Skip to content


Additional Commissioner of Income-tax, Gujarat Vs. Rustam Jehangir Vakil Mills Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtGujarat High Court
Decided On
Case NumberIncome-tax Reference Nos. 14 and 16 of 1974
Judge
Reported in[1976]103ITR298(Guj)
ActsCotton Textiles (Control) Order, 1948; Incomes Tax Act, 1961 - Sections 28, 37 and 37(1)
AppellantAdditional Commissioner of Income-tax, Gujarat;additional Commissioner of Income-tax, Gujarat
RespondentRustam Jehangir Vakil Mills Ltd.;aruna Mills Ltd.
Appellant Advocate K.H. Kaji, Adv.
Respondent Advocate J.M. Thakore, Adv. General and; J.P. Shah, Adv.
Cases ReferredPrafulla Kumar Malik v. Commissioner of Income
Excerpt:
direct taxation - interpretation - sections 28 , 37 and 37 (1) of income tax act, 1961 and clause 21 c (1) (b) of textile control order, 1948 - payment due to failure to carry out order of textile commissioner - reason for failure may be purely technical or technological - such failure cannot be treated as contravention of law - payment made for failure to carry out such direction not penalty - assessee entitled for deduction under section 37 on such payments. - - 8. it is common ground between the parties before us that there is no direct provision in the cotton textiles (control) order providing for the imposition of penalty as such for failure to carry out the directions issued by the textile commissioner under clause 21-a of the order. kaji for the revenue has urged before us.....divan, c.j.1. 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.....
Judgment:

Divan, C.J.

1. 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 Tribunal and following its own decision in Rustam Jehangir Vakil Mills Ltd. Out of which Income-tax Reference No. 14 of 1974 arose, the Tribunal allowed the appeal and held that the three items mentioned above of payments made to the Textile Commissioner under the provisions of the Cotton Textiles (Control) Order were deductible expenditure. The Tribunal held that the amounts were deductible under section 28 of the Income-tax Act, 1961, and, thereafter, at the instance of the revenue, the two questions have been referred to us as set out hereinabove, the only difference being that the amounts paid to the Textile Commissioner naturally differed from the payments made by the assessee concerned in Income-tax Reference No. 14 of 1974.

5. In order to appreciate the contentions arising in this case, it is necessary to refer to some of the provisions of the Cotton Textiles (Control) Order, 1948. This Order was issued by the Government of India in exercise of the powers conferred upon it by section 3 of the Essential Supplies (Temporary Powers) Act, 1946, which was subsequently substituted by the Essential Commodities Act and the Cotton Textiles (Control) Order, 1948, is deemed to have been continued under the provisions of the later statute. So far as we are concerned, we will only note that 'producer' for the purposes of this order means a person engaged in the production of cloth or yarn or both by power as defined in section 2(g) of the Factories Act, 1946, and the expression 'produce' and its grammatical variants shall be construed accordingly. Under clause 21, sub-clause (1), no manufacturer of cloth shall sell or otherwise dispose of cloth except in packed condition in the manner indicated in that sub-clause. Under clause 21A, sub-clause (1), which was substituted in the present from by the notification of August 7, 1966, the Textile Commissioner may, having regard to the matters specified in sub-clause (2) of clause 20, by order in writing, direct any producer with a spinning plant or a group of such producers to pack such minimum quantity of such cloth and during such period as may be specified in the direction. Clause 20, sub-clause (1), contemplates that the Textile Commissioner may, from time to time, issue directions in writing to any manufacturer or class of manufacturers, or manufacturers generally regarding the classes of manufacturers, or manufacturers generally shall or shall not manufacture, or the maximum or minimum quantities thereof which such manufacturer, or class of manufacturers or manufacturers generally shall manufacture during such period as may be specified in the order. Thus, clause 20 deals with the general directions whereas clause 21-A deals with specific directions regarding packing of such minimum quantity of cloth during such period as may be specified in the direction issued by the Textile Commissioner. Under sub-clause (2) of clause 21-A, it is open to the Textile Commissioner to grant further time for carrying out the directions issued under sub-clause (1) and to extend the period. Sub-clause (3) of clause 21-A is material and is in these terms :

'Any producer or group of producers to whom a direction has been issued under sub-clause (1) or sub-clause (2) shall comply with such direction.'

