Penalty for breach of import law is not deductible as business expenditure when paid to release confiscated goods.

A payment made to secure release of confiscated imported goods was held not to be deductible as business expenditure because it arose from breach of import restrictions and operated as a penalty under customs law. The governing test is whether the outlay was laid out wholly and exclusively for the purpose of earning business profits; a sum paid for infraction of law fails that test, even if the proceeding is directed against the goods rather than the trader personally. The amount paid in lieu of confiscation was therefore not a commercial loss incidental to the carrying on of business and was disallowed under the income-tax provision.

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Issues: Whether the amount paid to secure release of confiscated imported goods was an allowable deduction as expenditure wholly and exclusively laid out for the purpose of the business.

Analysis: The payment arose out of the import of dates contrary to the applicable import restrictions and was made in lieu of confiscation under the customs law. A sum paid as a penalty for breach of law is not a commercial loss incurred in the ordinary course of trading, even if the proceeding is directed against the goods rather than against the person. The governing test is whether the expenditure was laid out wholly and exclusively for the purpose of earning business profits; a penalty imposed for infraction of law fails that test because it is not incidental to carrying on the business as such.

Conclusion: The amount paid to obtain release of the confiscated goods was not an allowable deduction under the income-tax provision and the answer was against the assessee.

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