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Commissioner of Income-tax, Gujarat Vs. Maneklal Harilal Spg. and Mfg. Co. Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtGujarat High Court
Decided On
Case NumberIncome-tax Reference No. 56 of 1976
Judge
Reported in[1983]141ITR129(Guj)
ActsIncome Tax Act, 1961 - Sections 28, 37, 37(1) and 40
AppellantCommissioner of Income-tax, Gujarat
RespondentManeklal Harilal Spg. and Mfg. Co. Ltd.
Advocates: N.U. Rawal, Adv.
Excerpt:
- - 26,300 for the assessment year 1969-70 made by the assessee to the indian cotton mills federation for its failure to meet quota or import allotted quota of certain varieties of cotton within the specified time was allowable as an expenditure for working out the business income of the assessee ? 2. whether, on the facts and in the circumstances of the case, for the assessment year 1969-70 payment of rs. 26,300 for the assessment year 1969-70 made by the assessee to the indian cotton mills federation for its failure 'to meet quota or import allotted quota of certain varieties of cotton within the specified time' was allowable as an expenditure for working out the business income of the assessable. this question, though not directly covered by an decision of this court, would be..........year 1968-69 and rs. 26,300 for the assessment year 1969-70 made by the assessee to the indian cotton mills federation for its failure to meet quota or import allotted quota of certain varieties of cotton within the specified time was allowable as an expenditure for working out the business income of the assessee 2. whether, on the facts and in the circumstances of the case, for the assessment year 1969-70 payment of rs. 95,400 made to the textile commissioner under the provisions of clause 21 c(1)(b) of the cotton textile (control) order, 1948, was expenditure allowable under section 28 or under section 37 of the act ?' 2. at the instance of the assessee the following question is referred : 'whether, on the facts and in the circumstances of the case, the tribunal was justified in.....
Judgment:

Mankad, J.

1. In this reference three questions are referred to us for our opinion by the Income-tax Appellate Tribunal under s. 256(1) of the I.T. Act, 1961. Out of three questions the following two questions are referred to us by the Tribunal at the instance of the Commissioner of Income-tax.

'1. Whether, on the facts and in the circumstances of the case, payment of Rs. 38,100 for the assessment year 1968-69 and Rs. 26,300 for the assessment year 1969-70 made by the assessee to the Indian Cotton Mills Federation for its failure to meet quota or import allotted quota of certain varieties of cotton within the specified time was allowable as an expenditure for working out the business income of the assessee

2. Whether, on the facts and in the circumstances of the case, for the assessment year 1969-70 payment of Rs. 95,400 made to the Textile Commissioner under the provisions of clause 21 C(1)(b) of the Cotton Textile (Control) Order, 1948, was expenditure allowable under section 28 or under section 37 of the Act ?'

2. At the instance of the assessee the following question is referred :

'Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that perquisite in excess of 1/5th of the salary paid to the two managing directors, who were employees of the company, was rightly disallowable; an in holding that such perquisite and other remuneration to the directors would be allowed only if they are allowable under section 40(a)(v) and also under section 40(c) of the Act ?'

3. Out of three questions two questions, namely, question No. 2 referred to us at the instances of the Revenue, and the question referred to us at the instance of the assessee are covered by a decision of this court. The question whether the payment made to the Textile Commissioner under the provisions of clause 21C (1)(b) of the Cotton Textile (Control) Order, 1948, is expenditure allowable under s. 28 or s. 37 of the I.T. Act, 1961, is covered by a decision of this court in Addl. CIT v. Rustam Jehangir Vakil Mills Ltd. : [1976]103ITR298(Guj) . Respectfully following this decision, question No. 2, referred to us at the instance of the Revenue, must be answered in the affirmative and against the Revenue.

4. The question whether the Tribunal was justified in law in holding that the perquisite in excess of one-fifth of the salary paid to the two managing directors, who were employees of the company, was rightly disallowed, referred to us at the instance of the assessee, is covered by a decision of this court in Addl. CIT v. Tarun Commercial Mills Ltd. : [1978]113ITR745(Guj) . Respectfully following this decision, this question must be answered in the negative and against the Revenue.

5. This leaves us with the remaining question whether the payment of Rs. 38,100 for the assessment year 1968-69 and Rs. 26,300 for the assessment year 1969-70 made by the assessee to the Indian Cotton Mills Federation for its failure 'to meet quota or import allotted quota of certain varieties of cotton within the specified time' was allowable as an expenditure for working out the business income of the assessable. This question, though not directly covered by an decision of this court, would be clearly covered by the ratio of the decision of this court in the case of Addl. CIT v. Rustom Jehangir Vakil Mills Ltd. : [1976]103ITR298(Guj) .

