Law:

Section:

Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of - Assessment year 1968-69 - In consideration of Government having permitted assessee to use trade mark "sanforized on cloth assessee agreed to export certain quantity of cloth and in case of shortfall in export obligation to pay certain amount to Government on short export - Whether there was no breach of a public policy which might render payment, agreed to be made for default arising as a result of breach, as one akin to penalty or infraction of law and, hence, amount paid by assessee for non-fulfilment of export obligations was allowable as business expenditure - Held, yes FACTS The assessee-company was recognized as a registered user of the trade mark ("sanforized"). One of the conditions under which the assessee-company was recognized and registered as a user of the trade mark "sanforized" was that it would export such percentage of fabrics labelled "sanforized" as the Government of India may from time to time determine and in case of failure to attain such export target, the registration of the user was liable to be withdrawn. In pursuance of the said scheme a bond was executed by the company in favour of the President of India agreeing and undertaking to export 10% of sanforized cloth for the use of trade mark "sanforized" and to pay such sum to the Government as may be determined after being calculated at the rate of 10 paise per linear yard on the quantity of sanforized cloth including readymade garments and made-up articles falling short of the quantity of such cloth undertaken to be exported. In the relevant assessment year in its trading books the assessee made provision for payment to the Textile Commissioner for non-fulfilment of export obligations undertaken for the use of "sanforized" trade mark. The Income-tax Officer held that the said payment was by way of penalty and, therefore, could not be considered as incidental to carrying on of the business. He, therefore, disallowed the said expenditure. The AAC held that the amount provided was an expenditure incurred wholly and exclusively for the purposes of the assessee's business and allowed the assessee's claim.…

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