Business expenditure deduction remains allowable despite breach of an administrative order, if actually incurred for business purposes.

Expenditure actually incurred wholly and exclusively for business remains deductible under section 37(1) even if the payment exceeds a governmental rate or contravenes another law, so long as it is otherwise within the income-tax statute. The Rajasthan High Court applied the principle that deductibility depends on real business expenditure, not on the validity, prudence, or regulatory conformity of the underlying transaction. Because the assessee had in fact paid the higher pressing charges during the accounting year, the later refund did not alter the character of the payment for that year. The deduction was therefore allowable, and the contrary view of the Tribunal was incorrect.

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Issues: Whether expenditure actually incurred by the assessee for pressing cotton bales at Rs. 26.10 per bale, in the face of a governmental order fixing the charge at Rs. 16 per bale, was deductible under section 37(1) of the Income-tax Act, 1961 for the assessment year 1974-75.

Analysis: Section 37(1) allows expenditure laid out or expended wholly and exclusively for the purposes of business. The Court applied the settled principle that the income-tax law is to be construed on its own terms, and that the allowability of a business deduction depends on whether the expenditure was actually incurred for business purposes, not on whether the underlying transaction was valid, prudent, or in conformity with another statute. The Court relied on the line of authorities holding that even expenditure connected with an unlawful or prohibited transaction does not cease to be deductible if it is in fact incurred for the purposes of the business. The assessee had in fact paid the amount during the accounting year, and the subsequent refund in the next year did not alter the character of the payment for the year under consideration.

Conclusion: The deduction of Rs. 14,200 was allowable under section 37(1), and the Tribunal was wrong in holding that no liability beyond Rs. 16 per bale had been incurred during the relevant accounting year.

Ratio Decidendi: An expenditure actually incurred wholly and exclusively for the purposes of business is deductible under section 37(1) even if the payment contravenes another law or administrative order, provided the expenditure is otherwise within the income-tax statute.

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