Business expenditure deduction fails where damages for deliberate breach are treated as liability outside ordinary profit-making activity.

Damages and costs paid for deliberate breach of a trading agreement were held not to qualify as expenditure laid out wholly and exclusively for business purposes under Section 10(2)(xii) of the Indian Income-tax Act, 1922. The deduction was confined to outgoings incurred in carrying on the business and earning profits; a payment merely connected with trading activity was insufficient. Because the liability arose from wrongful conduct outside the ordinary course of business and was not incidental to the profit-making process, the amount was not allowable as business expenditure and the issue was answered against the assessee.

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Issues: Whether damages and costs paid for breach of a trading agreement are expenditure laid out or expended wholly and exclusively for the purposes of the assessee's business under Section 10(2)(xii) of the Indian Income-tax Act, 1922.

Analysis: The deduction under Section 10(2)(xii) is confined to expenditure incurred for the purpose of carrying on the business and earning its profits. A payment is not deductible merely because it arises in the course of trade or is connected with trading activity; it must be incidental to the trade itself and in the nature of a commercial loss. The amount in question was paid as damages and costs for a deliberate breach of an agreement with competing traders. Such liability arose from wrongful conduct extraneous to the ordinary course of business and was not incurred as part of the process of profit-earning.

Conclusion: The sum of Rs. 6,203 was not allowable as business expenditure under Section 10(2)(xii) and the question was answered in the negative, in favour of the Revenue.

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