Compensatory payment for building-plan regularisation was deductible as business expenditure, not a penalty for breach of law.

A payment made under a municipal regularisation scheme for building-plan deviations was treated as compensatory rather than penal where the statute permitted acceptance of a reasonable sum instead of demolition or alteration. Because the assessee was engaged in construction and sale of flats, the payment was incurred to preserve the building, protect closing stock, and continue the business. On ordinary commercial principles, it was directly connected with business operations and not a penalty for breach of law. The amount was therefore allowable as a business deduction in computing profits.

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Issues: Whether the amount of Rs. 4 lakhs paid to the municipal committee for regularising deviations in the building plan was a penalty for infraction of municipal laws or a compensatory payment allowable as a business deduction.

Analysis: The payment arose under the municipal scheme permitting the committee, instead of requiring alteration or demolition of a building erected in deviation from sanctioned plans or after lapse of sanction, to accept a reasonable sum by way of compensation. The statutory scheme distinguished such compensation from penal consequences or prosecution for an offence. The assessee's business was construction and sale of flats, and the payment was made to preserve the building, regularise the deviations, and save the business stock from demolition. On ordinary commercial principles, the outgoing was directly connected with the carrying on of the business and was incurred to protect the profit-making apparatus and preserve the closing stock.

Conclusion: The amount was not a penalty for infraction of law and was an allowable deduction in computing business profits; the answer to the referred question was in favour of the assessee.

Ratio Decidendi: A payment made under a statutory provision permitting ex post facto regularisation of building deviations by acceptance of compensation, where the payment is commercially necessary to preserve business stock and carry on the business, is not a penalty for breach of law and is deductible as business expenditure.

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