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TMI Blog1976 (3) TMI 20X X X X Extracts X X X X X X X X Extracts X X X X ..... 8. The Income-tax Officer disallowed this claim without assigning any reasons. The Appellate Assistant Commissioner in appeal against the said disallowance affirmed the order of the Income-tax Officer in view of his earlier order for the assessment year 1969-70, where a similar disallowance was upheld for the reasons stated therein. In further appeal to the Tribunal against the said disallowance, the Tribunal, following its earlier decision in Income-tax Officer v. Rustam Jehangir Vakil Mills Ltd., wherein the Tribunal had an occasion to consider an incidental question, allowed the deduction. In view of that decision, the Tribunal upheld the assessee's claim for the first deduction. The second deduction was on account of the amount paid by the assessee-company for non-fulfilment of its export obligations which were entailed on the assessee-company under the special permission granted by the Textile Commissioner, Bombay, bearing No. 11(405) 65-MP, dated August 7, 1965, and the bond executed by the assessee-company in favour of the President of India for incorporating automatic looms. The assessee-company was required to pay the said amount of Rs. 35,193 which was stated to be a pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d rate of 11 paise per metre was required to pay Rs. 35,192.52 to the Government of India to cover the aforesaid shortfall which the assessee-company did pay in the relevant accounting year. It is this amount which the assessee-company has claimed as business expenses before computation of its profits. This claim was negatived by the Income-tax Officer on the ground that the assessee-company by not honouring its export commitments had acted in contravention of its public policy, namely, of earning foreign exchange so as to recoup the expenditure towards foreign exchange incurred earlier by import of the machinery of automatic looms. The Income-tax Officer, therefore, disallowed the claim treating this amount as akin to penalty. In appeal, the Appellate Assistant Commissioner confirmed the view of the Income-tax Officer and disallowed the claim. The assessee-company, therefore, carried the matter in further appeal before the Tribunal. The Tribunal in its detailed order considered the various judicial pronouncements on this point of different High Courts and the Supreme Court and relying on the decision of the Allahabad High Court in Central Trading Agency v. Commissioner of Income-t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The claim on this count also met the same fate as in the case of the other two deductions before the Income-tax Officer and the Appellate Assistant Commissioner. However, before the Tribunal the assessee-company succeeded as the Tribunal was of the opinion that the said claim should be allowed as a revenue deduction in computing the total income of the assessee. The following three questions have, therefore, been referred to us at the instance of the revenue. " Whether, on the facts and in the circumstances of the case, the payment of Rs. 3,15,674 made to the Textile Commissioner under the provisions of the Cotton Textiles (Control) Order, 1948, was an allowable business expenditure under section 37 or section 28 of the Act of 1961? (2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law, in holding that the payment of Rs. 35,193 by the assessee-company was an allowable expenditure under section 37 or section 28 of the Act of 1961? (3) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law, in allowing the deduction of Rs. 10,910 as business expenditure under section 37 or under section 28 of the Act o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as the same was not incurred by the assessee-company in its character of trader. The exaction of the amount in question and its consequent payment by the assessee-company under the special permit granted by the Textile Commissioner and the bond executed by the assessee-company in favour of the President of India in pursuance of the said special permit was not a payment of mere damages for breach of contract, though it may not be exactly in the nature of penalty paid under the terms of a statute for contravention of any statutory provisions. None-the-less it was a payment akin to penalty for contravention of public policy enunciated by the Government of India and implemented by the Textile Commissioner in the matter of import of automatic looms by making it obligatory on the importer to export a prescribed quantity of cloth manufactured on the automatic looms so imported and the looms already existing. The above contentions of the revenue were sought to be repelled on behalf of the assessee-company by urging that in the ultimate analysis can this payment be equated to a penalty entailed or imposed for infraction of a statute? In the submission of the assessee-company, there is no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns by the Indian Cotton Mills' Federation, Bombay. The position regarding export obligations of the mills-companies on automatic looms installed under any of the schemes framed in 1956, 1959 and 1963 has been clarified in the following terms, the gist of which has been set out in the report of the