Penalty for delayed cess payment is not a business deduction where it arises from breach of statutory duty.

Penalty paid for delayed payment of cess and purchase tax under the U.P. Sugar-cane Cess Act, 1956 was held not deductible in computing business income. The liability arose from breach of a statutory obligation, and the penalty was distinct from the cess itself; a validating law did not convert that penalty into an allowable business outlay. Because the payment resulted from non-compliance with law, it was not expenditure laid out wholly and exclusively for the purposes of business and could not be justified on commercial expediency grounds. The reference was answered against the assessee and in favour of the Revenue.

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Issues: Whether the penalty paid for delayed payment of cess and purchase tax under the U.P. Sugar-cane Cess Act, 1956 was an allowable deduction in computing business income.

Analysis: The liability to pay the amount arose from failure to comply with a statutory obligation under the cess legislation. The penalty was distinct from the cess itself and was incurred only because the assessee defaulted in payment on the prescribed date. The validating legislation did not convert penalty into cess for the purpose of deduction. A payment made as a consequence of breach of law is not expenditure laid out wholly and exclusively for the purpose of business, nor can it be justified on grounds of commercial expediency.

Conclusion: The penalty was not an allowable deduction and the answer to the reference was against the assessee and in favour of the Revenue.

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