1979 (10) TMI 62

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....ion is a business expenditure, and should be allowed while computing the income of the assessee ? " The assessee is a limited company running a textile mill at Coimbatore. The Indian Cotton Mills Federation, of which the assessee is a member, makes allotment of foreign cotton to the member mills spinning higher yarn counts. The allotment is on the basis of the number of spindles working on higher counts. The mills have to give a guarantee at the rate of Rs. 100 per bale of the quantity of cotton which they agreed to accept. As and when quotas of foreign cotton are announced, the cotton would be distributed to individual mills in the proportion of the shares they had agreed to accept based on the spindleage of higher counts. The units whi....

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....In the present case, as would be clear from the statement of facts given above, there was a kind of pooling arrangement on the part of the Indian Cotton Mills Federation to distribute the foreign cotton, or what is called global cotton, in proportion to the spindleage utilised for spinning higher counts of yarn. The distributed quota of cotton has to be imported by the respective mills. Wherever any mill was not in a position to import the allotted quota, it had to pay to the Federation a fixed sum per bale. Thus, the whole arrangement is a contractual arrangement between the assessee and the Federation. The ITO has considered the amount paid to the Federation as a " penalty ". The word " penalty " does not appear to occur in any correspond....

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....charges. During the relevant accounting year, the assessee paid a sum of Rs. 4,300 by way of " penalty " to the association for being reinstated as a member and claimed it as business expenditure. The Tribunal disallowed the expenditure and on reference it was held that the amount paid was not allowable revenue expenditure. The amount in that case was paid for the purpose of reinstatement and not for any breach of any, obligation incurred during the relevant year. In dealing with such a situtation several cases have been noticed and at page 764, the a situation, learned judges observed : " We do not think that commercial expediency is always a corrector conclusive test to determine whether expenditure is laid out wholly and exclusively f....