Commissioner of Income Tax vs Hukumchand Mills Ltd.

Dr. B.P. Saraf, J.—By this reference u/s 256(1) of the Income Tax Act, 1961, the following two question of law have been referred by the Tribunal to this court at the instance of the Revenue :

"1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the sum of Rs. 2,38,140 which the assessee was called upon to pay under the provisions of section 21C(1) (b) of the Cotton Textiles (Control) Order, 1948, was not in the nature of a penalty for infraction of the law ?

Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the aforesaid payment of Rs. 2,38,140 was a business expense allowable u/s 37 of the Income Tax Act, 1961 ?"

This reference relates to the assessment year 1971-72. The assessee is a company carrying on business in the manufacture of textiles. During the relevant accounting year, the assessee paid to the Textile Commissioner a sum of Rs. 2,38,140 under the provisions of clause 21C(1) (b) of the Cotton Textiles (Control) Order, 1948 (for short, "Control Order"). This amount was debited by the assessee in its profit and loss account and was claimed as a deduction by way of business expenditure in the computation of its business income. This claim was allowed by the Income Tax Officer while assessing the income of the assessee for the relevant assessment year. However, this part of the order of the Income Tax Officer, in so far as it related to the allowance of the above claim, was later reversed by the Commissioner of Income Tax in exercise of his suo motu power of revision u/s 263 of the Act. According to the Commissioner of Income Tax, the amount in question was required to be paid by the assessee for an infringement of the legal obligation placed upon it under the provisions of the Control Order and, as such, it was not allowable as a deduction in the computation of its assessable income.

Against the order of the Commissioner of Income Tax, the assessee went in appeal to the Income Tax Appellate Tribunal (for short "the Tribunal"). The Tribunal accepted the contention of the assessee and cancelled the order of the Commissioner and restored that of the Income Tax Officer. The Tribunal held that the payment of the amount of Rs. 2,38,140 by the assessee to the Textile Commissioner was not for any infraction of law but was an expenditure incidental to the carrying on of the assessee''s business and, as such, it was a business expenditure which is allowable as a deduction u/s 37 of the Income Tax Act. In that view of the matter, the appeal of the assessee was allowed. Hence, this reference at the instance of the Revenue.

We have heard learned counsel of the Revenue, Mr. G. S. Jetley. The real controversy is whether the amount of Rs. 2,38,140 paid by the assessee to the Textile Commissioner under clause 21C(1) (b) of the Control Order is on account of any infraction of law or is a payment incidental to the carrying on of the assessee''s business. For resolving this controversy, it is necessary to examine the provisions of the Control Order. Under clause 20 of the Control Order, the Textile Commissioner has the power to issue directions in writing to any manufacturer or class of manufacturers regarding the classes or specifications of the cloth or yarn which they shall manufacture. While issuing such directions, the Textile Commissioner has to give regard to the demand for cloth or yarn, the need of the general public, the special requirements of the industry for such cloth or yarn, the capacity of the manufacturer to manufacture different descriptions or specifications of cloth or yarn and the necessity to make available to the general public cloth for mass consumption. When such directions are issued, under sub-clause (3) of clause 20, every manufacturer to whom such direction is issued has to comply with the same. There are a number of other powers vested in the Textile Commissioner with more or less similar objects. Clause 21A of the Control Order empowers the Textile Commissioner in cases specified therein to direct any producer with a spinning plant to pack such minimum quantity of such cloth during such period as may be specified in the direction. When such a direction is issued, the producer is bound to comply with the same. Clause 20C, however, deals with the options available to a producer to whom directions have been issued under sub-clause (1) of clause 21A of the Control Order. Clause 21C reads :

"21C. (1) Where the Textile Commissioner has issued directions under sub-clause (1) of clause 21A to any producer to pack a specified quantity of cloth during the period specified in the direction -

(a) the producer who packs quantities of such cloth during the period in excess of the minimum quantity 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 :

(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.

(2) 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 the said paragraph (a).

Explanation. - In this clause, ''producer'' includes a group of producers."

From a plain reading of the above clause, it is clear that the producer who packs quantities of such cloth during the specified period in excess of the minimum quantity is eligible for receiving cash payment by way of assistance from the Textile Commissioner in respect of such excess quantity packed by him at such rates and in respect of such maximum quantity as may be specified by the Central Government from time to time. Sub-clause (b) allows a producer, in lieu of packing the whole or part of the minimum quantity of cloth specified in the direction, to make payment to the Textile Commissioner in respect of the deficiency at such rates as may be specified by the Central Government. Sub-clause (2) provides that the payments made by a producer under sub-clause (b) in lieu of packing the minimum quantity. On a careful perusal of the scheme of the Control Order, it becomes clear that a producer has been given an option either to pack the minimum quantity of cloth as per the directions of the Textile Commissioner or in lieu thereof to pay in respect of the deficiency at such rates as may be specified by the Central Government. There is no absolute obligation on the producer to pack the minimum quantity. An option is given to him. He may make an attempt to pack and, in the events of his failure to produce the whole or a part of the minimum quantity, make the payment in respect of the deficiency. No penal consequences follows.

