Statutory penalty for breach of law is not deductible as business expenditure under the income-tax law.

A statutory penalty imposed for default in paying sugarcane cess was held not to be deductible as business expenditure under section 10(2)(xv) of the Indian Income-tax Act, 1922. The Court applied the principle that a payment made for breach of law is not laid out wholly and exclusively for the purposes of business and cannot be treated as a commercial loss. The assessee's financial difficulty and any liability to pay interest did not change the character of the penalty, especially as the default also attracted criminal liability under the Cess Act. The deduction claim was therefore rejected and the issue answered in favour of the Revenue.

---

---

Issues: Whether penalty paid under section 3(5) of the U.P. Sugarcane Cess Act, 1956, for default in payment of sugarcane cess is an allowable deduction under section 10(2)(xv) of the Indian Income-tax Act, 1922.

Analysis: The penalty was imposed for failure to pay cess within the prescribed time under the Cess Act. A statutory penalty imposed for breach of law is not an expenditure laid out wholly and exclusively for the purpose of business and cannot be treated as a commercial loss. The liability to pay interest or the assessee's financial difficulty did not alter the character of the payment, and the default also attracted criminal liability under section 4 of the Cess Act. The governing principle applied was that a payment made as penalty for infraction of law is outside the scope of deductible business expenditure.

Conclusion: The sum of Rs. 14,664 paid as penalty was not an allowable deduction under section 10(2)(xv) of the Indian Income-tax Act, 1922, and the question was answered in the negative, in favour of the Revenue.

Ratio Decidendi: A penalty imposed for breach of a statutory obligation is not deductible as business expenditure because it is not laid out wholly and exclusively for the purpose of the business.

---