A payment made by a taxpayer for non-fulfillment of an export obligation under a scheme of the Textile Commissioner for the use of the trademark "sanforized" is an expense wholly and exclusively laid out for the business of the taxpayer.

JUDGMENT :

B.K. Mehta, J.

The assessment year under reference is 1968-69, the corresponding previous year being the calendar year 1967. The assessee is a public limited company having a textile mill at Ahmedabad. It debited cloth kharajat account in its trading books with an amount of Rs. 18,247 with a view to make provision for payment to the Textile Commissioner for non-fulfilment of export obligations undertaken for the use of "sanforized" trade mark. The Income-tax Officer held that the said payment was by way of penalty and, therefore, could not be considered as incidental to carrying on of the business. He, therefore, disallowed the said expenditure by his assessment order of February 25, 1970. There were other claims and contention advanced on behalf of the assessee before the Income-tax Officer with which we are not concerned in this reference. The assessee being dissatisfied with the order of the Income-tax Officer carried the matter in appeal before the Appellate Assistant Commissioner. The Appellate Assistant Commissioner was of the opinion that the amount provided was, in the facts and circumstances of the case, an expenditure incurred wholly and exclusively for the purpose of the assessee's business. He, therefore, allowed the appeal to the extent to which it related to the claim of Rs. 18,247 on account of the amount paid for non-fulfillment of the export obligations. The revenue, therefore, went in appeal before the Tribunal, which following its decision in Income-tax Appeal No. 976 (Ahd.) of 1970-71 between Income-tax Officer v. Rustam Jehangir Vakil Mills Ltd., by its order of April 27, 1973, (1977) 2 Comp LJ 13 (Guj)] held that the payment of Rs. 18,247 must be regarded as revenue expenditure laid out wholly and exclusively for the purpose of the assessee's business. At the instance of the revenue, therefore, the following question has been referred to us for our opinion :

"Whether, on the facts and in the circumstances of the case, penalty of Rs. 18,247 paid to the Textile Commissioner for non-fulfilment of the assessee's export obligation was business expenditure incurred wholly and exclusively for the purpose of the assessee's business ?"

2. Before the attempt to answers the question, it would be profitable to set out shortly the broad features of the scheme under which the assessee had undertaken the obligation to export for the use of sanforized" trade mark.

3. The assessee-company was recognised as a registered user of trade mark No.100387 (sanforized) of M/s. Cluett Peabody & Co. with the Trade Mark Registry of the Government of India. One of the conditions under which the assessee-company was recognised and registered as a user of he trade mark "sanforized" was that it would export such percentage of fabrics labeled "sanforized" as the Government of India may from time to time determine and in case in case of failure to attain such export target, the registration of the user was liable to be withdrawn. It appears that in accordance with the above stipulation for the use of the trade mark in question, the Government of India determined that during the period July, 1963, to November, 1965, the respective mills recognised and registered as users of the said trade mark had to export 5% of the value of production of Sanforized cloth produced by them during that period. It further appears that when this trade mark registration was revalidated for a further period of seven years, it was decided to increase the export obligation of the Government of India was conveyed to the assessee-company by the Government of India in the Ministry of Commerce : vide letter No. 27(1) /66-MP, dated April 30, 1966. The entire question of export obligation and its enforcement was reviewed when it was found that many mills which were recognised and registered as users or the trade mark "Sanforized" failed to fulfill their export obligation during the period ending 1965. As a result of the review it was decided to enforce the export