Penalty for breach of statutory foodgrains control rules was not deductible as business expenditure.

A penalty paid for supplying foodgrains below the prescribed F.A.Q. standard under a statutory control scheme was not deductible as business expenditure. The court applied the test of whether the payment was laid out wholly and exclusively for the purpose of business, and held that a sum imposed for breach of law or of a public-policy based regulatory regime is not a commercial loss incidental to trading. Because the payment was punitive, not a normal trading adjustment or price reduction, it was disallowed under section 10(2)(xv).

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Issues: Whether the amount paid by the assessee as penalty for supplying foodgrains below the prescribed F.A.Q. standard was an admissible deduction under section 10(2)(xv) of the Indian Income-tax Act, 1922.

Analysis: The payment arose from the assessee's breach of contractual conditions entered into in pursuance of a statutory foodgrains control regime under the Essential Supplies (Temporary Powers) Act, 1946 and the Orissa Foodgrains Control Order, 1951. The decisive test was whether the sum was laid out wholly and exclusively for the purpose of the business and whether it could be treated as a commercial loss incidental to trading. A penalty imposed for transgression of statutory control or for conduct opposed to the public policy underlying such control is not an outgoing incurred for earning profits, even if it is connected with the business in a broad sense. The payment here was a punishment for supplying inferior goods in breach of the regulated scheme, not a reduction of sale price or a normal trading loss.

Conclusion: The amount of Rs. 25,700 paid by way of penalty was not an admissible deduction under section 10(2)(xv) and the answer to the reference was in the negative, against the assessee.

Ratio Decidendi: A penalty paid for breach of law or of a statutory control regime is not deductible as business expenditure unless it is shown to be a commercial loss incurred wholly and exclusively for the purpose of earning business profits.

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