LexTHE C.L.T., GUJARAT-I, AHMEDABAD versus THE AHMEDABAD COTTON MFG. CO. LTD. & ORS.
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THE C.l.T., GUJARAT-I, AHMEDABAD v. THE AHMEDABAD COTTON MFG. CO. LTD. & ORS. OCTOBER 15, 1993 B [B.P. JEEVAN REDDY AND N. VENKATACHALA, JJ.) Inc01rie Tax Act, 1961 : Section 37. Business expenditure-Company-Payment made to Textile Commis- C sioner, in exercise of option under Clause 21-c( l)(b) of Textile Control Order, 1948, instead of producing and packing minimum quantity of specified cloth-Nature of-Payment made to Textile Commissioner, in terms of option under the terms of the bond, for not fulfilment of export obliga- tion-Nature of-Held business expenditure-And not penalty. D E F A Textile Mill was being run by the assessee-Company, (In C.A. No. 2149of1977), during the accounting year 1971-72 previous to the Assess- ment 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) Or1ler, 1948, in the matter of producing and packing minimum quantity of specified type of cloth by it during the accounting year. However, the assessee instead of producing and packing the minimum quantity of specified type of cloth as required by the directions of the Textile Commis- sioner, paid to the Textile Commissioner Rs. 1,70,766 in exercise of the option available to it under Clause 21-C(l)(b) of the Control Order. So also, the assessee, which had not fulfilled its export obligation under a bond entered into as regards exporting certain quantity of sanforized cloth paid to the Textile Commissioner Rs. 5,17,781 for non-fulfilment of that obligation, in exercise of its option available under the terms of the bond. Thereafter, when the assessee filed its income-tax return relating to the G accounting year 1971-72 with the jurisdictional Income Tax Officer, if claimed deduction of both the said amounts out of its profits, as business expenditure. The Income Tax Officer refused to allow the claimed deduc- tions, taking the view that the said amounts paid by the assessee were not ' deduction which could be allowed as·ttems of its business expenditure. On H appeal the Appellate Assistant Commissioner, allowed the amounts 392 C.I.T. v. COTTON MFG. CO. 393 claimed by the Assessee as items of its business expenditure in respect of A its accounting year 1971-72. Revenue's appeal filed against that appellate order before the Tribunal did not meet with success. However, at the instance of the Revenue the Tribunal made a reference to the High Court under Section 256(1) of the Income Tax Act. The High Court upheld the claims of the assessee-Company. Similar orders were passed by the High Court in the connected appeals also. Against the decision of the High Court Revenue preferred appeals in this Court. B Dismissing the appeals, this Court HELD : 1. It is ture, that a payment made by an assessee doing C business in the aceounting year is not entitled to claim deduction under Section 37 of the Income Tax Act, 1961 of an amount paid by such assessee during the year as an amount of penalty or an amount akin to penalty for any breach or infraction of law or any public policy which is sought to be achieved by such law. But if such payment is made by the assessee during the relevant accounting year without any breach of infraction of any law D or any public policy sought to be achieved by it and in fact in obedience to provisions of such law as a measure of business expediency, there could be no valid reason not to allow such payment as deductible expenditure of the assessee under Section 37 of the Income Tax Act. [404H, 405-A, BJ 2. Therefore, what needs to be done by an Assessing Authority under the Income Tax Act, 1961, in examining the claim of an assessee that the payment made by such assessee was a deductible expenditure under Section 37 of the Income Tax Act although called penalty, is to see whether the law E or scheme under which the amount was paid required such payment to be made, as penalty or as something akin to penalty, that is imposed by way F of punishment for breach or infraction· of the law or the statutory scheme. If the amount so paid is found to be not a penalty or something akin to penalty due to the fact that the amount paid by the assessee was in exercise of the option conferred upon him under the very law or scheme concerned, to regard such payment as business expenditure of the assessee, allowable under
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