Compensatory versus penal levy principle controls income-tax deduction, with only the compensatory component allowable.

A statutory impost for income-tax deduction purposes must be examined by its true character, not its label: a purely compensatory levy is deductible, while a composite levy must be apportioned and only the compensatory element allowed. The Court rejected the maintainability objection based on bypassing the reference procedure under section 256(2) and treated the petition as entertainable in the circumstances. Applying the apportionment principle, the levy under section 36(3) of the Bombay Sales Tax Act was not deductible in full; the penal component had to be disallowed. The Tribunal's order was set aside and the matter remitted for fresh disposal on that basis.

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Issues: (i) Whether the special leave petition was not entertainable for bypassing the procedure under section 256(2) of the Income-tax Act, 1961. (ii) Whether the levy under section 36(3) of the Bombay Sales Tax Act, 1959 was deductible in full or required bifurcation between compensatory and penal components.

Issue (i): Whether the special leave petition was not entertainable for bypassing the procedure under section 256(2) of the Income-tax Act, 1961.

Analysis: The objection was that the petitioner had approached the Court directly without first pursuing the reference procedure. The Court declined to dismiss the matter on that ground, and treated the petition as maintainable in the circumstances of the case.

Conclusion: The objection to maintainability was rejected.

Issue (ii): Whether the levy under section 36(3) of the Bombay Sales Tax Act, 1959 was deductible in full or required bifurcation between compensatory and penal components.

Analysis: The governing principle applied was that the character of the statutory impost must be examined by reference to the scheme of the levy, not its label. A wholly compensatory impost is allowable as a deduction, while a composite impost must be split into compensatory and penal elements, with deduction confined to the compensatory part.

Conclusion: The levy was to be apportioned between compensatory and penal components, and only the compensatory component could be allowed as a deduction.

Final Conclusion: The Tribunal's order was set aside and the matter was remitted for fresh disposal in accordance with the principle of apportionment of a composite statutory impost.

Ratio Decidendi: For income-tax deduction purposes, a statutory impost must be examined by its true nature: if it is purely compensatory it is deductible, and if it is composite the compensatory component alone is allowable while the penal component must be disallowed.

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