The payment for assignment of the right to consume electricity was held to be a business expenditure under Section 37 of the Act, as it was in the interest of the Company for the purposes of business.

( 1 ) AT the instance of the Revenue, the Income Tax Appellate Tribunal, has referred the following two questions of law Under Section 256 (1) of the Income Tax Act, 1961 (hereinafter referred to as "act") relating to the assessment year 1981 -82 for opinion to this Court. "1. Whether in law and in the circumstances of the case, the Honble Income Tax appellate Tribunal was justified in deleting the addition of Rs. 12,25,000/- paid to M/s J. K. Synthetics and M/s J. K. Iron and Steel Co. Ltd. ?"

( 2 ) WHETHER in law and in the circumstances of the case, the Honble Income Tax Appellate tribunal was justified in holding that the payment of Rs. 12,25,000/- was not in the nature of ex-gratia payment nor diversion of income?" 2. The brief facts of the case are as follows:the assessee/opposite party (hereinafter referred to as "assessee") was a Public Limited company and engaged in the business of manufacturing and sale of Jute goods and also derived income from the interest on securities income and from house property business etc.

( 3 ) DURING the year under consideration, there was power cut and assessee Company availed of surplus capacity of electricity available with M/s J. K. Synthetics and M/s J. K. Iron and Steel co. Ltd. , with the approval of Kanpur Electricity Supply Administration. A resolution was passed by the Board of Directors on 18. 4. 1980 authorising the arrangement between M/s J. K. Synthetics Ltd and M/s J K, Iron and Steel Co. for transfer of unutilized power available with the above two Companies to the J. K. Central Sub Station. As per resolution passed in the meeting, the assessee Company was to meet the actual cost of consumption of power and pay electricity charges to K. E. S. A. in respect of diverted power consumed by the assessee company. In addition, it was agreed to pay compensation of Rs. 1. 75 Lacs per month to M/s J. K. Synthetics Ltd. and M/s J. K. Iron and Steel Co. and the same was to be shared equally by the assessee Company and by M/s J. K. Cotton Mills, who were also availing of the facilities of diverted power from M/s J. K. Synthetics and M/s J. K. Iron and Steel Co. Ltd. In this way, during the year under consideration, apart from the payment to K. E. S. A. for the actual power consumed, the assessee Company paid a sum of Rs. 12,25,000/- to M/s J. K. Synthetics and M/s j. K. Iron and Steel Co. Ltd. and claimed deduction of the said amount. The Income Tax Officer disallowed the assessees claim mainly for the following reasons: (a) The selling of electricity is a constravention of Electricity Act and in his opinion, the payment of Rs. 12,25,000/- represented nothing, but sale price of electricity by J. K. Synthetics and M/s J. K. Iron and Steel Co. Ltd. , to the assessee Company. This payment was, therefore, in contravention of law and could not bed allowed as business expenditure. (b) That there was no pecuniary loss or damage to M/s J. K. Synthetics and J. K. Iron Co. Ltd. , as a result of diversion of power by them to the assessee Company and to M/s J. K. Cotton Mills and so there could be no case for paying compensation to those Companies without any loss or damage to them. The payment made was otherwise than for business consideration and business expediency. (c) The payment of compensation amounted to a pure and simple diversion of the income in favour of other two Companies in the same group without an overriding title. Such diversion by the assessee Company could not be allowed as a deduction. The payment of compensation was a mere facade for transfer of funds affected under the garb of resolution passed in the metting of Board of Directors, the resolution itself being a serving document.

( 4 ) THE assessee being aggrieved with the above decision of the Income Tax Officer, preferred an appeal before the Learned C. I. T. , (A), who sustained the addition with the observation that the

"i. T. O. was absolutely correct in his statement that the above payment of Rs. 12,25,000