6. Clause 21-C is in these terms :

'21-C. (1) Where the Textile Commissioner has issued directions under sub-clause (1) of clause 21-A to any producer to pack a specified quantity of cloth during the period specified in the direction - ........ (b) such producer may, in lieu of packing the whole or part of the minimum quantity of cloth specified in the said direction, make payment to the Textile Commissioner in respect of the deficiency at such rates as may be specified by the Central Government and within such time as may be determined by the Textile Commissioner.'

7. Sub-clause (a) of clause 21-C (1) provides that the producer who packs quantities of such cloth during the period in excess of the minimum quantity specified in the direction shall be eligible for receiving cash payment by way of assistance from the Textile Commissioner in respect of such excess quantity packed at such rates and in respect of such maximum quantity as may be specified by the Central Government from time to time. Clause 21-C, sub-clause (2), provides that all payments received from producers under paragraph (b) of sub-clause (1) shall, as far as may be, be utilised towards payments, if any, to producers under paragraph (a) of the said sub-clause.

8. It is common ground between the parties before us that there is no direct provision in the Cotton Textiles (Control) Order providing for the imposition of penalty as such for failure to carry out the directions issued by the Textile Commissioner under clause 21-A of the Order. The only question is, whether as urged by Mr. Kaji on behalf of the revenue, the payment made by the producer concerned to the Textile Commissioner in respect of the deficiency of cloth when he has not packed (produced) the whole or part of the minimum quantity of cloth specified in the direction issued to him can be said to be a payment akin to penalty. In terms it does not amount to penalty but the question that we have to consider is, whether looking to the scheme of the Cotton Textiles (Control) order, it is akin to payment of penalty.

9. On a plain reading of clause 21-C (1)(b) in the context of the scheme of clauses 21-A and 21-C as a whole, it is clear that the producer to whom the Textile Commissioner has issued direction under clause 21-A to pack the minimum quantity of a particular type of cloth during the particular period specified in the direction, has three option; either he can comply with the direction and during the original period specified in the direction or during the extended period, the producer can pack the minimum quantity and then meet the requirements of that particular direction. It is also open to him to produce and pack during the relevant period cloth in excess of the minimum quantity specified in the direction and in that eventuality, he becomes eligible under clause 21-C(1)(b) for receiving cash payment by way of assistance from Textile Commissioner. The third option available to the producer is not to pack the whole or part of the minimum quantity of cloth as specified in the direction issued by the Textile Commissioner and in that eventuality, in lieu of packing the whole or part of the minimum quantity of cloth, make payment to the Textile Commissioner at such rates as may be specified by the Central Government and within such time as may be determined by the Textile Commissioner. The scheme contemplated by the Cotton Textiles (Control) Order is with a view to satisfy and practically to meet the requirements of the consumers on the one hand and to meet technically the requirement of the producers on the other. As was pointed out to the Tribunal in the course of the arguments when the case of the assessee concerned in Income-tax Reference No. 16 of 1974 was being argued before the Tribunal, the textile mills concerned my not have the required machineries to produce the controlled variety of cloth which the Textile Commissioner had directed the mills to produce. In the case of this particular assessee, the machinery could only produce finer variety of cloth and not the particular variety of controlled cloth which the Textile Commissioner had directed the mills to produce and hence it was not possible for the textile mills to produce and pack the required quantity of the controlled cloth. That is one aspect. It is also from the technical point of view the question of what is known in technical language as the 'production mix' of each textile unit concerned depending upon the availability of raw materials and depending upon the ruling prices for the controlled variety of cloth on the one hand and the price of raw cotton and the quality and quantity of cotton available in the marked and the capacity of the installed machinery of the particular textile mill to manufacture the particular type of cloth up to the particular quantity on the other hand. It is because of these variable factors which go on varying from unit to unit and from time to time that the Cotton Textiles (Control) Order has left it to the option of the producer concerned to decide whether the producer would produce the minimum quantity specified in the direction issued by the Textile Commissioner or would exceed the minimum quantity or would not produce the minimum quantity either in whole or in part and make the payment contemplated by clause 21-C(1)(b). Under these circumstances, the words used in clause 21-C, namely that the 'producer may, in lieu of packing the whole or part of the minimum quantity........ make payment' go to indicate that the option has been given to the producer to decide whether he would produce any part of the minimum quantity of cloth specified in the direction issued by the Textile Commissioner or would not produce any part of the minimum quantity and decide to make the payment to the Textile Commissioner at the rates specified by the Central Government and within the time determined by the Textile Commissioner.

