Court allows deduction for payment to Textile Commissioner as business expenditure

Commissioner Of Income-Tax, Gujarat III Versus Tarun Commercial Mills Co. Limited

Commissioner Of Income-Tax, Gujarat III Versus Tarun Commercial Mills Co. Limited - [1977] 107 ITR 172, 1977 CTR 21 Issues Involved:
1. Whether the payment of Rs. 18,247 to the Textile Commissioner for non-fulfillment of the assessee's export obligation was business expenditure incurred wholly and exclusively for the purposes of the assessee's business.

Summary of Judgment:

Issue 1: Nature of Payment to Textile Commissioner
The primary issue was whether the payment of Rs. 18,247 made by the assessee to the Textile Commissioner for non-fulfillment of export obligations could be considered as business expenditure. The Income-tax Officer initially disallowed the expenditure, categorizing it as a penalty and not incidental to the business. However, the Appellate Assistant Commissioner and subsequently the Tribunal allowed the expenditure, viewing it as incurred wholly and exclusively for business purposes.

Scheme and Conditions for Use of "Sanforized" Trade Mark
The assessee-company was a registered user of the "sanforized" trade mark, which required exporting a certain percentage of fabrics. Failure to meet these export obligations resulted in a payment of 10 paise per linear yard for the shortfall. This payment was described as a penalty in the scheme but was argued to be a necessary business expense.

Revenue's Argument
The revenue contended that the payment was akin to a penalty for infraction of law or public policy, thus not allowable as a business expense. They argued that the payment was not mere liquidated damages but a penalty for failing to meet the export obligations linked to the use of the trade mark.

Assessee's Argument
The assessee argued that the payment was not for any statutory infraction but was a business decision influenced by commercial expediency and factors beyond their control, such as market conditions and production capabilities. They cited the case of Additional Commissioner of Income-tax v. Rustam Jehangir Vakil Mills Ltd., where similar payments were considered allowable business expenses.

Court's Analysis and Conclusion
The court analyzed the scheme and the bond executed by the assessee, noting that the payment was optional and could be influenced by various business factors. The court emphasized that the substance of the transaction should be considered, and the payment was not an infraction of law but a business expense. The court concluded that the payment was wholly and exclusively for business purposes and not akin to a penalty.

Final Decision
The court answered the question in the affirmative, in favor of the assessee, and held that the payment of Rs. 18,247 was a business expenditure incurred wholly and exclusively for the purposes of the assessee's business. The Commissioner of Income-tax was directed to pay the costs of the reference to the assessee.