Unlawful business expenditure: payment linked to export contravention was not deductible under income-tax law.

Expenditure incurred to facilitate export of wool in contravention of the Export Control regime was held not to be an allowable deduction. The court reasoned that a payment directly and proximately connected with an unlawful act is not laid out wholly and exclusively for business purposes under section 10(2)(xv) of the Indian Income-tax Act, 1922. It further held that the same amount could not be claimed as a trading outgoing under section 10(1) merely by reference to commercial accountancy, because expenditure otherwise prohibited by law does not become deductible through a different accounting route. The deduction was therefore disallowed.

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Issues: Whether the sum of Rs. 6,800, paid in connection with the export of wool without the requisite quota, was an admissible deduction either under section 10(2)(xv) of the Indian Income-tax Act, 1922, or under section 10(1) of that Act on accepted principles of commercial accountancy.

Analysis: The amount was held to have been paid to achieve what was prohibited by law, namely, export of wool in contravention of the Export Control regime. Expenditure that has a direct and proximate connection with an act amounting to infringement or contravention of law is not expenditure laid out wholly and exclusively for the purpose of business within section 10(2)(xv). The same amount could not be treated as an allowable outgoing under section 10(1) merely by invoking commercial accountancy, because an item disallowed as unlawful expenditure cannot be brought in as a deductible trading outgoing through a different route.

Conclusion: The amount of Rs. 6,800 was not deductible under either section 10(2)(xv) or section 10(1); the question was answered against the assessee.

Ratio Decidendi: Expenditure incurred to carry out a business transaction in contravention of law is not an allowable deduction if it is directly connected with the unlawful act, and it cannot be claimed as a trading outgoing under commercial accountancy principles when it is otherwise disallowed by the income-tax law.

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