Penalty for unauthorised sales tax is not deductible as business expenditure under income tax law.

Penalty paid for demanding, charging or retaining unauthorised sales tax under the Rajasthan Sales Tax Act was held not deductible in computing total income. Expenditure incurred for breach of law is not a normal incident of business and cannot be treated as a commercial loss. The deduction claim under section 37 of the Income-tax Act failed because the penalty was not laid out wholly and exclusively for business purposes. The distinction between an automatic statutory liability and a discretionary penalty supported denial of the deduction, so the amount was disallowed.

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Issues: Whether the penalty paid to the Sales Tax Department under section 16(1)(j) of the Rajasthan Sales Tax Act, 1954 was deductible in computing the assessee's total income.

Analysis: The liability arose from the assessee's act of demanding, charging, or retaining unauthorised sales tax, and the statutory provision treated such conduct as an infraction attracting penalty. Expenditure incurred for breach of law is not a normal incident of business and cannot be regarded as a commercial loss. For deduction under section 37 of the Income-tax Act, 1961, the amount must be laid out wholly and exclusively for the purposes of business, which is not satisfied by a penalty imposed for contravention of law. The distinction between an automatic statutory liability and a discretionary penalty also supports denial of deduction.

Conclusion: The amount paid as penalty was not allowable as a deduction while computing total income, and the answer was against the assessee.

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