Penalty for breach of law is not deductible as business expenditure, even when incurred during business operations.

Penalty paid for delayed cess payment under the U.P. Sugarcane Cess Act was held not to be deductible as business expenditure under the Income-tax Act. The statutory scheme distinguished compensatory interest on delay from penalty imposed for default after prescribed procedure, and the governing principle applied was that expenditure arising from an infraction of law is not laid out wholly and exclusively for business purposes. The asserted business necessity for the delay was unsupported by evidence, so the disallowance was upheld against the assessee.

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Issues: Whether penalty paid under section 3(5) of the U.P. Sugarcane Cess Act, 1956 for delayed payment of cess is allowable as a business expenditure under the Income-tax Act, 1961.

Analysis: The statutory scheme distinguished between interest on delayed payment under section 3(3), penalty recoverable at the discretion of the collecting authority under section 3(5), and criminal liability under section 4. Interest was treated as compensation for delay and as part of the cess liability, but the penalty under section 3(5) arose only on default and after the prescribed procedure under rule 8. The governing principle was that expenditure incurred for an infraction of law is not a normal incident of business and is not deductible as an amount laid out wholly and exclusively for business purposes. The asserted business necessity for delayed payment was not supported by evidence.

Conclusion: The penalty was not an allowable business expenditure and the answer was against the assessee.

Ratio Decidendi: A penalty imposed for breach of law is not deductible as business expenditure because it is not incurred wholly and exclusively for the purposes of the business, even if the default arose in the course of carrying on that business.

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