Composite statutory levy treated as partly compensatory and partly penal; deduction depends on apportionment of components.

A levy described as a penalty under section 36(3) of the Bombay Sales Tax Act was treated as composite, containing both compensatory and penal elements. The operative principle is that the label of the charge is not decisive; its real character must be examined as a whole. For income-tax purposes, only the compensatory portion may be considered for deduction, while the penal portion remains non-deductible. Where a payment has mixed character, deductibility requires apportionment between the two components rather than treating the entire amount as allowable.

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Issues: (i) Whether the amount described as penalty under section 36(3) of the Bombay Sales Tax Act was wholly compensatory or wholly penal in character; (ii) whether the entire amount paid under that provision was allowable as a deduction under the Income-tax Act.

Issue (i): Whether the amount described as penalty under section 36(3) of the Bombay Sales Tax Act was wholly compensatory or wholly penal in character.

Analysis: The nature of the levy had already been considered in earlier decisions, which held that the exaction under section 36(3) is not to be understood by its label alone. The provision was treated as a composite levy containing both a compensatory element for delayed payment and a penal element for breach of the sales tax law. The proper approach is to examine the provision as a whole and identify the real character of the impost.

Conclusion: The levy under section 36(3) of the Bombay Sales Tax Act is composite in nature, being partly compensatory and partly penal.

Issue (ii): Whether the entire amount paid under that provision was allowable as a deduction under the Income-tax Act.

Analysis: A payment that is purely compensatory may be deductible, whereas a payment that is penal for infraction of law is not. Since the levy under section 36(3) contains both elements, the entire amount could not be accepted as fully deductible. The correct course was to determine the proportion attributable to compensation and the proportion attributable to penalty, and then consider deductibility accordingly.

Conclusion: The entire amount was not allowable as deduction; the matter required apportionment between the compensatory and penal components for deciding deductibility.

Final Conclusion: The reference was answered by rejecting the claim that the whole payment was deductible and by directing reconsideration of the amount on an apportioned basis according to its compensatory and penal character.

Ratio Decidendi: Where a statutory levy is composite and contains both compensatory and penal elements, only the compensatory portion may be considered for deduction, and the penal portion remains non-deductible.

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