6. It appears that the Govt. of India decided to import certain quantity of cotton which was broadly divided into two categories, namely, Global quota and American PL 480 quota. In order to ensure equitable distribution of the imported cotton and smooth working of the scheme under which cotton was imported, the Indian Cotton Mills Federation (hereinafter referred to as 'the Federation') was entrusted with the work of actual allotment of quotas to various persons, companies or mills. It further appears that under the scheme, the Federation had to allot what is described as'link quotas'. Under this scheme, a person seeking to import cotton under Global quota had to import proportionate quantity of American PL 480 cotton also. Such person had to give an undertaking in writing with bank guarantee to the Federation that he or it would lift the entire quota of both the varieties within the specified time and in case he or it failed to import the allotted quota or any of the two varieties, he or it would pay Rs. 100 per bale to the Federation. It was only after such an undertaking was given that the Federation would recommend to the Government to allot to that person a specified quota for the import of cotton.

7. In the assessment year 1968-69, the assessee failed to import American PL 480 cotton to the extent of 381 bales and consequently it had to pay Rs. 38,100 at the rate of Rs. 100 per bale to the Federation. In the next year, i.e., assessment year 1969-70, the assessee had to pay Rs. 26,300 to the Federation for failure to import the alloted quota of American cotton. It is the case of the assessee that it did not import cotton as per the allotment made to it, as American PL 480 cotton was not of the requisite quality and it preferred to make payments as stated above to the Federation instead of importing the said variety of cotton as per the allotment made to it. The assessee claimed deduction of the aforesaid payments as business expenditure.

8. The ITO disallowed this claim of the assessee on the ground that the aforesaid amounts paid by the assessee to the Federation partook the character of penalty inasmuch as the payments were made on account of contravention of the directions given by the Government. In other words, according to the ITO, the said payments were not business expenditure.

9. In the appeal preferred by the assessee, the AAC, however, took the view that the payments made to the Federation were on par with compensation paid for shortfall in production of controlled variety of cloth. Therefore, according to the AAC, the payments were admissible deductions. In the appeal preferred by the Revenue, the Tribunal took the view to the effect that the payments made by the assessee were directly linked or connected with its business and, therefore, the assessee was entitled to claim deduction of these payments. The Tribunal also relied on its decision in the case of ITO v. Rustom Vakil Mills Ltd.,. to uphold the claim of the assessee. It is in the background of these facts that the aforesaid question has been referred to us for our opinion.

10. In our opinion, the ratio of the decision of this court in Addl. CIT v. Rustam Jehangir Vakil Mills Ltd. : [1976]103ITR298(Guj) , will apply to the aforesaid claim made by the assessee. On the same principle on which the payments made to the Textile Commissioner under the provisions of clause 21C(1)(b) of the Cotton Textile (Control) Order, 1948, are allowable expenditure, the aforesaid payments made to the Federation are allowable expenditure. We do not see any force in the Revenue's argument that the payments made to the Federation partakes the character of penalty. No breach or infraction of law on the part of the assessee has been pointed out to us. In other words, it is not the Revenue's case that it was on account of any infraction of law committed by the assessee that it was required to make the aforesaid payments by way of penalty. The payments are directly linked or connected with the business of the assessee. It was due to the commercial expediency that the assessee did not import cotton of the variety known as American PL 480 and preferred to make payment to the Federation as the cotton of this variety was not of requisite quality which it could profitably use for its business. It must, therefore, be held that the expenditure which the assessee incurred in making the aforesaid payment was a business expenditure, deduction of which is allowable under law. We are, therefore, of the view that the Tribunal was justified in confirming the order of the AAC deleting the disallowance of the said expenditure in each of the assessment years under consideration. For the aforesaid reasons the first question which is referred to us for our opinion at the instance of the Revenue must be answered in the affirmative and against the Revenue. In other words, all the three questions referred to us are answered against the Revenue.

11. In the result, we answer the questions referred to us as follows :

----------------------------------------------------------------------Question Answers----------------------------------------------------------------------At the instance of the Revenue:'1. Whether, on the facts and in Affirmative (against thethe circumstances of the case, Revenue)the payment of Rs. 38,100 for theassessment year 1968-69, and Rs.26,300 for the assessment year1969-70, made by the assessee tothe Indian Cotton Mills Federa-tion for its failure to meetquota or import allotted quotaof certain varieties of cottonwithin the specified time wasallowable as an expenditure forworking out the business incomeof the assessee ?2. Whether, on the facts and in Affirmative (against thethe circumstances of the case, Revenue)for the assessment year 1969-70,the payment of Rs. 95,400 made tothe Textile Commissioner underthe provisions of clause 21C(1)(b)of the Cotton Textile (Control)Order, 1948, was expenditureallowable under section 28 orunder section 37 of the Act ?'At the instance of the assesseefor the asstt. year 1969-70.'Whether, on the facts and in Negative (against thethe circumstances of the case, Revenue)the Tribunal was justified inlaw in holding that perquisite inexcess of 1/5th of the salarypaid to the two managing directorwho were employees of the companywas rightly disallowed ; and inholding that such perquisite andother remuneration to the direc-tors could be allowed only ifare allowable under section40(a)(v) and also under section40(c) of the Act ?'


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