Kalpesh Classes

Penalties​​ 

An expenditure is not deductible unless it is a commercial loss in trade, and a penalty imposed for breach of the​​ law cannot be described as such. Such penalties which are incurred by an assessee in proceedings launched against him for an infraction of the law cannot be called commercial losses incurred by an assessee in carrying on his business an dare not deductible​​ - Haji Aziz & Abdul Shakoor Bros V/s. CIT [1961] 41 ITR 350 (SC).

Interest payable on arrears of cess under section 3(3) of the U.P. Sugar Cane Cess (Validation) Act is in reality part and parcel of the liability to pay cess, and it is not a penalty for which provision has been separately made in section 3(5). Interest so paid is hence not for the infringement of any law, and is hence deductible - Mahalakshmi Sugar Mills Co. V/s. CIT [1980] 123 ITR 429 (SC).

Interest and damages under sales tax act​​ 

Where​​ assessee claimed deduction under section 37(1) for interest and damages paid by it for delayed payment of sales tax under Bombay Sales Tax Act and for delayed payment of contribution under ESI Act,​​ appellate authorities were not justified in refusing to allow assessee’s claim under section 37(1)​​ without any examination of scheme of provisions of Bombay Sales Tax Act or ESI Act, to find​​ whether impost of interest/damages paid by assessee was compensatory in nature so as to entitle it for deduction under said section​​ - Prakash Cotton Mills (P) Ltd. V/s. CIT [1993] 67 Taxman 546/201 ITR 684 (SC).