Contingent liability and regulatory breach payments were held not deductible as business expenditure under income-tax law.

Liquidated damages paid for breach of an export obligation were held not deductible as business expenditure under section 10(2)(xv). The court reasoned that the liability was only contingent during the relevant accounting year and became ascertainable only when the claim was later asserted and quantified, so it could not be deducted in the earlier year. It also found that the payment was not laid out wholly and exclusively for business, because the breach was a departure from statutory and contractual controls over export sales and was akin to a penalty for infraction of a regulatory obligation.

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Issues: Whether the sum paid as liquidated damages for breach of the export obligation was allowable as a deduction under section 10(2)(xv) of the Indian Income-tax Act in the assessment year 1944-45.

Analysis: The liability arising from the assessee's failure to export the coffee was only contingent during the relevant accounting year and was not ascertained until the Coffee Board asserted the claim and the amount was fixed and paid later. A contingent or anticipated liability is not deductible as expenditure for the earlier year. The payment was also not expenditure laid out wholly and exclusively for the business, because the breach was not an incident of normal trading but a departure from the statutory and contractual controls governing export sales. In substance, the amount paid was akin to a penalty for infraction of the regulatory obligation and was not incidental to the trade itself.

Conclusion: The amount was not deductible under section 10(2)(xv), and the answer to the reference was against the assessee.

Ratio Decidendi: A contingent or unascertained liability cannot be deducted as business expenditure for an earlier year, and a payment made for breach of a regulatory trading obligation, being akin to a penalty rather than an incident of normal trade, is not expenditure laid out wholly and exclusively for business.

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