Thus, the Control Order, in clear terms, gives two options to the producer. The choice is his. It is for him to decide the mode of compliance and to exercise his option. In a given case, keeping in mind his business expediency, he may find it more profitable or beneficial to pay to the Textile Commissioner at the specified rate than pack the minimum quantity of cloth or yarn in terms of the directions. In another case, packing the minimum quantity may be more expedient or profitable. The expediency or profitability may also vary from producer to producer. Some producers may even find it profitable or expedient to pack quantities in excess of the minimum. In that event, they will be eligible to get payment at rates specified in respect of the excess from the Textile Commissioner. Thus, payment by the producer in lieu of packing the minimum quantity is one of the modes of compliance with the directions issued under the law. No question of payment will arise if he decides to pack the minimum quantity as per the directions. If he does not do so or fails to do so in full or in part for any reason whatsoever, he may make the payment at the specified rate in lieu thereof. In both the cases, the directions of the Textile Commissioner will be complied with.

A careful analysis of the various clauses of the Control Order makes it abundantly clear that the payment made by the producer is itself in compliance with the directions of the Textile Commissioner under the Control Order and not for infraction thereof or any other provision of the Control Order. There is no dispute about fact that the payment in question is incidental to the business of the assessee. It is therefore, an expenditure laid out wholly and exclusively for the purpose of the business of the assessee. It cannot be attributed to any infraction of law. In fact and reality, it is an expenditure incurred by the assessee in complying with the requirements of the law. Under the circumstances, these payments were rightly held by the Tribunal to the allowable deduction in the computation of the business income of the assessee.

The above view of ours gets full support from a decision of the Gujarat High Court in Additional Commissioner of Income Tax, Gujarat Vs. Rustam Jehangir Vakil Mills Ltd., . In that case also, a somewhat similar controversy came up for consideration before that court. There also, payment had been made by the producers to the Textile Commissioner on failure to produce the prescribed quantity of cloth as required by the scheme framed by the Control Order. The Gujarat High Court, on persual of the scheme of the Control Order and the relevant clauses thereof, held that such payment of compensation was made under an option under the Control Order itself and was not one for breach of law and it was, therefore, an allowable business expenditure u/s 37(1) of the Act.

Reference, may also be made in this connection to a decision of this court in Commissioner of Income Tax, Bombay City-IV Vs. Chemicals and Fibres of India Ltd., . In that case, the assessee carried on the business of manufacturing chemical fibers. In 1965, the assessee was granted an advance import license of the c.i.f. value of Rs. 15,00,000 under the Art Silk Export Promotion Scheme by the Central Government for importing raw materials, subject to certain conditions. For compliance with the said conditions, the assessee executed a bond in favour of the President of India for a sum of Rs. 13,67,565.79. As per the licence, the assessee was under an obligation to export art silk fabrics of the value of nearly Rs. 21 1/2 lakhs. The assessee fulfilled a major part of its obligation except for shortfall of about Rs. 2.74 lakhs. This shortfall was also made up after a delay of one month. However, the Central Government forfeited the guaranteed amount to the extent of about Rs. 2.74 lakhs. The claim of the assessee for deduction of the above amount was disallowed by the Income Tax Officer and the Appellate Assistant Commissioner. However, on second appeal, the Tribunal held that the deduction was allowable. on a reference at the instance of the Revenue to this court, it was held (at page 423) :

"We find that the liability to export art silk fabrics up to the quantity specified and within the time stipulated in that bond could not be regarded as a statutory liability. It was a contractual liability. The assessee completed over 80 per cent. of its export obligation within the time prescribed by the bond and completed its entire export obligation, although within one month after the time prescribed under the bond expired. The amount which the assessee had to pay under the bond was calculated on the footing of the shortfall. In these circumstances, it can hardly be looked upon as a penalty for an infraction of the law or any statutory obligation or of public policy, but must be regarded as damages paid under a contract."

In the light of the foregoing discussion, we are of the clear opinion that, in the instant case, the Tribunal was justified in holding that the payment made to the Textile Commissioner by the assessee under clause 21C(1) (b) of the Control Order was not in the nature of a penalty for infraction of law but was an expenditure which was incidental to the carrying on of the assessee''s business. In that view of the matter, we answer both the questions referred to us in the affirmative, i.e., in favour of the assessee and against the Revenue. Under the facts and in the circumstances of the case, we make no order as to costs.