Compensatory statutory levy for delayed tax payment was held deductible as business expenditure, not a penalty for breach of law.

Amount payable for delayed remittance of sales tax under section 13(2) of the Karnataka Sales Tax Act, 1957, was held to be a mandatory statutory liability computed by the Act without discretion to waive or reduce it. Because the levy was compensatory in character, arising from delay in payment rather than punishment for breach of law, it was not treated as a penalty for infraction of law. The court therefore held that the amount was allowable as a business deduction under section 37(1) of the Income-tax Act, 1961, and answered the question in favour of the assessee.

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Issues: Whether the amount paid under section 13(2) of the Karnataka Sales Tax Act, 1957, for delayed payment of sales tax was a penalty for infraction of law or a compensatory statutory liability, and consequently whether it was allowable as a deduction under section 37(1) of the Income-tax Act, 1961.

Analysis: The liability under section 13(2) was held to be mandatory and computed in the manner prescribed by the sales tax statute, leaving no discretion to waive or reduce it. The amount was treated as compensatory in character, being payable for delay in remitting tax due, and not as a penalty imposed for breach of law. The reasoning was supported by the principle that a statutory impost of this nature is analogous to an accretion to the tax liability and therefore falls within the category of business expenditure.

Conclusion: The amount paid under section 13(2) of the Karnataka Sales Tax Act, 1957, was allowable as a deduction under section 37(1) of the Income-tax Act, 1961, and the question was answered in the affirmative, in favour of the assessee.

Ratio Decidendi: A statutory levy imposed for delayed payment of tax, which is compensatory and not punitive in nature, is an allowable business deduction and not disqualified as a penalty for infraction of law.

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