Penalty for breach of law is not a business loss or deductible expense unless incurred wholly and exclusively for business.

A penalty paid for breach of customs law was treated as neither a business loss under section 10(1) nor deductible business expenditure under section 10(2)(xv) of the Indian Income-tax Act, 1922. The governing principle applied was that a deductible expense must be laid out wholly and exclusively for the purpose of business, while a business loss must spring directly from and be incidental to trading operations. Amounts paid because the assessee incurred liability for infraction of law were held not to be commercial losses or normal incidents of trade. The claim was therefore rejected in favour of the Revenue.

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Issues: Whether the penalty paid under the Sea Customs Act and the related loss could be taken into account under section 10(1) or allowed as a deduction under section 10(2)(xv) of the Indian Income-tax Act, 1922.

Analysis: The disputed payment arose from an isolated import transaction found by the Tribunal not to have been undertaken in good faith. A deduction under section 10(2)(xv) requires expenditure laid out wholly and exclusively for the purpose of business, and a claim under section 10(1) must represent a loss which springs directly from the business and is incidental to it. A penalty incurred for breach of law is not a commercial loss and is not a normal incident of carrying on trade. The Court applied the governing principle that amounts paid because the assessee has rendered itself liable to penalty for infraction of law do not qualify as business losses or business expenditure.

Conclusion: The penalty and resulting loss were not allowable either under section 10(1) or under section 10(2)(xv); the answer was against the assessee and in favour of the Revenue.

Ratio Decidendi: A penalty imposed for contravention of law is not a commercial loss or allowable business expenditure unless it is shown to be an expenditure incurred wholly and exclusively for the purpose of carrying on the business.

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