Ahmedabad Millowners' Association for the year 1964 at item No. 70 at page 56: " In a circular letter addressed to member-associations on the 26th June, 1964, the Indian Cotton Mills' Federation, Bombay, again clarified the position regarding the export obligation on automatic looms installed under any of the schemes of 1956, 1959, 1963, for installation of such looms for export as under: (1) 50% of production (i.e., 13,333 yds. per loom per annum) for 5 years if imported automatic looms are installed. (2) 33 1/3% of production (i.e., 8,888 yds. per loom per annum) for 5 years if indigenous automatic looms are installed. (3) In addition to the above, mills will be required to export at least 50% of the average quantity of cloth exported by them during the basic years (viz., 1959, 1960 and 1961)." It should be noted that the corresponding quantity of the cloth manufactured on aut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. They cannot be deducted if they fall on the assessee in some character other than that of a trader. An expenditure is not deductible unless it is a commercial loss in trade and a penalty imposed for breach of the law during the course of trade cannot be described as such. If a sum is paid by an assessee conducting his business, because in conducting it he has acted in a manner which has rendered him liable to penalty for an infraction of the law, it cannot be claimed as a deductible expense, as it cannot be called a commercial loss incurred in carrying on his business. Infraction of the law is not a normal incident of business" An attempt has been made on behalf of the revenue to impress upon us that the nature of payment has been described by both the parties to the bond as penalty. We do not think that we can decide the nature of the payment by its mere description by the parties. In order to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e payment for infraction of any provision of law. In fact we have not been pointed out any provision in the Essential Supplies (Temporary Powers) Act, 1946, which empowers the Central Government to link up the export obligation with the permission to import machinery from abroad. Consequently, there cannot be any provision in the Cotton Textiles (Control) Order, 1948, issued in pursuance of the powers under the parent Act of 1946. An attempt was, therefore, made to persuade us that when the Textile Commissioner had a power under clause 12 of the aforesaid Order to permit a person to acquire or instal any power-loom, it necessarily implies a power to give a qualified permission as the Textile Commissioner has undoubtedly got a power to grant an absolute permission. We do not think that this attempt of the revenue is well-founded because the Textile Commissioner has merely required the assessee-company to execute a bond in the form and manner prescribed in favour of the President of India to cover the shortfall in export at the rate of 11 paise per metre. On the plain reading of this condition No. 6 in the special permit, we do not find that the liability to pay a sum calculated at 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ence. The facts before the Madras High Court in Senthikumara's case [1957] 32 ITR 138 (Mad) were that the assessee before the Madras High Court was a firm carrying on business in coffee, cardamoms, etc. During the assessment year 1944-45, the assessee under contracts entered into with the India Coffee Board, Delhi, purchased 12,390 cwt. of coffee for export to the Middle East and Australia. In addition, it also purchased from other export licensees 2,303 cwt. of coffee which was intended for export to the said countries. The price of coffee fixed by the India Coffee Board on the export quota was far below the local price. In case of failure to export the coffee so purchased, clause 8 of the contract in that case provided three remedies to the Board, namely, (a) to recover a fixed measure of damages at Rs. 20 per cwt. to be paid to the surplus pool; (b) to export an equivalent by weight of coffee purchasing the same from the pool and to recover the loss incurred in the transactions from the buyer. The decision of the Controller in the matter of price at which such coffee was purchased and sold and in the matter of fixing the loss was final; and (c) to call upon the buyer to restore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s in some sense connected with the trade, for it may be only remotely connected with the trade, or it may be connected with something else quite as much or even more than with the trade. Only such losses can be deducted as are connected in the sense that they are really incidental to the trade itself. It is not enough that the disbursement is made in the course of, or arises out of, or is connected with, the trade or is made out of the profits of the trade. It must be made for the purposes of earning the profits." The Division Bench of the Madras High Court thereafter applied these tests to the facts and circumstances of the case before it. It would be profitable to set out the relevant considerations which prevailed with the Division Bench of the Madras High Court to treat the breach made by the assessee-company before it as a wilful and deliberate violation of its obligation to export the quota of coffee purchased from the India