10. Mr. Kaji for the revenue has urged before us that there is no option to the producer concerned once he has failed to produce the minimum quantity of cloth either in whole or in part and once it is found that the whole or part of the minimum quantity directed by the Textile Commissioner under clause 21-A has not been produced, the making of the payment to the Textile Commissioner is a necessary consequence. In our opinion, this contention of Mr. Kaji overlooks the basic structure of the scheme under clauses 21-A and 21-C of the Cotton Textiles (Control) Order. The scheme is to leave it to the discretion and the option of the producer to decide whether the producer would produce the minimum quantity or quantity in excess or quantity below the minimum quantity specified by the Textile Commissioner in his directions and the consequences of receiving the assistance from the Textile Commissioner on the one hand when there is excess or the requirement to make the payment, if there is a shortfall, would then follow. It is also important to bear in mind that, under the scheme of sub-clause (2) of clause 21-C, the payments received from producers who have failed to produce the whole or part of the minimum quantity directed by the Textile Commissioner shall, as far as may be, be utilised towards payments, if any, to producers who have produced and packed cloth in excess of the minimum quantity, that payment also being made at such rates as may be specified by the Central Government from time to time. Thus, far from the payments being in the nature of penalty or akin to penalty, the payment contemplated by clause 21-C(1)(b) is a necessary concomitant of the option that the producer concerned may have exercised while deciding not to produce and pack the whole or part of the minimum quantity specified in the direction of the Textile Commissioner.

11. Mr. Kaji, on behalf of the revenue, has very strongly relied upon the decision of the Madras High Court in Senthikumara Nadar & Sons v. Commissioner of Income-tax It may be pointed out that this decision of the Madras High Court and the principles laid down in this decision have been approved by the Supreme Court in the subsequent ecision in Haji Aziz and Abdul Shakoor Bros. v. Commissioner of Income-tax In the case before the Madras High Court the assessee-firm, which carried on business in coffee, entered into contracts with the India Coffee Board and purchased coffee in the accounting year 1942-43 at a rate far below the price of coffee to be sold within India, with a contractual obligation to export the whole of the coffee so purchased to places outside India. In addition, the assessee also purchased coffee from others out of their export quota which also it was under an obligation to export. The assessee, however, exported only part of the coffee, and sold the balance within India, in contravention of its obligations. When the Coffee Board came to know in 1964 of the sales within India and called upon the assessee to explain, the assessee admitted that it had failed to export part of the coffee purchased and agreed to pay liquidated damages in accordance with one of the three alternatives provided in the contract. The damages the assessee was liable to pay for its breach of contract were assessed at Rs. 1,19,177 and the assessee paid the amount in instalments in the accounting year 1945-46, and claimed that the amount should be deducted under section 10(2)(xv) of the Indian Income-tax Act, 1922, from its profits for the accounting year 1942-43. Under the relevant clause of the contract, if the assessee failed to ship the coffee purchased for export to a destination outside India, the Board reserved to itself the right to levy liquidated damages or to restore the status quo in any one of the following ways, at the absolute discretion of the Controller of Coffee : (a) to recover a fixed measure of damages at Rs. 20 per cwt. to be paid to the surplus pool; (b) to export an equivalent quantity by weight of coffee purchasing the same from the pool and to recover the loss incurred in the transactions from the buyer. The decision of the Controller in the matter of price at which such coffee is purchased and sold and in the matter of fixing the loss shall be final; and (c) to call upon the buyer to restore the stock delivered to him at a price less than the purchase price by 2 1/2 per cent, of the price for every month after the expiry of the period for export fixed above and the date when the buyer is called upon to restore the stock provided that a period of 15 days and over shall be treated as a month and a period less neglected. The fixed damages referred to in clause (a) were to deemed as liquidated damages and the buyer was not to be entitled to any reduction thereof in any circumstances. The Coffee Board exercised its option at (a) as indicated in the contract and thereafter the question as to whether this amount of Rs. 1,19,177 should be allowed as a deduction or not arose before the taxing authorities. On these facts the Madras High Court held that, until the Coffee Board made it clear which of the alternative it chose, the liability of the assessee was only a contingent liability in the accounting year 1942-43 and even if the assessee had debited against enforcement in future of what was a contingent liability in 1942-43. The liability arose in the year 1945-46, when the claim for damages was made and was ascertained only after the assessee admitted the liability and, therefore, it could not be related back as an item of expenditure to the year 1942-43 and, therefore, the deduction could not be allowed under section 10(2)(xv) form the profits of 1942-43. The Madras High Court also held in that case that although what the assessee paid to the Coffee Board was called liquidated damages, the payment was really akin to a penalty for committing an act opposed to public policy, a policy that underlay the Coffee Board to enforce. The breach of its contractual obligations to the Board was not in the course of the normal trading activities of the assessee. The money was not even incidental to the business itself. Therefore, the amount was not an expenditure allowable under section 10(2)(xv).

