Law:

Section:

Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Sales tax authorities imposed penalty on assessee under sections 8(2) and 17(3) of the Madhya Pradesh general Sales Tax Act, 1958 - Whether amount of penalty paid by assessee allowable as business expenditure - Held, on facts, no FACTS During the accounting year relevant for the assessment year 1971-72, the assessee paid penalty imposed on it under sections 17(3) and 8(2) of the Madhya Pradesh General Sales Tax Act, 1958 (MPGST Act), respectively, and claimed the same at business expenses under section 37(1). However, the assessee did not produce any material to show that the penalty imposed on it under section 8(2) of the MPGST Act was the minimum, comprising only the difference in tax between the amount of tax at full rate and the amount of tax paid by it under section 8(1) of the said Act. The ITO disallowed the assessee's claim and the AAC upheld his action. On second appeal, the Tribunal held that the penalty imposed on the assessee under section 8(2) of the MPGST Act was in the nature of an extra payment of sales tax. It further held that the penalty imposed under section 17(3) of the MPGST Act thereof could not be equated with a penalty imposed for an economic offence involving moral turpitude as the assessee had committed merely technical violations for the breach of which it was required to pay a compensation. Accordingly, it allowed the assessee's claim. On reference: HELD It is true that the liability to pay tax or cess or interest on arrears of tax or cess, which is automatic if the tax or cess is not paid within the prescribed period, is an allowable expenditure. However, no expense which is paid by way of a penalty for a breach of the law can be said to be an expenditure wholly and exclusively laid out for the purpose of the business. Again, the question as to whether the breach of law involves moral turpitude or only a violation of some technical provision is not decisive of the question as to whether the amount is an allowable expenditure under section 37(1). On the other hand, in the case of expenses incurred on account of the penalty levied for a breach of the law, the penalty…

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