Penalty for breach of law is not deductible as business expenditure; labour disallowance reduced and TDS interest remanded.

Penalty paid for breach of law in relation to under-declared sales tax was held not deductible as business expenditure under section 37(1), so the disallowance was sustained. Cash labour payments made at remote work sites, supported by vouchers and site records, justified only a restricted disallowance; the estimate was reduced from 15% to 10%. Interest relating to delay or non-remittance of TDS required factual verification, so the matter was remanded to the Assessing Officer. An additional ground for deduction under section 80IA was admitted, with the issue restored for adjudication because the factual basis had not been examined below.

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Issues: (i) whether the sales tax penalty disallowance was allowable as business expenditure under section 37(1); (ii) whether the disallowance of a portion of cash payments made to labourers was justified; (iii) whether the interest paid for delay or non-remittance of TDS was liable to disallowance or required fresh verification; and (iv) whether the additional ground claiming deduction under section 80IA could be admitted and restored for adjudication.

Issue (i): whether the sales tax penalty disallowance was allowable as business expenditure under section 37(1)

Analysis: The payment was found to relate to under-declared tax and to have been levied as a penalty for breach of law. A payment made for violation of law is not an admissible business expenditure under section 37(1).

Conclusion: The disallowance was upheld and the issue was decided against the assessee.

Issue (ii): whether the disallowance of a portion of cash payments made to labourers was justified

Analysis: The assessee's work sites were stated to be in remote locations and the labour payments were largely supported by vouchers and site records. On the facts, the estimated disallowance at 15% was considered excessive, and a lower estimate was found appropriate.

Conclusion: The disallowance was restricted to 10% of the cash labour payments and the issue was partly decided in favour of the assessee.

Issue (iii): whether the interest paid for delay or non-remittance of TDS was liable to disallowance or required fresh verification

Analysis: There was a factual dispute as to whether the amount represented interest for delay in remittance or interest for non-remittance of TDS. As the character of the payment required verification, the matter was restored to the Assessing Officer for a fresh decision after providing an opportunity of hearing.

Conclusion: The issue was remanded and allowed for statistical purposes.

Issue (iv): whether the additional ground claiming deduction under section 80IA could be admitted and restored for adjudication

Analysis: An appellate authority can entertain an additional legal ground and, where the factual basis has not been examined below, restore the matter for consideration in accordance with law. The claim was therefore admitted, but the merits were left for examination by the Assessing Officer.

Conclusion: The additional ground was admitted and restored to the Assessing Officer for adjudication.

Final Conclusion: The appeal succeeded only in part, with one disallowance sustained, one disallowance restricted, and the remaining issues restored for fresh consideration.

Ratio Decidendi: A payment made by way of penalty for breach of law is not deductible as business expenditure, while an appellate forum may admit a new legal ground and remit factual issues for fresh adjudication.

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