12. In connection with this decision of the Madras High Court, the supreme Court observed in Haji Aziz and Abdul Shakoor Bros. v. Commissioner of Income-tax :

'The Madras High Court in Senthikumara Nadar & Sons v. Commissioner of Income-tax. held that payment of penalty for an infraction of the law fell outside the scope of permissible deductions under section 10(2)(xv). In that case the assessee had to pay liquidated damages which was akin to penalty incurred for an act opposed to public policy, a policy under-lying the Coffee Market Expansion Act, 1942, and which was left to the Coffee Board to enforce.'

13. The Supreme Court in this particular case of Haji Aziz and Abdul Shakoor Bros. v. Commissioner of Income-tax has considered the entire case law up to the date of pronouncement of the judgment on November 24, 1960, and has summed up the legal position emerging from the different authorities as follow :

'A review of these cases shows that expenses which are permitted as deductions are such as are made for the purpose of carrying on the business, i.e., to enable a person to carry on and earn profit in that business. It is not enough that disbursements are made in the course of or arise out of or are concerned with or made out of the profits of the business but they must also be for the purpose of earning the profits of the business. As was pointed out in Von Glehn's case an expenditure is not deductible unless it is a commercial loss in trade and a penalty imposed for breach of the law during the course trade cannot be described as such. If a sum is paid by an assessee conducting his business, because in conducting it he has acted in a manner which has rendered him liable to penalty, if cannot be claimed as a deductible expense. It must be a commercial loss and in its nature must be contemplable as such. Such penalties which are incurred by an assessee in proceedings launched against him for an infraction of the law cannot be called commercial losses incurred by an assessee in carrying on his business. Infraction of the law is not a normal incident of business and, therefore, only such disbursements can be deducted as are really incidental to the business itself. They cannot be deducted if they fall on the assessee in some character other than that of a trader. Therefore, where a penalty is incurred for the contravention of any specific statutory provision, it cannot be said to be a commercial loss falling on the assessee as a trader, the test being that the expenses which are for purpose of enabling a person to carry on trade for making profits in the business are permitted but not if they are merely connected with the business....... In our opinion, no expense which is paid by way of penalty for a breach of the law can be said to be an amount wholly and exclusively laid for the purpose of the business. The distinction sought to be drawn between a personal liability and a liability of the kind now before us is not sustainable because anything done which is an infraction of the law and is visited with a penalty cannot on grounds of public policy be said to be a commercial expense for the purpose of a business or a disbursement made for the purpose of earning the profits of such business.'

14. In this case of Haji Aziz and Abdul Shakoor Bros. v. Commissioner of Income-tax, the Supreme Court affirmed the decision of the Bombay High Court in Commissioner of Income-tax v. Haji Aziz and Abdul Shakoor Bros

15. The Punjab High Court has followed the decision of the Bombay High Court in Raj Woollen Industries v. Commissioner of Income-tax. The Supreme Court in the decision in Haji Aziz and Abdul Shakoor Bros. v. Commissioner of Income-tax has also considered the decisions of the courts in England, namely, Strong & Coapany of Romsey Ltd. v. Woodifield and Commissioner of Inland Revenue v. E. C. Warnes & Co. Ltd., and also Commissioners of Inland Revenue v. Alexander von Glehn & Co. Ltd.

16. The question, therefore, in the light of these decisions which have been reviewed by the Supreme Court, that we have to consider is whether the payment which has been made by the assessee to the Textile Commissioner under the provisions of clause 21-c (1)(b) can be said to have been occasioned by an infraction of the law. We have already pointed out that 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. 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. As was pointed out in the course of the argument before the Tribunal in the case arising out of Income-tax Reference No. 16 of 1974, the particular manufacturer may not have proper machinery for the manufacture of the cloth which the Textile Commissioner directs him to produce. 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. Under these circumstances it cannot be said that by failing to produce the whole or part of the minimum quantity of cloth specified in the direction issued by the Textile Commissioner, that particular manufacturer commits an infraction of the law. On the contrary, the scheme is that the law itself gives an option to the producer concerned to adopt one of the three courses and, if he complies with the law by choosing one of the three options offered to him, he cannot be said to commit any infraction of law. 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.

