Penalty for breach of law is not deductible as business expenditure under section 37(1) when legally impermissible.

Penalty paid for breach of law is not an allowable business deduction under section 37(1) of the Income-tax Act because such expenditure is not laid out wholly and exclusively for business purposes. The decisive test is whether the outgoing is legally permissible under section 37(1), not whether the breach involved moral turpitude or only a technical infraction. Applying the prior binding view, the Madhya Pradesh High Court held that penalty imposed under the Madhya Pradesh General Sales Tax Act could not be deducted as business expenditure, and the claim for deduction was rejected.

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Issues: Whether penalty paid under the Madhya Pradesh General Sales Tax Act was deductible as business expenditure under section 37(1) of the Income-tax Act, 1961.

Analysis: Expenditure incurred on account of penalty levied for breach of law is not laid out wholly and exclusively for the purposes of the assessee's business. The decisive test is not whether the breach involves moral turpitude or only a technical infraction, but whether the outgoing is of a nature permissible under section 37(1). The prior binding view holding such penalty to be non-deductible was followed.

Conclusion: The deduction of Rs. 6,700 as business expenditure was not allowable. The question referred was answered in the negative, in favour of the Revenue.

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