Compounding fees for over-dimensional transport consignments were held allowable as business expenditure, not penal outgoings.

Compounding fees paid to the Regional Transport Office for transporting over-dimensional consignments were treated as ordinary business expenditure under section 37(1) because they were incurred routinely in the course of the transport business and were collected as compounding charges at the check post, not as a consequence of seizure or prosecution. The expenditure was held not to be penal in character and not paid for an infraction of law. The disallowance was therefore unsustainable, and the deduction was allowed.

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Issues: Whether compounding fees paid to the Regional Transport Office for transporting over-dimensional consignments under the Motor Vehicles Act, 1988 were allowable as business expenditure under section 37(1) of the Income-tax Act, 1961 or were hit as penalty for violation of law.

Analysis: The payments were made routinely in the course of the assessee's transport business for carrying indivisible over-dimensional consignments. The amount was collected at the check post as compounding charges and not as a consequence of seizure or prosecution for an offence. On the facts, the expenditure was incurred as a necessary incident of the business and did not represent an amount paid for an infraction of law. Such outgoings were therefore not penal in character and fell within the scope of ordinary business expenditure.

Conclusion: The compounding fees were allowable under section 37(1) and the disallowance was unsustainable, in favour of the assessee.

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