17. We may also point out that under the scheme it is contemplated that the manufacturer who produces the minimum quantity of the type of cloth specified in the direction issued by the Textile Commissioner may have to incur some loss on that particular item of production and he may be allowed to make it up by charging appropriate prices in the rest of the items of production. If a particular manufacturer exceeds the minimum quantity specified in the direction issued by the Textile Commissioner to him, he is entitled under clause 21-C(1)(a) to be reimbursed by way of some assistance in cash. If a manufacturer does not incur any particular item of extra expenditure by producing the minimum quantity of cloth specified in the direction issued by the Textile Commissioner, then in order to see that he does not make any undue profit by refraining from production of such minimum quantity, this particular piece of legislation provides in clause 21-C(1)(b) for making a payment in cash to the Textile Commissioner in lieu of the production of the whole or part of the minimum quantity. Hence, what is being done at the time of making the payment is an incident of the production of cloth by the manufacturer depending upon the exercise of option which he will do in view of the technical or technological reasons of his own production machinery. Under these circumstances it is obvious that the payments made under clause 21-(C)(1)(b) can never be said to be by way of a payment extracted or required for an infraction of the law and hence this particular case is taken out of the principle enunciated by the Supreme Court in Haji Aziz and Abdul Shakoor Bros. v. Commissioner of Income-tax.

18. The question then arises whether this particular payment falls under section 37(1) of the Income-tax Act or whether if falls under the general provisions of section 28. Under section 28 the profits and gains of any business or profession which was carried on by the assessee at any time during the previous year is chargeable to income-tax under the head 'Profits and gains of business or profession.' It is well settled that in arriving at the figure of profits and gains what is to be considered is the net profits and gains in the commercial sense and not only receipts and all amounts which are proper items of expenditure can be deducted at the stage of arriving at the figure of profits and gains of business. Section 37, on the other hand, is a specific provision where deduction is provided by the Act itself and under that section, any expenditure laid out or expended wholly and exclusively for the purposes of the business or profession, is allowed as a deductible expenditure in computing the income chargeable under the head 'Profits and gains of business or profession.' It is also well settled that, while construing a similar phrase occurring in section 10(2)(xv) of the Indian Income-tax Act, 1922, the question of what is laid out or expended wholly and exclusively for purposes of the purposes of the business has to be judged by applying the test of commercial expediency and from the point of view of a businessman. It seems to us, therefore, that the expenditure mentioned in section 37(1) is a specific instance whereas a general provision is made in section 28 before the figure of profits and gains can be properly arrived at. In the instant case, 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. 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 of course, whatever falls under section 37(1) would also be covered by the more general provisions of section 28 but since the case falls under the specific provision, it is not necessary to refer to the more general provisions of section 28.

19. It was urged on behalf of the revenue by Mr. Kaji that only a loss incurred from the commercial point of view can fall under section 28 and if any expenditure is incurred while carrying on the business, unless it is covered by the words of section 28(1) that expenditure may not be deductible. It is not necessary for us in the course of this judgment to decide this point, because we find, on the facts of this case, that the expenditure incurred by the manufacturer concerned in making the payment under clause 21-C(1)(b) was incurred wholly and exclusively for the purposes of the business and hence is covered by section 37(1) of the Income-tax Act, 1961. It is, therefore, not necessary to discuss the decision in Prafulla Kumar Malik v. Commissioner of Income-tax, Commissioner of Income-tax v. Pannalal Narottamdas & Co. and Commissioner of Income-tax v. Prafulla Kumar Mallick These three decisions were cited at the Bar before us in connection with the controversy whether section 28 covered only losses or other items of expenditure as well, but as we have pointed out on the facts of this case, it is not necessary for us to enter into that controversy.

20. The result, therefore, is that in Income-tax Reference No. 14 of 1974, we answer the questions referred to us as follows :

Question No.(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).

The payment was business expenditure allowable under section 37 of the Income-tax Act, 1961.

21. The Commissioner will pay the costs of this reference to the assessee.

22. In Income-tax Reference No. 16 of 1974 also the questions referred to us are answered on the same lines, that is -

Question No. (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).

The payments were business expenditure allowable under section 37 of the Income-tax Act, 1961.

23. The Commissioner will pay the costs this reference to the assessee.


Save Judgments// Add Notes // Store Search Result sets // Organizer Client Files //