ. held that the assessee was not entitled to claim the deduction. The decision of the Madras High Court in Mask Co. v. Commissioner of Income-tax [1943] 11 ITR 454 (Mad) was followed. Reference was also made to the observations of Rowlatt J. and Lord Sterndale M.R. which we have already extracted. Learned counsel for the assessee relied upon Commissioner of Income-tax v. Royal Calcutta Turf Club [1961] 41 ITR 414 (SC), Central Trading Agency v. Commissioner of Income-tax [1965] 56 ITR 561 (All), Govind Choudhury and Sons v. Commissioner of Income-tax [1971] 79 ITR 493 (Orissa) and Additional Commis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h Court held that it was not admissible deduction under section 10(2)(xv), but could be treated as a loss deductible from the income itself under section 10(1) of the 1922 Act as it was a payment integrally connected with the carrying on of the business of supply of paddy. It was also a clear case of a loss in trading. In Additional Commissioner of Income-tax v. Rustam Jehangir Vakil Mills [1976] 103 ITR 298 (Guj), the assessee had the option to pack and supply a minimum quantity of cloth as directed by the Textile Commissioner or pack and supply cloth in excess of the minimum quantity specified or to pack and supply less than the minimum quantity specified. For excess supply he was entitled to cash payment by way of assistance from the Textile Commissioner. If he supplied less he would have to compensate the Textile Commissioner at prescribed rates. The assessee who packed and supplied less than the minimum specified quantity of cloth had to pay to the Textile Commissioner certain amounts which he claimed as deductible expenditure. The Gujarat High Court accepted the claim of the assessee. They held that there was no question that the amount was paid by way of penalty or that th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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