Contractual breach payments may be deductible where they are incidental to business operations and not penalties for illegality.

Payments made for breach of contractual obligations in the course of a contracting business were held to be deductible because they arose from delays and risks incidental to business operations. The court applied the principle that a commercial loss or expenditure incurred in carrying on and earning business profits is allowable, while a penalty for breach of law is not. On the facts found, the disputed amounts were not paid for any legal infraction but for contractual breaches inherent in the business, so they constituted allowable business loss or expenditure.

---

---

Issues: Whether penalties and damages paid for breach of contractual obligations in the course of the assessee's contract business were deductible as business expenditure or business loss.

Analysis: The payments were found to arise from delays and breaches inherent in the nature of the assessee's contracting business. The governing principle applied was that an expenditure or loss incurred to carry on and earn profits in business may be allowable if it is a commercial loss incidental to the business, whereas a penalty for breach of law is not deductible. On the facts found, the disputed amounts were not paid for breach of any law but were incidental to the carrying on of the business and arose from contractual obligations and risks contemplated by the parties. The reasoning was consistent with the settled view that loss incidental to business operations is deductible where it springs from the business itself.

Conclusion: The payments were allowable deductions as business loss or expenditure, and the question was answered in favour of the assessee.

Ratio Decidendi: A payment made for breach of contractual obligation, when it is incidental to and arises in the ordinary course of carrying on the business, constitutes an allowable business loss or expenditure; only penalties for breach of law are excluded from deduction.

---