Business expenditure on breached export contracts was deductible where the contracts were ordinary commercial transactions, not unlawful or against public policy.

Damages and legal expenses arising from breach of ordinary forward export contracts were treated as business losses deductible in computing profits, because the contracts were normal incidents of export trade and not shown to be illegal, speculative, or opposed to public policy. The court noted that the export-control notifications contemplated quota-based export and licensing rather than an absolute ban, so the assessee had not infringed any express or implied prohibition. On that basis, the amounts were held to be incurred for the purpose of earning profits and allowable as deductions under section 10(2)(xv) of the Income-tax Act, 1922.

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Issues: Whether damages and legal expenses incurred on breach of forward export contracts were allowable as business expenditure in computing business profits under section 10 of the Income-tax Act, 1922.

Analysis: Forward contracts for export, including stipulations for future shipment and contractual guarantees, were held to be normal features of export and not imprudent merely because export controls existed. The notifications issued under section 3 of the Imports and Exports Control Act, 1947 showed no absolute ban on export of groundnut oil; they contemplated quota-based export and licensing, with policy changing from time to time. On the facts, the assessee did not contravene any express or implied prohibition, and its contracts entered into in advance of the policy declaration were not shown to be speculative, unlawful, or opposed to public policy. The resulting damages and legal expenses were therefore losses intimately connected with the business and incurred for the purpose of earning profits, not penalties for infraction of law.

Conclusion: The amounts paid as damages and legal expenses were allowable deductions under section 10(2)(xv) of the Income-tax Act, 1922, and the question was answered in favour of the assessee.

Ratio Decidendi: A loss arising from breach of ordinary commercial export contracts is deductible if the contracts are normal incidents of the business and are not shown to be illegal or contrary to a specific statutory prohibition or public policy.

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