Business expenditure on contractual damages allowed where liability arose directly from a supply contract breached in the ordinary course of trade.

Damages paid for breach of a business supply contract were treated as business expenditure where the liability arose from a commercial transaction entered into in the ordinary course of business. The assessee's failure to supply material within the stipulated time gave rise to the buyer's damages claim, and the expenditure was held to have a direct nexus with the business contract and the assessee's non-performance. Such liability was not outside the scope of allowable business expenditure merely because it took the form of damages, and the claim was allowable as incidental to the carrying on of the business.

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Issues: Whether the assessee's claim for damages paid on account of breach of a business supply contract was allowable as incidental to the carrying on of business.

Analysis: The liability arose from a commercial transaction entered into in the ordinary course of business. The assessee failed to supply material within the stipulated period, resulting in a damages claim by the buyer. Since the expenditure stemmed directly from the business contract and the assessee's non-performance under that contract, the claim had a clear nexus with business activities and was not outside the scope of business expenditure merely because it arose from a liability to pay damages.

Conclusion: The claim was allowable as incidental to the carrying on of the business, in favour of the assessee.

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