Penalty for breach of law is not a deductible business loss, and prior-year set-off claims were rejected.

Penalty paid for tampering with an import licence and contravening customs law was treated as an infraction of law, not a commercial loss incurred for business purposes, so it was not deductible in computing business income. The claim to set off unabsorbed depreciation and earlier years' business loss against the relevant year's income was also rejected, as the court applied its earlier ruling in the assessee's own case and found the set-off unavailable on those facts. Both questions were answered against the assessee and in favour of the Revenue.

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Issues: (i) Whether penalty paid to customs authorities for tampering with an import licence and contravening customs law is deductible in computing business income; (ii) Whether the assessee was entitled to set off unabsorbed depreciation and business loss of earlier years against the income of the relevant assessment year.

Issue (i): Whether penalty paid to customs authorities for tampering with an import licence and contravening customs law is deductible in computing business income.

Analysis: The amount was paid as penalty for breach of law after the assessee altered the import licence and imported goods beyond its authority. A payment made for infraction of law is not a commercial loss incurred for the purpose of carrying on business. The distinction drawn in later decisions between lawful business losses incidental to business and penalties for illegality remained decisive, and the facts fell within the rule that such penalties are not allowable as business expenditure or loss.

Conclusion: The penalty was not deductible and the finding was against the assessee.

Issue (ii): Whether the assessee was entitled to set off unabsorbed depreciation and business loss of earlier years against the income of the relevant assessment year.

Analysis: The claim for set-off was covered by the court's earlier decision in the assessee's own case for a prior year. Applying that ruling, the assessee was not entitled to the claimed set-off of earlier years' business loss and unabsorbed depreciation against the income of the year under consideration.

Conclusion: The set-off claim was rejected and the finding was against the assessee.

Final Conclusion: The reference was answered in favour of the Revenue, with both questions decided against the assessee.

Ratio Decidendi: A penalty paid for breach of law is not a deductible business loss, and earlier years' losses or depreciation can be set off only in accordance with the governing rule applicable to the assessee's case.

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