Compounding payment for deliberate undervaluation was not a business deduction; only the proper insurance premium element was allowable.

Compounding a criminal offence under the War Risks (Goods) Insurance Ordinance was not an expenditure wholly and exclusively laid out for business purposes where it arose from deliberate undervaluation of stock and the need to avoid prosecution. The court treated such outlay as connected to a dishonest act, not the conduct of trade, so it could not be deducted under the income-tax provision. Only the amount corresponding to the insurance premium that would have been payable for proper cover could be linked to business, while the balance remained non-deductible. The reference was answered against the assessee.

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Issues: Whether the sum paid by the assessee for compounding the offence under the War Risks (Goods) Insurance Ordinance was an admissible deduction as expenditure wholly and exclusively laid out for the purposes of business under the income-tax law.

Analysis: The amount disallowed was not incurred for the conduct of the assessee's business but arose from the deliberate undervaluation of stock and the consequent need to avoid criminal prosecution. Expenditure incurred to compound an offence cannot be treated as having been laid out wholly and exclusively for business purposes when the underlying act was not required for trade or business and was done to secure dishonest gain. Only the portion equivalent to the premium that would have been payable for proper insurance could be linked to business; the balance retained its character as non-deductible outlay.

Conclusion: The disputed sum was not deductible under Section 10(2)(xv) of the Income-tax Act, and the answer to the reference was against the assessee.

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