Penalty for breach of statutory obligations is not deductible as business expenditure under income tax law.

Penalties paid for delayed payment of cane cess and cane purchase tax under the U.P. Sugarcane Cess Act, 1956 and the U.P. Sugarcane (Purchase Tax) Act, 1961 were treated as amounts arising from breach of law, not as normal business outgoings. Deductibility under the Income-tax Act requires expenditure to be incidental to business and laid out wholly and exclusively for business purposes. A payment made for contravention of statutory obligations is not a commercial loss or allowable revenue expenditure. Such penalties were therefore not deductible in computing business income.

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Issues: Whether penalties paid for delayed payment of cane cess and cane purchase tax under the U.P. Sugarcane Cess Act, 1956, and the U.P. Sugarcane (Purchase Tax) Act, 1961, were allowable as deduction in computing business income.

Analysis: Deductibility under the Income-tax Act depends on the expenditure being incidental to business and laid out wholly and exclusively for the purposes of the business. A penalty incurred for breach of law is not a normal incident of business and does not constitute a commercial loss or business expenditure. The settled view applied was that amounts paid by way of penalty for contravention of statutory obligations cannot be treated as allowable revenue outgoings.

Conclusion: The penalties were not allowable deductions in computing the assessee's taxable income and the question was answered in the affirmative, in favour of the Revenue and against the assessee.

Ratio Decidendi: Penalty paid for infraction of law is not an expenditure laid out wholly and exclusively for the purposes of business and is therefore not deductible as business expenditure.

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