Law:

Section:

Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of - Assessment year 1969-70 - Indian Catton Mills Federation, of which assessee was a member, made allotment of foreign cotton to member mills spinning higher yarn counts - Distributed quota of cotton had to be imported by respective mills and where allotted quota was not imported by mill, it had to pay to federation a fixed sum per bale - Assessee was allotted certain bales of cotton but it failed to import all allotted bales and therefore, had to pay certain sum to federation as per arrangement - Assessee claimed said amount as deduction - ITO disallowed same on ground that what was paid to federation was only 'penalty' for infringement of its obligation - Whether word 'penalty' would ordinarily involve concept of some violation of statute or public policy - Held, yes - Whether since in instant case as whole arrangement was contractual and was only between cotton mills and federation, there was no question of any violation of statute or public policy - Held, yes - Whether since in instant case, amount having been paid only to avoid further loss, could only be treated as an expenditure laid out wholly and exclusively for purpose of business, and as there was no element of penalty, in those circumstances, amount was to be allowed as deduction - Held, yes FACTS The Indian Cotton Mills Federation, of which the assessee was a member, made allotment of foreign cotton to the member mills spinning higher yarn counts. The allotment was on the basis of the number of spindles working on higher counts. The mills had to give a guarantee at the rate of Rs. 100 per bale of the quantity of cotton which they agreed to accept. For the relevant assessment year, the assessee was given a quota of 715 bales of cotton. As against this, the assessee imported only 374 bales. Since it did not comply with the terms of the arrangement with the Indian Cotton Mills Federation it had to pay a sum of Rs. 34,100 to the Federation for the non-import of the remaining bales of allotted cotton under what was called the guarantee clause. The assessee claimed this amount as deduction in its assessment for the said…

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