Penalty in lieu of confiscation is not deductible as business expenditure under section 37 for breach of law.

Payment made to customs authorities as a penalty in lieu of confiscation for unauthorised import was not deductible as business expenditure under section 37 of the Income-tax Act, 1961. The Bombay HC treated the outlay as a penalty arising from an infraction of law, not a compensatory or revenue expense incurred wholly and exclusively for business purposes. Accordingly, the deduction claim failed and the issue was decided against the assessee.

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Issues: Whether the amount paid by way of penalty in lieu of confiscation to the customs authorities was allowable as a business expenditure under section 37 of the Income-tax Act, 1961.

Analysis: The imported goods were found to be unauthorised under the relevant import control law and were liable to confiscation. The amount paid by the assessee was not a compensatory business outlay but a sum paid to secure release of goods in lieu of confiscation. Such a payment was characterised as a penalty arising from an infraction of law and not as expenditure laid out wholly and exclusively for business purposes.

Conclusion: The deduction was not allowable under section 37 of the Income-tax Act, 1961 and the issue was decided against the assessee.

Ratio Decidendi: A payment made as penalty in lieu of confiscation for breach of law is not an allowable business expenditure under section 37.

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