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1975 Supreme(Guj) 133
IN THE HIGH COURT OF GUJARAT
B.J. DIVAN, T.U. MEHTA, JJ.
Additional Commissioner of Income-Tex - Petitioner
Versus
Rustam Jehangir Vakil Mills Ltd. - Respondent
ITR No. 14 of 1994 and ITR No. 16 of 1994.
Decided on : 06-11-1975
Payment made by producer to Textile Commissioner under clause 21-C(1)(b) of the Cotton Textiles (Control) Order, 1948, is not in the nature of penalty and is allowable expenditure under section 37 of the Income-tax Act, 1961.
Headnote:
INCOME TAX - Cotton Textiles (Control) Order, 1948 - Payment made by producer to Textile Commissioner under clause 21-C(1)(b) of the Order - Whether penalty or incidental to business - Whether allowable expenditure under section 28 or 37 of the Income-tax Act, 1961.
Fact of the Case:
The assessee, a textile manufacturer, was directed by the Textile Commissioner to produce certain types of cloth. The assessee did not manufacture that type of cloth and thereafter under clause 21-C(1)(b) the assessee was called upon to pay different amounts from time to time. The assessee claimed this amount as an allowable expenditure on the ground that it was expended wholly and exclusively for the purposes of the business of the assessee.
Finding of the Court:
The Court held that the payment made by the assessee to the Textile Commissioner under the provisions of clause 21-C(1)(b) of the Cotton Textiles (Control) Order was not in the nature of penalty and was incidental to the carrying on of the assessee's business. The Court further held that the payment was business expenditure allowable under section 37 of the Income-tax Act, 1961.
Issues: 1. Whether the payment made to the Textile Commissioner by the assessee for contravention of the directions given by the Textile Commissioner was in the nature of penalty and not incidental to the carrying on of the assessee's business ? 2. Whether, on the facts and in the circumstances of the case, the payment of Rs. 91,387 made to the Textile Commissioner under the provisions of clause 21-C(1)(b) of the Cotton Textiles (Control) Order, 1968, was business expenditure allowable under section 28 or under section 37 of the Act ?
Ratio Decidendi: 1. The Court held that the payment made by the assessee to the Textile Commissioner under the provisions of clause 21-C(1)(b) of the Cotton Textiles (Control) Order was not in the nature of penalty and was incidental to the carrying on of the assessee's business because: a) The Cotton Textiles (Control) Order, 1948, and the scheme set out in clauses 21-A and 21-C give an option to the producer concerned to adopt any one of the three courses and in the event of his adopting the course of not packing the whole or part of the minimum quantity specified in the direction of the Textile Commissioner, he has to make a payment. b) The option has to be exercised by him on his own responsibility and presumably he will do so in the light of the exigencies of his own business. c) The particular manufacturer may not have proper machinery for the manufacture of the cloth which the Textile Commissioner directs him to produce. d) Under these circumstances, his failure of produce the whole or part of the minimum quantity specified in the direction issued by the Textile Commissioner may be purely because of technical or technological reasons which are entirely beyond his control. e) Hence, there is no question of any amount paid as penalty or any amount paid being akin to penalty as was the case before the Madras High Court in the Coffee Board case. 2. The Court held that the payment was business expenditure allowable under section 37 of the Income-tax Act, 1961, because: a) The amount was spent by the manufacturer concerned for the purpose of carrying on its business and it was laid out and expended wholly and exclusively for the purposes of the business so that from the commercial point of view, he would carry on the business of manufacturing cotton cloth under the scheme set out in clauses 21-A and 21-C of the Cotton Textiles (Control) Order. b) Hence, the amount spent by the manufacturer would fall fairly and squarely within section 37(1) of the Income-tax Act, 1961, and it is not necessary for us to resort to section 28 as the Tribunal has done.
Final Decision: The Court answered the questions referred to it as follows: Question No.(1). 17.1. The payment was not in the nature of penalty and was incidental to the carrying on of the assessee's business. Question No.(2). 17.2. The payment was business expenditure allowable under section 37 of the Income-tax Act, 1961. The Commissioner was directed to pay the costs of the reference to the assessee.
JUDGMENT :
B.J. Divan, J.
In both these cases the Tribunal, at the instance of the revenue, has referred identical questions of law. As a matter of fact, the Tribunal first decided the case out of which Income-tax Reference No. 14 of 1974 arises and having decided that matter, the Tribunal proceeded to follow that decision in the matter out of which Income-tax Reference No. 16 of 1974 arises. The identical questions have been thereafter referred to us for our decision. The questions are :
"(1) Whether the payment made to the Textile Commissioner by the assessee for contravention of the directions given by the Textile Commissioner was in the nature of penalty and not incidental to the carrying on of the assessee's business ?
(2) Whether, on the facts and in the circumstances of the case, the payment of Rs. 91,387 made to the Textile Commissioner under the provisions of clause 21-C(1)(b) of the Textile Commissioner under the provisions of clause 21-C(1)(b) of the Cotton Textiles (Control) Order, 1968, was business expenditure allowable under section 28 or under section 37 of the Act ?
2. In Income-tax Reference No. 16 of 1974, in the second question the amounts of payments made in the accounting period relevant for the different assessment years have been substituted but barring that difference arising from the particular facts of that case, the principle involved in both the cases is the same. Hence, we shall dispose of both these references by this common judgment.
3. In Income-tax Reference No. 14 of 1974, we are concerned with assessment year 1969-70, the relevant accounting year being the financial year ending on March 31, 1969. The assessee is a limited company manufacturing cotton textiles and a direction was issued by the Textile Commissioner under the provisions of the Cotton Textiles (Control) Order, directing the assessee to produce certain types of cloth or what is known as produce and pack minimum quantity of the particular type of cloth as set out in the direction. The assessee did not manufacture that type of cloth and thereafter under clause 21-C(1)(b) the assessee was called upon to pay different amounts from time to time and in the year of account relevant to the assessment year 1969-70, the assessee paid an aggregate amount of Rs. 91,387 to the Textile Commissioner. The assessee claimed this amount of Rs. 91,387 as an allowable expenditure on the ground that it was expended wholly and exclusively for the purposes of the business of the assessee. The Income-tax Officer did not allow this deduction and thereafter the matter was taken in appeal by the assessee. The Appellate Assistant Commissioner allowed the claim of the assessee and thereafter the revenue took the matter in further appeal to the Tribunal. The Tribunal confirmed the decision of the Appellate Assistant Commissioner and held that the payment was an allowable adjustment while determining the profits and gains from business under section 28 of the Income-tax Act, 1961. Thereafter, at the instance of the revenue, the questions hereinabove set out have been referred to us for our opinion,
4. In Income-tax Reference No. 16 of 1974, we are concerned with three assessment years, namely, 1969-70, 1970-72. The assessee in this case is a limited company running a textile mill and manufacturing cotton cloth. The assessee was directed by the Textile Commissioner to pack specified variety of controlled cloth. This was not done the hence by different orders the Textile Commissioner directed the assessee-mills to pay certain amounts, namely, Rs. 1,62,283 in the assessment year 1969-70, Rs. 2,47,283 in the assessment year 1970-71 and Rs. 2,34,610 in the assessment-year 1971-72. The assessee claimed these amounts in the relevant assessment years as deductible allowances. The Income-tax Officer did not allow the expenditure. The Appellate Assistant Commissioner on appeal confirmed the orders of the Income-tax Officer. The assessee preferred further appeals before the Trib
