Penalty for unauthorised tree cutting is not deductible as business expenditure under the business purpose test

A payment made as a penalty for breach of law, or for unauthorised conduct, is not deductible as business expenditure because it is not incurred wholly and exclusively for business purposes. The distinction is between sums paid under a lawful statutory option or scheme and sums imposed for infraction of law. On the facts, additional royalty or penalty paid for blazes cut on trees not allotted to the assessee fell in the latter category and was treated as a non-allowable business outlay.

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Issues: Whether the additional royalty or penalty paid for cutting blazes on trees not allotted to the assessee was admissible as business expenditure.

Analysis: The governing principle is that a payment made as a penalty for breach or infraction of law is not deductible as expenditure laid out wholly and exclusively for the purposes of business. A distinction must be drawn between a payment made under a lawful option or as part of a statutory scheme and a payment imposed for unauthorised conduct. On the facts, the amount relating to blazes cut on unallotted trees fell in the latter category and could not be treated as a commercial loss or permissible business outlay.

Conclusion: The payment of additional royalty or penalty on blazes cut on trees not allotted to the assessee was not allowable as business expenditure and the Tribunal's disallowance was .

Ratio Decidendi: A payment imposed for breach of law or for unauthorised conduct is not deductible as business expenditure, because it is not incurred wholly and exclusively for the purposes of business.

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