Penalty for delayed sales tax payment is not compensatory and cannot be claimed as a deduction under income tax law.

Penalty levied for delayed payment of sales tax under section 36(3) of the Bombay Sales Tax Act, 1959 was held to be penal in character and to contain no compensatory element. Applying the statutory scheme and binding precedent, the Court treated the impost as a true penalty rather than a compensatory levy. As a result, it was not allowable as a deduction under section 37(1) of the Income-tax Act, 1961, and the issue was answered in favour of the Revenue and against the assessee.

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Issues: Whether penalty levied under section 36(3) of the Bombay Sales Tax Act, 1959, for delayed payment of sales tax is compensatory in nature and therefore allowable as a deduction under section 37(1) of the Income-tax Act, 1961.

Analysis: The Court followed its earlier decision that, on examination of the scheme of section 36(3) of the Bombay Sales Tax Act, 1959, penalty levied for delayed payment of sales tax is penal in character and does not contain any compensatory element. The Court noted that the governing principle is to examine the statutory scheme to determine whether an impost described as penalty or interest is compensatory or penal in nature. On that basis, the controversy was treated as concluded by binding precedent.

Conclusion: The penalty under section 36(3) is not compensatory and is not an allowable deduction under section 37(1); the question was answered in favour of the Revenue and against the assessee.

Ratio Decidendi: A statutory penalty for delayed payment of sales tax, where the governing provision is penal in character and contains no compensatory element, is not deductible as business expenditure under section 37(1) of the Income-tax Act, 1961.

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