Penalty for illegal import is not a business deduction under section 37; unlawful expenditure cannot be treated as ordinary business cost.

A fine paid to secure release of confiscated imported goods for violation of customs and import control law is not allowable as a business deduction under section 37 of the Income-tax Act, 1961. The court applied the principle that expenditure incurred for infringement of law is not an ordinary incident of business and is not laid out wholly and exclusively for business purposes. Because the assessee had assumed the risk of importing goods without proper licence coverage, the payment was treated as a non-deductible outgoing and had to be added back to income.

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Issues: Whether the amount of Rs. 27 lakhs paid as fine for release of confiscated imported goods was deductible as business expenditure under section 37 of the Income-tax Act, 1961.

Analysis: The payment arose from confiscation of goods under the Customs Act, 1962 and the Imports and Exports (Control) Act, 1947. The decisive principle applied was that a payment made for infringement of law is not an ordinary incident of business and is not expenditure laid out wholly and exclusively for business purposes. The Court also noted that the assessee had taken the risk of importing goods not covered by the relevant licence position, so the payment could not be treated as a bona fide business outgoing.

Conclusion: The amount was not deductible under section 37 of the Income-tax Act, 1961 and was liable to be added back to the assessee's income.

Final Conclusion: The reference was answered against the assessee and in favour of the Revenue.

Ratio Decidendi: A fine paid to secure release of confiscated goods for violation of import and customs law is not an allowable business deduction under section 37 of the Income-tax Act, 1961.

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