Coffee Board and selling it in the International market as a contravention of the provisions of its licence. This is what the Division Bench of the Madras High Court has considered before arriving at the decision in the case before it that the nature of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ras High Court spelt out from the scheme contained in the Coffee Market Expansion Act (Act VII of 1942) that there was a statutory basis for the control by the India Coffee Board over the sales of coffee whether for ultimate export out of India or for sale within India. The India Coffee Board was empowered to regulate and control sales of coffee produced in India in the interest of the national economy of the country. In order to effectuate that policy, the Board was empowered to control and regulate the sales of coffee produced in India. According to section 14 of the Coffee Act, 1942, every owner of land planted with coffee plants was required to be registered as an owner in respect of such estate owned by him, and by section 17 no registered owner was entitled to sell or contract to sell in the Indian market coffee from any registered estate if by such sale the internal sale quota allotted to that estate is exceeded. By section 20 the Board was empowered to grant authorisation to export coffee from India in the prescribed manner and in the prescribed cases. By section 22 the Board was empowered, with the previous sanction of the Central Government, to allot to such registered es ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee-company to import machinery from abroad. We do not think that this reliance is justified because in the first place there was no public policy of compulsory export for all the mill-companies. The schemes of import of automatic looms in 1956, 1959 and 1963, clearly indicate that the Government of India wanted to encourage a voluntary effort by the mill-companies intending to rationalise their manufacturing activities by importing and installing automatic looms to export the cloth manufactured on such looms as well as the existing looms. It is only with a view to encouraging the voluntary efforts in that direction that while permitting the import of automatic looms from abroad, the Textile Commissioner laid down certain conditions enjoining the export of a prescribed quantity of cloth manufactured by the importing textile mills and also prescribing a certain amount of damages in case of default in achieving the target so prescribed. We are afraid we cannot compare this scheme before us in the present reference with the scheme which we find in the Coffee Market Expansion Act (Act VII of 1942). As a matter of fact, the damages agreed to be paid was something which was contempl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble for the shortfall in achieving the export target the fulfilment of which depended on the competition in the international market, the quality of the goods to be exported, the reputation and standing of the manufacuring unit, so on and so forth. The parties did contemplate when they ascertained and fixed the maximum sum to be paid in case of the default of carrying out the entire obligation of export commitment that the said amount was the loss to which the assessee-company would be exposed in case of its default. We should also emphasise the fact that the assessee-company had achieved 90% of its target and out of the total obligation of exporting 32 lakhs and odd metres of cloth it had in fact exported actually 29 lakhs and odd metres of cloth. We do not think, therefore, that the revenue was right when it contended that since there is violation of the public policy of the Government of India to recoup itself in the foreign exchange, the exaction of the payment, though under the bond, should be considered as one akin to a penalty. The second question, which has been referred to us, therefore, should be answered in the affirmative and in favour of the assessee-company. That ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the use of the trade mark "sanforized", and in course of that trade it was required to furnish bank guarantee to the Government securing payment which the assessee-company would be required to make to cover the shortfall in the export target agreed between the parties for the permission for the use of trade mark "sanforized". It was really for the purpose of carrying on the business of foreign trade in order to fulfil the export target that the assessee-company was required to furnish bank guarantee. As the Supreme Court observed in Haji Aziz Abdul Shakoor Bros.' case [1961] 41 ITR 350 (SC) the expenses were laid out for the purpose of carrying on business and earning profits. The entire reasoning which we have indicated above while answering question No. 2 applies a fortiori in the determination of question No. 3 about the expenses incurred for furnishing bank guarantee. Unless the assessee-company could furnish a bank guarantee securing payment to be made by it for its default to fulfil the export commitments, it could not carry on the trade of export of cloth. In that view of the matter, therefore, we think that we must answer question No. 3 in the affirmative and in favou ..... X X X X Extracts X X X X X X X X Extracts X X X X
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