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SUPREME COURT OF INDIA
(Gujarat High Court)
B.P. Jeevan Reddy, N. Venkatachala
CIT, GUJARAT-I, AHMEDABAD, APPELLANT
Versus
AHMEDABAD COTTON MFG. CO. LTD. AND OTHERS, RESPONDENTS.
Civil Appeal Nos. 2123, 2149, 2171-72, 2226, 2241 and 2243 of 1977
decided on October 15, 1993.
Income Tax Act, 1961 - Section 256 – Circumstances evidence – Whether payment made to the Textile Commissioner by assessed for contravention of direction given by Textile Commissioner was in nature of penalty and not incidental to the carrying on of the assesses business – Claim of compensation - This appeal arises from judgment in Income Tax Reference decided by the Gujarat High Court - Questions referred by the Tribunal under Section 256(1) of Act for opinion of High Court in that Reference, were these - Whether, the payment made to the Textile Commissioner by for contravention of direction given by Textile Commissioner was in the nature of penalty and not incidental to carrying on of business - Whether on facts and in circumstances of the case payment Textile Commissioner under the provisions of clause 21- Cotton Textiles amended from time to time, was business expenditure allowable under Section 28 of Income Tax Act, 1961 – Held, Therefore, what needs to be done by an assessing authority under I.T. Act, 1961 in examining claim of an that payment made by such was a deductible expenditure under Section 37 of the I.T. Act although called penalty is to see whether law or scheme under which amount was paid required such payment to be made, as penalty or as something akin to penalty that is imposed by way of punishment for breach or infraction of law or statutory scheme - If the amount so paid is found to be not a penalty or something akin to penalty due to fact that the amount paid by assessed was in exercise of the option conferred upon him under the very law or scheme concerned assessing authority has to regard such payment as business expenditure of assessed allowable under Section 37 of the I.T. Act, as an incident of business laid out and expended wholly and exclusively for the purposes of the business - However, if such payment of assessed is that which is made in exercise of the option given to such assessed by the law or statutory scheme there arises no need for assessing authority to go into the question whether the payment could be regarded as that made as a measure of business expediency, for it cannot ignore the fact in that the law or the statutory scheme enables incurring of such expenditure in course of assesses business - In 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 it is the substance of the transaction between the parties which has to be considered for purposes of determining what is the nature and import of the scheme and the bond executed in pursuance thereof - Exercise of option, as stated above, may be the result of the commercial expediency as well as certain extraneous factors over which the manufacturers might not have the control and, therefore, in view of the scheme and the bond with which we are concerned here, it cannot be said that there is a breach of a public policy which may render the payment, agreed to be made for the default arising as a result of the breach, as one akin to penalty. Under no circumstances, without violence to the language, it can be said to be infraction of the law – Appeal dismissed
JUDGMENT
The Judgment of the Court was delivered by
VENKATACHALA, J. - These are the appeals of the Revenue arising from different judgments of the Gujarat High Court delivered on References made at its instance under Section 256(1) of the Income Tax Act, 1961, to be referred to as the I.T. Act, on obtaining certificates of fitness to appeal to this Court. As the decision to be rendered by us in Civil Appeal No. 2149 (NT) of 1977 could form the basis for disposal of the remaining appeals, we shall proceed to consider that appeal and decide it at the first instance.
Civil Appeal No. 2149(NT) of 1977 - C.I.T. v. Mihir Textiles Ltd. (1977 Tax LR 586 : 104 ITR 167 (Guj HC)) :
2. This appeal arises from the judgment in Income Tax Reference No. 175 of 1976 decided by the Gujarat High Court. The questions referred by the Tribunal under Section 256(1) of the I.T. Act for 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 assessees 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 21-C(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 the payment incidental to carrying on of the assessees business ?
3. Facts which led to the reference of the said questions, for 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 manufacturer of cotton textiles, had to comply with the directions issued from time to time by the Textile Commissioner under the provisions of the Cotton Textiles (Control) Order, 1948, hereinafter referred to as the Control Order, as amended and then in force, in the matter of producing and packing minimum quantity of specified type of cloth by it during the accounting year. The assessee instead of producing and packing the minimum quantity of specified type of cloth as required by the aforesaid directions of the Textile Commissioner, paid to the Textile Commissioner Rs 1,70,766 in exercise of the option available to it under clause 21-C(1)(b) of the Control Order. Thereafter, when the assessee filed its income tax return relating to the accounting year 1971-72 with the jurisdictional Income Tax Officer (ITO), it claimed deduction of the said amount out of its profits, as business expenditure. So also, the assessee, which had not fulfilled its export obligation under a bond entered into as regards exporting certain quantity of sanforized cloth and had paid to the Textile Commissioner (sic Government) Rs. 5,17,781 for non-fulfilment of that obligation, in exercise of its option available under the terms of the bond, claimed deduction of that amount as well as in its income tax return of the accounting year 1971-72 as its business expenditure. The ITO who made the assessment order in respect of the said accounting year, refused to allow the claimed deductions, taking the view that the said amounts paid by the assessee to the Commissioner of Income Tax were not deductions which could be allowed as items of its business expenditure. In appeal preferred by the assessee against that assessment order, the Appellate Assistant Commissioner, allowed the said amounts claimed by the assessee as items of its business expenditure in respect of its accounting year 1971-72 and made an order allowing the appeal. Revenues appeal filed against that appe
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