Penalty for statutory breach and share-issue expenses: both treated as non-deductible, with capital versus revenue distinction applied.

Penalty paid for delay in remitting sugarcane cess and purchase tax was treated as a penalty for breach of statutory law, so it was not laid out wholly and exclusively for business and was not deductible. Expenditure incurred for issuing additional equity shares was held to relate to the company's permanent capital structure, making it capital expenditure rather than revenue expenditure. The article therefore states that both claims were decided against the assessee and in favour of the Revenue.

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Issues: (i) Whether penalty paid for delay in payment of sugarcane cess and purchase tax was deductible as business expenditure; (ii) Whether expenditure incurred in connection with the issue of additional equity shares was allowable as business expenditure.

Issue (i): Whether penalty paid for delay in payment of sugarcane cess and purchase tax was deductible as business expenditure.

Analysis: The penalty was imposed for default in payment of statutory dues under the Sugarcane Cess Act. A payment made as penalty for breach of law is not an expenditure laid out wholly and exclusively for the purposes of business. The earlier binding view on the same point was followed, and the distinction drawn from cases involving deduction from bills or computation of income was held inapplicable because the assessee had itself paid the penalty out of business income and claimed deduction.

Conclusion: The penalty was not an allowable deduction and the issue was answered against the assessee.

Issue (ii): Whether expenditure incurred in connection with the issue of additional equity shares was allowable as business expenditure.

Analysis: Expenditure incurred for issuing additional equity shares relates to the permanent capital structure of the company. Such expenditure is on capital account and is not connected with the day-to-day working operations or circulating capital of the business.

Conclusion: The expenditure was capital in nature and was not allowable as revenue expenditure.

Final Conclusion: The reference was decided entirely against the assessee and in favour of the Revenue on both questions.

Ratio Decidendi: Penalty paid for breach of statutory law is not deductible as business expenditure, and expenditure incurred for raising share capital is capital expenditure, not revenue expenditure.

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