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Issues: Whether penalty paid under rule 173Q of the Central Excise Rules, 1944, and fine paid in lieu of confiscation of goods were allowable as deductible business expenditure in computing the assessee's income.
Analysis: Penalties paid for breach of law incurred in the course of business are not ordinary business expenditure, because a trader is expected to conduct business in accordance with law. Only the compensatory element in a levy described as a penalty can qualify for deduction. On the facts, the penalty was imposed in addition to duty for violation of excise rules and was not a sum otherwise payable as excise duty. The amount paid in lieu of confiscation was paid only to avoid surrender of the goods and was likewise not compensatory in character. The governing principle applied was that purely penal amounts are not deductible, while only compensatory levies may be treated as business expenditure.
Conclusion: The amounts paid were penal in nature and not compensatory, so they were not allowable as deductible business expenditure; the answer was against the assessee and in favour of the Revenue.
Ratio Decidendi: A penalty imposed for violation of law is not deductible as business expenditure unless it is shown to be compensatory in character; only the compensatory element of a penal levy can be allowed.
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