Commercial expediency allowed deduction of statutory deficiency payment made instead of packing the prescribed cloth quantity.

Payment made under a statutory option to the Textile Commissioner in lieu of packing the minimum quantity of cloth was treated as a commercial business outlay, not a penalty or unlawful exaction. Because the Cotton Textiles (Control) Order, 1948 permitted the producer either to pack the prescribed quantity or pay the deficiency amount, the expenditure was held to be incurred on grounds of commercial expediency and wholly and exclusively for business purposes under section 37(1) of the Income-tax Act, 1961. The amount was therefore allowable as a business deduction in favour of the assessee.

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Issues: Whether the amount paid to the Textile Commissioner under clause 21C(1)(b) of the Cotton Textiles (Control) Order, 1948, in lieu of packing the minimum quantity of cloth, was deductible as business expenditure under section 37(1) of the Income-tax Act, 1961.

Analysis: The payment was made under a statutory scheme that gave the producer an option either to pack the prescribed quantity of cloth or to pay the deficiency amount. Exercising that option did not amount to an infraction of law, breach of public policy, or payment by way of penalty. The expenditure was integrally connected with the assessee's business choice under the control order and was incurred on grounds of commercial expediency. The amount was therefore laid out wholly and exclusively for the purposes of the business within the meaning of section 37(1).

Conclusion: The payment was allowable as a business deduction and the answer was in favour of the assessee.

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