1983 (2) TMI 1 - HC - Income Tax

High Court allows textile company's payment under Control Order as business expense under Income-tax Act

The High Court of Bombay ruled that the payment made by the textile manufacturing company under the Cotton Textiles (Control) Order, 1948, was a business ... Business Expenditure, Penalty Issues:1. Whether the payment made by the assessee under the Cotton Textiles (Control) Order, 1948, was a penalty for infraction of the law or a business expenseRs.2. Whether the payment of Rs. 2,38,140 by the assessee was allowable as a deduction under section 37 of the Income-tax Act, 1961Rs.Analysis:The High Court of Bombay addressed a reference under section 256(1) of the Income-tax Act, 1961, regarding the nature of a payment made by the assessee under the Cotton Textiles (Control) Order, 1948. The Tribunal referred two questions to the court, focusing on whether the payment was a penalty for violating the law and if it could be considered a business expense under the Income-tax Act. The assessee, a textile manufacturing company, paid Rs. 2,38,140 to the Textile Commissioner under the Control Order, claiming it as a business expenditure in its income computation. The Income-tax Officer initially allowed the deduction, but the Commissioner of Income-tax later reversed this decision, stating the payment was not deductible as it was for an infringement of legal obligations.The Tribunal overturned the Commissioner's decision, holding that the payment was a business expense incidental to the company's operations and allowable under section 37 of the Income-tax Act. The court analyzed the Control Order's provisions, emphasizing that the payment by the producer was a compliance option, not a penalty for non-compliance. The court highlighted that the producer had the choice to either pack the minimum quantity of cloth or make a payment in lieu of packing, with no penal consequences for choosing the latter.Drawing parallels from previous judgments, the court cited the Gujarat High Court's decision in a similar case, where payments made under the Control Order were deemed allowable business expenditures. Additionally, a case involving contractual liabilities was referenced to differentiate between penalties for law breaches and contractual obligations. The court concluded that the payment made by the assessee was not a penalty but an expenditure necessary for conducting its business, thus justifying the Tribunal's decision. Consequently, both questions were answered in favor of the assessee, with no costs awarded.