Sen, J. - (1.) The Tribunal referred the following question of law to the Andhra Pradesh High Court under S. 256(1) of the Income-tax Act, 1961."1. Whether on the facts and in the circumstances of the case, a sum of Rs. 2,95,000/- has to be taken into account in computing the income of the assessee from business under the provisions of S. 28 of the Income-tax Act, 1961 If the answer to the above question is in the negative- Whether on the facts and in the circumstances of the case, the claim of Rs. 2,95,000/- is covered by sub-rule (J) of Rule 6-DD, framed under S. 40-A(3) of the Income-tax Act, 1961 - 2. "Whether on the facts and in the circumstances of the case, the sum of Rs. 19,659/- incurred as guest-expenses is allowable as a deduction -
(2.) The assessee, to start with, was a partnership consisting mostly of family members. In 1965, it was converted into a public limited company to carry on the business of export of tobacco. The first directors appointed at the time of incorporation were to hold office during their lifetime or until they resigned voluntarily.
(3.) On the basis of the information received, a search was conducted by the Enforcement Directorate in the assessee's business premises. A number of letters and other documents were seized which disclosed that the assessee had indulged in transactions in violation of the provisions of Foreign Exchange (Regulation) Act (for short 'FERA'). It was found that the assessee had remitted to a private party in Singapore in violation of law. Proceedings were taken against the assessee for infringement of Ss. 4(2) and 5(1)(e) of FERA and ultimately a penalty of Rs. 35,000/- was imposed under S. 23(1)(a) read with S. 23-C of the Act, the assessee in its income-tax return for the assessment year 1970-71 claimed deduction of Rs. 2,95,000/- as business expenditure/loss. According to the assessee in course of carrying on of its business by the year 1968, it had accumulated 329.2 tonnes of substandard quality tobacco which it could not export over the last three years. Since the accumulated stock of tobacco was of substandard quality, it could not be sold at the floor price fixed by the Government of India for such tobacco. According to the assessee, it had no alternative but to sell the tobacco at a discount of 20% to a Singapore party. On paper, the full sale price was paid by the Singapore party, but in reality 20% of the price paid by the party was remitted back to him through one Shamsuddin. In pursuance of this agreement, tobacco was sold and the full floor price was received by the assessee from the Singapore party. The assessee paid a sum of Rupees 2,88,000/- to Shamsuddin who remitted the equivalent amount in Singapore currency to the Singapore party. Thus, according to the assessee, it had no alternative but to enter into such a transaction with a view to dispose of the said unsold stock of inferior quality of tobacco. In these facts of the case, it was claimed by the assessee that the amount of Rs. 2,88,000/- paid to Shamsuddin ought to be deducted as business expenditure or treated as business loss.;